On July 27 2017, nine whole years since the tampering scandal reared its ugly head, the CEO of the Financial Conduct Authority (FCA), Andrew Bailey, announced that Libor will be phased out by 20211. While some commentators have said that the announcement may be somewhat premature, efforts to replace Libor have been in the works for some time.
Back in July 2014, the Financial Stability Board (FSB) published its report on interest rate benchmark reform2. This prompted the commissioning of working groups across the G20 and in November 2014, the Federal Reserve convened the Alternative Reference Rates Committee (ARRC). Similarly, the Bank of England commenced a working group on Sterling Risk-Free Reference Rates, the Swiss National Bank convened the National Working Group, and the Bank of Japan convened the Japanese Study Group on Risk-Free Rates.
On June 22 2017, the ARRC’s working group announced that it had decided on the Secured Overnight Funding Rate (SOFR) as its preferred near risk-free interest rate benchmark for use in certain new U.S. dollar derivatives and other financial contracts3.
This whitepaper will explore the key differences between SOFR and Libor and the implications this change will have on interest rate derivatives and floating rate debt.