Group says loans, securitizations shifting away from now-defunct LIBOR toward SOFR, replacements

A “pipeline” of new loans and securitizations reflects a shift away from a now-defunct interest reference rate toward a replacement rate, according to a group that helped set up and introduce the replacement.

In a release of its proceedings during a Wednesday meeting, the Alternative Reference Rate Committee (ARRC), a group sponsored by the Federal Reserve, said the transition away from the London Interbank Offered Rate (LIBOR) – which was no longer published after the beginning of the year – to “robust reference rates” was progressing strongly into the first part of 2022.

The group also said that a shift in derivative markets – primarily in interest rate swaps and futures – was speeding up toward the replacement rate it developed, the Secured Overnight Financing Rate (SOFR).

“Activity data from cash and derivatives markets point to continued positive momentum in the transition from LIBOR to SOFR,” the ARRC said in a summary of its meeting. Specifically, the agency said:

  • SOFR swaps now account for the majority of interest rate risk traded in the outright linear swaps market.
  • Average daily SOFR futures volumes doubled in January relative to December 2021. SOFR futures volumes and open interest have increased relative to Eurodollar futures and the overall short-term interest rate (STIR) futures market.

ARRC Readout for February 16, 2022 Meeting