The Race for Libor’s Replacement Is Too Close to Call
The interest-rate benchmark’s heir apparent, SOFR, has weaknesses that others are trying to exploit.
Who’s in the lead?
Photographer: Henry Browne/Getty Images
By now, Wall Street is well aware that its days of using the London Interbank Offered Rate are numbered. What’s increasingly unclear, however, is what will rise from its ashes.
In the U.S., Libor’s heir apparent was supposed to be the Secured Overnight Financing Rate, or SOFR. It began picking up momentum years ago but hasn’t come anywhere close to Libor’s ubiquity as banks and other market players drag their feet on transitioning away from the rate they’ve used for almost half a century. In 2019, the U.S. Treasury began exploring the idea of issuing SOFR-linked debt, which would be a huge step toward cementing its legitimacy as a future borrowing benchmark, yet it never moved forward; Wall Street now thinks such an offering won’t happen anytime soon. Still, strategists generally expect that it will morph into a liquid derivatives and cash-market benchmark by the time dollar Libor is supposed to be retired in mid-2023.