Term SOFR restrictions spark valuation debate

Ban on interdealer trading leaves dealers divided over accounting treatment of in-demand contracts

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Strict trading curbs on derivatives linked to a term version of the secured overnight financing rate, or SOFR, have ignited a debate over whether the hedging instruments should be classified as illiquid assets on dealer balance sheets.

Guidelines from the Alternative Reference Rates Committee (ARRC), the Federal Reserve-backed group tasked with weaning US markets off Libor, limit the use of term SOFR derivatives to direct hedging of loans and other cash products referencing the rate. The

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