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- 1. LIBOR out SOFR in By Faraz Zuberi February 26, 2020
- 2. In the following few slides….. • History of LIBOR • The demise of LIBOR • In comes SOFR • How is SOFR better? • Transition from LIBOR to SOFR
- 3. History of LIBOR LIBOR stands for London Inter Bank Offer Rate LIBOR started in 1980s Rate used to benchmark credit agreements It’s the average interest rate of borrowing by major banks
- 4. The demise of LIBOR In 2008 • Regulators realized LIBOR is largely based on estimates In 2012 • It was revealed that the rates were artificially inflated by more than 12 financial institutions In 2022 • The British Regulator that compiles the LIBOR rates will no longer require banks to submit interbank lending rate details
- 5. In comes SOFR…. Stands for Secured Overnight Financing Rate Is based on rates at which investors offer overnight loans to banks Is calculated from the overnight loans that are backed by investors bonds Is published by New York Fed (starting April 2018) SOFR
- 6. How is SOFR better than LIBOR? The rate was selected as benchmark in the United States by a committee of several large banks Unlike LIBOR, SOFR is based on extensive actual trading LIBOR has 35 different rates, SOFR publishes one rate based on overnight loans
- 7. Transition from LIBOR to SOFR Transitioning • The two benchmarks will coexist for a while. • Transition will not be easy. There are more than $200 trillion LIBOR based contracts out of which unmatured ones will need to be converted. Repricing • Repricing is complex due to difference in LIBOR vs SOFR interest rate composition. • LIBOR represents unsecured loans, whereas, SOFR is based on loans backed by virtually risk-free treasury bonds.
- 8. What alternatives have other countries selected? UK • SONIA, an overnight lending rate ECB • EONIA, overnight unsecured loans Japan • TONAR
- 9. Recap • LIBOR will stop getting published after 2021 • In the U.S.A., SOFR is set to replace LIBOR as the benchmark • SOFR is more reliable as it is based on several actual overnight loans • Out of more than $200 trillion LIBOR based contracts, the unmatured loans would need to be repriced at conversion • Other Countries have their own benchmark rates