Odd Lots This Is The Index That's Supposed To Replace LIBOR
Jun 2, 2020
In this engaging discussion, Joe Abate, a money market strategist at Barclays, delves into the vital transition from LIBOR to the Secured Overnight Financing Rate (SOFR). He highlights the key differences between these benchmarks and examines the challenges posed by actual marketplace transactions. Abate also addresses the significant hurdles of creating term rates from an overnight benchmark and the legal risks associated with the change. The conversation reveals profound implications for financial markets adapting to this new standard.
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Regulatory Push for a New Benchmark
- Regulators, led by the UK's PRA and adopted by the Federal Reserve, pushed for a new benchmark.
- The Alternative Reference Rate Committee (ARRC) formed to find and implement a LIBOR replacement.
Key Differences Between SOFR and LIBOR
- SOFR, unlike LIBOR, is an overnight, secured, treasury repo rate.
- Key differences include term structure, security, and inclusion of bank credit risk.
Addressing SOFR's Volatility
- SOFR's volatility, seen in September 2019, raised concerns about its suitability as a benchmark.
- Averaging daily SOFR quotes is expected to mitigate this volatility, unlike LIBOR's forward-looking approach.