From LIBOR to SOFR in US

Nice piece by Jessie Romero in Richmond Fed Econ Focus. It talks about the journey of LIBOR to Secured Overnight Financing Rate or SOFR in US Dollar inter-bank market:

In 2010, the British bank Barclays came under investigation for manipulating a reference interest rate called the London Interbank Offered Rate, or LIBOR. At the time, LIBOR underpinned more than $300 trillion worth of financial contracts worldwide. Over the next several years, authorities would learn that multiple global banks, including U.S.-based institutions JPMorgan Chase and Citigroup, were guilty of manipulating LIBOR; the banks would end up paying more than $9 billion in fines, and more than 20 people faced criminal charges.

The scandal exposed serious flaws in how LIBOR was calculated and spurred international regulators to seek out alternative benchmarks. In the United States, this effort has been led by the Alternative Reference Rates Committee (ARRC), a private-sector group convened by the Federal Reserve and other regulators. The committee has recommended that markets adopt a new reference rate, and although the transition is underway, there are still about $200 trillion — 10 times the level of U.S. GDP — worth of outstanding contracts based on the U.S. dollar LIBOR. (The rate is also calculated for the Swiss franc, the euro, the British pound, and the Japanese yen; before the scandal, LIBOR was calculated for 10 different currencies.) In addition, new contracts referencing the rate continue to be written, even though it’s likely to disappear after 2021. Will the financial sector leave LIBOR in time?

LIBOR’s fall is as mighty an event as it can be….

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