Bloomberg: US Libor Replacement

In April, the New York Federal Reserve Bank launched a new US benchmark rate – the Secured Overnight Financing Rate, SOFR – to compete with the London Interbank Offered Rate, or Libor. Libor offers a range of rates depending on currencies and loan duration, but is based on human expectations – a system deemed a problem after investigations revealed that some bankers had been rigging rates profits. SOFR, based on a technical formula calculating costs of cash borrowed based on Treasury securities, should be more challenging to manipulate. But the bank announced calculation difficulties during the second week of operations. “Any hiccups in the transition are also jarring because it could upset the transition plan laid out by the Alternative Reference Rates Committee, which the Fed created in 2014 to shepherd the replacement for dollar Libor,” reports Alex Harris for Bloomberg. A goal is to develop SOFR-based rates with longer time frames. After 2021, the UK authority will no longer require banks to submit Libor data. Analysts note the markets must have confidence that the overnight rates have no errors or manipulations. – YaleGlobal