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Understanding the Transition to SOFR
What your business needs to know about the transition from LIBOR to SOFR.
Replacing USD LIBOR with a transaction-based rate: SOFR
While there were a number of reference rates that could have taken USD LIBOR’s place, the Secured Overnight Financing Rate (SOFR) was the official recommendation of the Alternative Reference Rates Committee (ARRC), the U.S. industry group convened by the Federal Reserve Board and the New York Fed that guided the LIBOR transition.
The main difference between SOFR and LIBOR is how the rates are produced. While LIBOR was based on panel bank input, SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities in the repurchase agreement (repo) market. The transaction volumes underlying SOFR regularly were around $1 trillion in daily volumes. The repo market’s large transaction volume gave the ARRC confidence that SOFR was reliable through a wide range of market conditions, making it a good long-term option to replace LIBOR.
Go deeper on the transition to SOFR
Take a look at our FAQs below for additional details on LIBOR, SOFR, and how your business can understand the transition.
For any additional questions, please reach out to your Capital One Commercial Bank Relationship Manager.
LIBOR Transition FAQs
1.
What is LIBOR?
LIBOR, the London Interbank Offered Rate, was a popular benchmark index rate worldwide. Banks used LIBOR to determine interest payments for financial products like commercial loans and derivative products. LIBOR was the most commonly used global benchmark for short-term interest rates, and was previously referenced in approximately $200 trillion of financial contracts and securities.
2.
Why did the financial industry move away from LIBOR?
There were concerns about the validity and transparency of LIBOR. The rate was calculated on a limited number of market transactions, making it based more on the judgment of a panel of banks rather than on data.
Additionally, the ICE Benchmark Administration (IBA) took steps to phase out LIBOR. In December 2021 they stopped publishing non-USD LIBOR rates and the 1-week and 2-month tenors of USD LIBOR, and after June 2023 banks weren’t required to submit information used to calculate USD LIBOR rates. For these reasons, the financial industry sought a LIBOR alternative.
3.
What is SOFR?
SOFR is the Secured Overnight Financing Rate. Whereas LIBOR was more dependent on expert judgment of panel banks, SOFR is based on data from observable transactions in the marketplace. For more key facts about LIBOR vs. SOFR, please see our comparison chart above.
4.
Did this transition only happen in the U.S.?
This transition happened worldwide. Outside the U.S., several other markets also transitioned away from their relevant currency IBOR to an overnight, risk-free rate. The countries below transitioned to the referenced alternatives:
- United Kingdom – Sterling Over Night Indexed Average (SONIA)
- European Union – Euro Short-Term Rate (ESTR)
- Japan – Tokyo Overnight Average Rate (TONAR)
- Switzerland – Swiss Average Rate Overnight (SARON)
- Canada – Canadian Overnight Repo Rate Average (CDOR transition to CORRA occurring by YE 2024)
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