All articles tagged with #sofr
U.S. banks borrowed $1.5 billion from the Federal Reserve's repo facility amid quarterly tax payments and Treasury debt settlements, indicating temporary funding tightness. SOFR rose above the interest on reserves, reflecting high demand for secured funding, but analysts expect this pressure to be short-lived.
The article discusses a provision in the Trump administration's budget bill that could severely limit funding for the US Treasury's Office of Financial Research (OFR), potentially leading to its de facto shutdown. This could impair the collection of critical data for financial stability, including the data underpinning the Secured Overnight Financing Rate (SOFR), which is replacing Libor. The move might undermine efforts to maintain a transparent and resilient financial system, raising concerns about the impact on financial market stability.
The Secured Overnight Financing Rate (SOFR) is an interest rate used by financial institutions for overnight borrowing, backed by U.S. Treasury securities, and serves as a benchmark for various financial instruments, including adjustable-rate mortgages (ARMs). SOFR has replaced LIBOR due to its reliance on actual transaction data, making it less susceptible to manipulation. For homeowners, SOFR affects the rates of ARMs during the adjustment period, but not fixed-rate mortgages. It's important for borrowers to understand how SOFR may influence their mortgage rates and to be aware of the terms in their loan contracts.
The London interbank offered rate (Libor), the world's dominant interest rate benchmark for the past 40 years, has come to an end. As regulators look for replacements, the authors argue against a one-size-fits-all approach and advocate for the development and adoption of multiple benchmarks in addition to the secured overnight financing rate (SOFR). They highlight the need for credit-sensitive benchmarks that reflect the borrowing costs of banks and everyday businesses, as well as benchmarks with longer terms. They believe that variety and choice in interest-rate benchmarks are essential for market performance and durability.
The financial system's reliance on the London Interbank Offered Rate (LIBOR), a tarnished interest-rate benchmark, is coming to an end after a decade-long process. LIBOR, which underpinned trillions of dollars in contracts globally, will cease to be published from next week. It was replaced by the Secured Overnight Financing Rate (SOFR) in the United States. The transition away from LIBOR has been a massive effort, with significant fines imposed on the financial industry for manipulating the benchmark. While most contracts have shifted to SOFR, some loans still tied to LIBOR remain, posing challenges for borrowers. British regulators have published a rate that mimics LIBOR until September 2024 to avoid market disruptions.
The transition from LIBOR to SOFR is almost complete, with the final cessation of LIBOR expected at the end of this year. While the transition has caused some pain for market participants, particularly in the derivatives market, the end is in sight. SOFR-linked products are becoming more prevalent, and the market is adjusting to the new interest rate benchmark.