LIBOR has been in the financial news since July 2017 when the UK’s Financial Conduct Authority decided to phase out this reference rate, which over $350 trillion in financial products are based upon. Ralph Waldo Emerson said it best with this quote, “The future belongs to those who prepare for it.” If you have not started a plan to address the LIBOR transition, now is the time to begin.
The Federal Reserve has created the Alternative Reference Rates Committee (ARRC) to assess viable alternatives and the secured overnight financing rate (SOFR) was identified as LIBOR’s replacement. SOFR is an overnight rate based on the U.S. Treasury repurchase (repo) market, which needs to be developed into a term rate in order to be used as a market index, and it also needs more history in order to make it a reliable index. Additionally, SOFR doesn’t include a credit risk component. If the tenor and credit components can be addressed, then market participants could replace LIBOR with SOFR plus a credit spread, that will aid in the phase-out of LIBOR on by the mandated date of December 31, 2021.
To read a more in-depth explanation of the history of the transition from LIBOR, visit our website.
The FHLBank System is a primary leader in the financial system’s adoption of SOFR. The System is working to help build the SOFR market by participating in SOFR-indexed bond issuances. FHLBank Topeka has been an active participant in these bond issues and is working on a conversion from LIBOR to SOFR in our own contracts.