LIBOR Vs SOFR

London Interbank Offered Rate (LIBOR) has been under attack since the LIBOR scandal back around 2008. The LIBOR is arrived from a consensus of interest rates from major banks worldwide. The scandal involved bank whom were found to be falsifying their rate submission to alter the LIBOR. The reason was so the banks could profit from the altered rate.

Many financial instruments rely on the LIBOR to set their rates. Some of these include mortgages, student loans and financial derivatives. By manipulating the LIBOR, this will effect the rates on these instruments.

The scandal was so pervasive that in 2012 the British Bankers’ Association agreed to transfer the oversight of the LIBOR to the UK regulators. Some criminal charges were brought against traders and fines were imposed against the banks.

In the US the Alternative Reference Rate Committee (ARRC) was instructed to find a replacement for the LIBOR. Their solution was the Secured Overnight Financing Rate (SOFR).

The SOFR is defined as a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. It is calculated as a volume weighted median of transaction level repo data collected from the banks. The SOFR will be published every business day at 8 am from the New York Fed.

Considering that the banks are still involved in supplying the raw data, it is questionable if this new rate will be an improvement over the LIBOR.

Source: wolfstreet.com

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