Global Stock Markets
The New York Federal Reserve will launch a benchmark U.S. rate on
Tuesday to potentially replace Libor, and market participants hope it
will prove more reliable after a long and complex switchover.
The New York Fed will begin publishing the Secured Overnight Financing Rate (SOFR), 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.
Analysts have struggled to explain a recent jump in Libor, which has reached nine-year highs USD3MFSR=X even as bank credit quality is seen as solid.
Increased short-term Treasury issuance and declining demand for credit due to tax reforms are deemed the most likely factors. A decline in interbank lending has reduced the robustness of the rate, which is sometimes estimated rather than based on actual transactions.
SOFR is based on the overnight Treasury repurchase agreement market, which trades around $800 billion in volume daily.
A move away from Libor, however, is expected to be gradual and complicated.
One issue is that there is not yet a market for term loans such as one and three months, as in Libor.
It will take time to develop liquidity in derivatives based on the rate. 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.
The New York Fed will begin publishing the Secured Overnight Financing Rate (SOFR), 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.
Analysts have struggled to explain a recent jump in Libor, which has reached nine-year highs USD3MFSR=X even as bank credit quality is seen as solid.
Increased short-term Treasury issuance and declining demand for credit due to tax reforms are deemed the most likely factors. A decline in interbank lending has reduced the robustness of the rate, which is sometimes estimated rather than based on actual transactions.
SOFR is based on the overnight Treasury repurchase agreement market, which trades around $800 billion in volume daily.
A move away from Libor, however, is expected to be gradual and complicated.
One issue is that there is not yet a market for term loans such as one and three months, as in Libor.
It will take time to develop liquidity in derivatives based on the rate. 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.
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