Understanding the Transition from LIBOR to SOFR

What Your Company Needs to Know About the Transition from LIBOR to SOFR

Replacing US Dollar LIBOR with a Transaction-Based Rate: SOFR While several benchmark interest rates have been proposed to replace US Dollar LIBOR, the Secured Overnight Financing Rate (SOFR) was the official recommendation of the Alternative Reference Rate Committee (ARRC), a US industry group convened by the Federal Reserve and the Federal Reserve Bank of New York, which guided the LIBOR transition.

The key difference between SOFR and LIBOR is how rates are generated. While LIBOR relied on bank input, SOFR is a broad measure of the cost of borrowing cash overnight against US Treasury securities in the repurchase agreement (repo) market. The underlying transaction volume for SOFR was approximately US$1 trillion in daily volume. The high volume of transactions in the repo market gave the ARRC confidence that SOFR was reliable under a wide range of market conditions, making it a good long-term option to replace LIBOR.

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