Phasing Out LIBOR
A global initiative to find a replacement benchmark rate for the London Interbank Offered Rate (LIBOR) has been underway for several years. In the U.S., the Alternative Reference Rates Committee (ARRC), a working group of market participants and regulators, was convened and tasked with developing a rate to replace LIBOR and ensuring a successful transition. Market participants are anticipating LIBOR’s elimination at the end of 2021.
The Secured Overnight Financing Rate (SOFR) was selected by the ARRC as the recommended alternative to LIBOR. Unlike LIBOR, SOFR is supported by the very deep, liquid overnight Treasury Repurchase Agreement (repo) market, which features average daily trading volume close to $1 trillion. This enables SOFR to be set in a transparent fashion based solely on transactions.
LIBOR / SOFR Comparison
The Role of FHLBanks
A smooth transition from LIBOR to SOFR will be crucial to the stability of the financial markets, and a robust market for SOFR debt must be developed as part of that transition. As the largest issuer of floating-rate debt, the FHLBanks are uniquely positioned to help develop and shape the market for SOFR-linked debt.
The FHLBanks have established a System-wide transition task force. We are a participant in the ARRC working groups. And we are active in the issuance of SOFR debt. In addition, FHLBanks are committed to supporting our member financial institutions throughout the course of the transition.