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Life After LIBOR – A Look at SOFR One Year Later

Minneapolis, MN | June 4, 2024 | By: John Trefethen, Director and Co-Founder


What life looks like after LIBOR - notes that say LIBOR and SOFR

Almost a year ago the transition from the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) occurred. This transition had been in the works for many years and officially concluded in 2023. Now that it’s been a year, below are some updates that have occurred since the transition.

 

  • There has been widespread adoption of SOFR.  An excess of $2 trillion of new financial instruments including loans, bonds and derivatives have been issued and are currently outstanding.  


  • In the past 12 months there has been a significant increase in trading volumes and liquidity in SOFR-based products increasing by nearly 50%.


  • The development and adoption of SOFR term rates, which provide forward-looking term structures similar to those of LIBOR, have gained traction. 


  • Financial institutions have had to upgrade their systems and processes to accommodate SOFR including risk management, valuation models, and accounting systems.


  • Regulators have provided guidance and support to facilitate the transition including the endorsement of SOFR by the Federal Reserve.


  • Market participants have developed new hedging strategies to manage exposure to SOFR including SOFR futures and options, Eris swap futures and various over-the-counter derivatives.


  • Credit spread adjustments have been widely used to bridge the gap between SOFR and LIBOR ensuring that the overall interest rate remains comparable.


  • Financial models have been recalibrated to price SOFR-based instruments accurately. This includes adjustments to yield curves and discounting methodologies.

 

Overall, the transition from LIBOR to SOFR represents a major shift in the financial markets, necessitating widespread adjustments across various facets of the industry.  While there have been hiccups with the transition and challenges remain, the progress over the past year indicates a strong commitment from market participants and regulators alike moving forward.

 

 

 

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Founded in 2004, HedgeStar is a leading independent provider of outsourced valuation and independent hedge accounting services for financial instruments including interest rate, currency, and commodity derivatives. HedgeStar provides derivative fair value calculations, cash flow hedge accounting, fair value hedge accounting, and risk management services.

 

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Author: John Trefethen, Director and Co-Founder

 

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Office: 952-746-6040

 

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