America’s Libor Successor Is Racing to Gain Traction: QuickTake

Efforts by global regulators to develop a replacement for scandal-tainted Libor, the London interbank offered rate, are well underway. In the U.S., the Federal Reserve Bank of New York and U.S. Treasury Department’s Office of Financial Research introduced the Secured Overnight Financing Rate, or SOFR, in April. The development of the reference rate and derivatives markets tied to it are a critical step in the quest to wean more than $350 trillion of securities off Libor.

The benchmark has come a long way since April, when two weeks after its introduction the New York Fed disclosed it had made errors calculating the rate. Since the initial hiccups, SOFR has largely printed in line with expectations, close to the effective fed funds rate, the Fed’s target benchmark. One concern is that it has proven more volatile than Libor, given that it’s more susceptible to price swings tied to Treasury-bill issuance, as well as month- and quarter-end supply variations.