April 5, 2018 - On Tuesday, April 3rd, the NY Fed began publishing SOFR – a possible replacement for LIBOR – to great interest (at the LSTA, at least). So, the results thus far? As the Fed data shows, SOFR came out of the box at 1.8% on Day One, climbed to 1.83% on Day Two, and then declined to 1.74% on Day Three. A couple of initial observations: First, SOFR is an overnight secured rate, based off Treasury repos. In comparison, according to WSJ, overnight LIBOR – an unsecured rate with credit risk – is 1.7%, below the secured SOFR rate. (That said, i) overnight LIBOR doesn’t necessarily mean that much, and ii) commentators have noted that repo rates have widened as 3-month T-bill issuance has increased.) Second, SOFR has moved a lot in its three-day life. Commentators also note that overnight repos do move around – particularly around quarter-end – but should be smoother when compounded. Finally, there has been more than $800 billion of daily trading volume making up SOFR. This is dramatically more robust than the estimated $500 million of trading underlying 3-month LIBOR, as demonstrated on p. 10 of the ARRC Second Report. The LSTA is the co-chair of the ARRC business loans and CLOs committee. We will continue to watch SOFR and will report back as we learn more in the second week of its life.
Become a Member
Membership in the LSTA offers numerous benefits and opportunities. Chief among them is the opportunity to participate in the decision making process that ultimately establishes loan market standards, develops market practices, and influences the market’s direction.