NY Fed Launches LIBOR Replacement; Publishes First SOFR Rate At 1.80%

This morning at 8am, the New York Fed, in cooperation with the Treasury Department’s Office of Financial Research, launched a much-anticipated, if largely worthless (for now) benchmark interest rate to replace Libor, together with two other reference rates, which traders and market participants hope will prove more reliable than the infamously rigged and manipulated index after a long and complex switchover.

The so-called Secured Overnight Financing Rate (SOFR), was set at 1.80 percent, roughly 17bp below the GC repo rate and 12bp above the fed effective.

Here is the full breakdown of today's rates:

  • Secured Overnight Financing Rate (SOFR) set at 1.80%
  • Broad General Collateral Rate (BGCR) set at 1.77%
  • Tri-party General Collateral Rate (TGCR) set at 1.77%

SOFR - which unlike Libor is secured - is based on the overnight Treasury repurchase agreement market, which trades around $800 billion in volume daily. As Reuters notes, publishing the rate is the first step in a multi-year plan to transition more derivatives away from the London interbank offered rate (Libor), which regulators say poses systemic risks if it ceases publication; ironically it also poses systemic risks if it keeps rising as it references a total of $300 trillion in financial (swaps, futs and derivatives) and non-financial (loans, mortgages) debt.

Some are delighted by the new rate: “It’s going to be based on a very, very robust set of transactions. I don’t think a lot of the issues and unknown volatility around Libor is going to exist,” said Blake Gwinn, an interest rate strategist at NatWest Markets in Stamford, Connecticut.

To be sure, the relentless ramp higher in both LIBOR and L-OIS has confused many: “Instances like what we’ve been going through this past month where it’s not even a clear cut bank credit issue or a dollar funding issue per se. It’s kind of got everybody scratching their heads trying to figure out why it’s doing what it’s doing,” Gwinn said.

And speaking of 3M USD Libor, today's fixing rose yet again, up from 2.3118% to 2.3208%, the highest since November 2008 and up for their 38th straight session, longest streak since November 2005.

Still, a move away from Libor is expected to be gradual and complicated: the most pragmatic reason is that there is not yet a market for term loans such as one and three months, as in Libor. And there may never be one, unless floating debt creators are incented to shift the reference benchmark from Libor to SOFR.

“It’s hard to imagine a way they could come up with a similar calculation for a term rate and that’s the big difference between whether or not people would be comfortable adopting SOFR as a straight replacement for Libor,” said Thomas Simons, a money market economist at Jefferies in New York.

To be sure, it will take a long time to develop liquidity in derivatives based on the rate; it will take even longer to transplant existing Libor-linked securities to SOFR. The CME Group will launch futures trades based on SOFR on May 7, while major dealers will enable swaps trading on the rate this year.

Investors will also need to adjust to the day to day volatility of the repurchase market, where rates typically increase ahead of monthly and quarterly closings.

“A lot of folks have not really followed the repo market and some of the intramonth variations particularly closely,” said Mark Cabana, head of STIR at Bank BofA. “On a day to day basis it will be more volatile, but smoothing out over a three month time horizon it should be similarly volatile."

Now, the only question is whether it will ever be adopted.


TeethVillage88s Tue, 04/03/2018 - 10:38 Permalink

Well what tricks do they ever miss.  They use all of Propaganda, Stasi, MK-Ultra on us... they abuse their power and make people think they are responsible for the corruption of banks, central banks, regulators, SEC, FINRA, FTC, Treasury, and US Congress in it's Lobbying by Foreign Agents.

- So they turned back 100 years of achievements in citizen rights, worker rights, anti-trust, anti-money trust, banking control, nationhood, and the Middle Class gains... 100 years all gone like Social Security which is fake, phony, and false


Roger Ramjet Tue, 04/03/2018 - 10:39 Permalink

I continue to believe that the Fed, which is suppose to promote stability, is one of the least stable factors affecting the economy.  When the rules do not suit them, they change the rules; when a measure works against their narrative, they drop or change the measure.  Now when a rate is not cooperating with their policy, what do they do, change the rate.

Somehow, there are those who still maintain that the Fed has credibility.

headhunt Tue, 04/03/2018 - 10:56 Permalink

This is just government bureaucrats trying to justify there own existence.

I see no reason to introduce this unless they see England crashing and burning which would f' all LIBOR linked loan holders

hanekhw Tue, 04/03/2018 - 11:16 Permalink

I have a question. Why not just call it a sock puppet if it looks, functions and is attached to your hand as you waive it back and forth?

Herdee Tue, 04/03/2018 - 11:53 Permalink

They can back it with trillions in the ESF. The ESF is classified as national security so you can never find out how many trillions are in the slush fund used for manipulating markets.

rejected Tue, 04/03/2018 - 12:15 Permalink

FRB,,, unneeded, and unwanted.

FRB PhD = Purely horrible Decisions. 

They're soaking up the good life while destroying the currency. While they live in the finest homes, ride in the finest cars, chauffeur driven, eat the finest food,,, Americans have to survive on McD's wages, live in subsidized rent crap or with Mumsey, eat the worse foods.

Problem is most Limo's spend what money they don't have driving flashy F150's and own the $1100 Apple iPhone until they can't make the payments.

So,,, should one feel sorry for the idiots?

fbazzrea Tue, 04/03/2018 - 14:31 Permalink

is it just my imagination or since ZH was bought out has there been a discernible left turn in the comments section?

maybe rebrand to ZeroHead?

Easyp Tue, 04/03/2018 - 15:58 Permalink

And is immediately rigged by the 1% to screw over the 90% who are stupid enough to trust the institutions of Government.  The remaining 9% of us just get more pissed off by the naked dishonesty of the State.