7.20.18: What Will Replace the LIBOR Index?

In April 2018, the Federal Reserve released a new U.S. benchmark rate called the Secured Overnight Financing Rate, or SOFR. The SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. Over the past 30 days, the SOFR has generally ranged between 1.90% and 2.00%. Although no formal announcement has been made, finance professionals are in agreement that the SOFR is the likely replacement for LIBOR by the end of 2021, when the LIBOR index is scheduled to be phased out.

The phase-out of the LIBOR index stems from a 2012 scandal that resulted from a series of fraudulent actions connected to LIBOR and the follow-on investigation and reaction. The LIBOR is an average interest rate calculated through submissions of interest rates by major banks across the world. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates to profit from trades. In June 2012, multiple criminal settlements by Barclays Bank revealed significant fraud and collusion by member banks connected to the rate submissions, which led to the scandal.

With the SOFR under the control of the Federal Reserve, the belief is that manipulation of the index would be difficult. The hope is that oversight by the Federal Reserve will eliminate any scandals regarding the new benchmark, should it formally replace LIBOR.

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