Group reports smooth acceptance of SOFR as replacement for LIBOR

A Federal Reserve-developed alternative to a now-defunct interest rate reference vehicle has made considerable progress as a replacement rate, the group that developed the rate said Thursday.

In a report on its latest meeting Wednesday (March 23), the Alternative Rate Reference Rates Committee (ARRC) said swaps using the Secured Overnight Financing Rate (SOFR) now account for around 80% of interest rate risk traded in the outright linear swaps market.

Additionally, the group said, average daily SOFR futures volumes increased by 50% month-over-month in February. SOFR futures volumes and open interest continue to increase relative to Eurodollar futures and the overall STIR futures market, group said.

SOFR was developed by the Federal Reserve (through the Federal Reserve Bank of New York, which established the ARRC) to replace the London Interbank Overnight Rate (LIBOR). That rate became defunct at the end of last year after its developers determined it could no longer be relied on as a accurate reflection of current economic conditions.

In addition, the ARRC said anecdotal feedback “reflects continued progress in the shift from LIBOR to SOFR,” as indicated in a sentiment survey of ARRC members which found that survey respondents continued to characterize the LIBOR transition overall as progressing smoothly or generally smoothly into 2022, with no meaningful change in sentiment compared to the a survey conducted in January.

ARRC Readout for March 23, 2022 Meeting