LIBOR, the London Interbank Offered Rate, has been the benchmark for credit agreements since the 1980s. However, regulators realized in 2008 that LIBOR rates were artificially inflated, and banks will no longer submit rates after 2022. The Secured Overnight Financing Rate (SOFR) published by the New York Fed will replace LIBOR in the US. SOFR is based on actual overnight lending transactions backed by treasury bonds, making it more reliable than LIBOR which had different rates and was subject to manipulation. Transitioning the $200 trillion in existing LIBOR contracts to SOFR will be complex due to differences in how interest is calculated. Other countries like the UK and EU are also transitioning to their

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

10. That’s all folks!