
First SOFR term rate coming in 2020
Staff at the New York Fed are working on a series of backward-looking averages

The Federal Reserve Bank of New York will begin publishing a series of backward-looking secured overnight financing rates (SOFR) in the first half of 2020. Cash markets have been clamouring for a term rate to replace Libor as the benchmark for floating rate loans.
Lorie Logan, deputy manager of the System Open Market Account, discussed the effort at the last Federal Open Market Committee meeting, minutes published on February 20 revealed. Staff at the New York Fed have already started work on publishing the rates, which Logan described “as a further step to support reference rate reform”.
Public comment will be sought later this year before publication begins in the first half of 2020.
Loan issuers may be forced to ditch Libor by the end of 2021, when banks will be allowed to stop submitting quotes for the scandal-plagued benchmark. The absence of a SOFR term rate, whether backward- or forward-looking, has aroused anxiety in the market for loans, which are typically pegged to three-month Libor rates.
“This is another positive development for SOFR that will encourage take-up of the rate by cash products,” says Ian Walker, an analyst at Covenant Review, an analytics firm with representatives on two of New York Fed-convened Alternative Reference Rates Committee’s (ARRC) working groups.
Randal Quarles, the Fed’s vice-chairman for supervision, first floated the idea of publishing a compound average of SOFR – which he dubbed SAFR, for secured average financing rate – in a speech at the New York Fed last July. He said SAFR would make it easier for cash markets to move away from Libor, but that it “would not be a competitor” to a forward-looking SOFR rate.
Meanwhile, the ARRC is working on a forward-looking term SOFR rate, which is expected to begin publishing by the end of 2021.
“The more [a rate] looks and feels like the way the market has been functioning, the higher the success will be,” says David Knutson, head of credit research for the Americas at Schroders. “If the market has been using forward-looking Libor rates for some time, then if that can be replicated on a SOFR or SAFR basis, then it’s more likely to be successful.”
The absence of an official term rate has led to the issuance of SOFR-linked cash products using home-brewed methodologies. Last June, the European Investment Bank issued a floating rate note with coupon payments linked to a backward-looking, daily compounded average of the UK’s sterling overnight index average. Fannie Mae followed suit in July, issuing $6 billion of floating rate notes that paid a daily average of SOFR over the prior quarter.
But more SOFR-linked issuance is needed to develop liquidity in the market. Schroders’ Knutson says the Fed’s move to publish an official term rate will promote issuance and ensure that liquidity does not split across rival rates. One such rival rate could be Ice Benchmark Administration’s proposed US dollar bank yield index, aimed at the cash market.
“If there isn’t a central guiding light in this uncertainty, it will foster a confusion and potentially a variety of interpretations, methodologies, or rates, and that’s negative for everyone in the market. The most efficient market would look to a rate that is widely recognised as ‘the rate’,” he says.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Derivatives
Collateral markets in need of rewiring
New data suggests a tech upgrade is needed to avoid a large central bank footprint in markets
Dutch pensions have extra year to restructure hedges
January 2028 implementation date allows more time for long-dated swaps to roll off
Fast LPs accuse rivals of maxing out last look response times
Firms with sub-10ms checks complain of losing volumes to slower rivals, prompting one to ditch ECNs
Swap Connect shines light on US client clearing hurdles
New scheme may intensify calls for CFTC to reassess its exempt DCO limitations
US life insurer index options market hits $1trn mark
Counterparty Radar: Lincoln Financial emerges as top player in Q4 with $43 billion portfolio increase
Long-end euro swap pricing anomaly remains largely untapped
Deviation in swap curve attracts limited interest because of regulatory and pension reform barriers
SG1 growth slower than expected, say LPs
Despite sluggish take-up of Singapore FX matching engines, some hope a new NDF venue will offer a boost
Eurex scrambles to avert Treasury collateral ban on US default
Current policy prevents CCP from selectively excluding eligible collateral