Progress Report on SOFR

More than halfway through LIBOR’s planned transition, SOFR’s adoption has lagged

It has been a year since the Federal Reserve Bank of New York launched the Secured Overnight Financing Rate (SOFR) to replace the London Interbank Offered Rate (LIBOR) by the end of 2021. A formal transition plan developed by the Alternative Reference Rate Committee (ARRC) has laid out a timely transition to SOFR with specifics on steps to encourage SOFR’s adoption (Figure 1). The ARRC’s plan aims to promote the use of SOFR-based financial instruments and the development of a forward-looking SOFR term structure to boost the new rate’s usage and market liquidity.

Source: ARRC, Transition from LIBOR,, May 2019. OIS is overnight index swap; EFFR is effective federal funds rates; PAI is price alignment interest; CME is a leading derivatives marketplace’ ICE is the Intercontinental Exchange; PAI is price alignment interest; LCH is a leading global clearing house; and CCP is Central counterparty clearing house; H2 is second half; Q1 is first quarter.

But while the market mechanics of the transition have generally followed the Plan’s timeline, the actual adoption of SOFR in terms of transaction volumes remains in its infancy. We believe the delay in SOFR’s adoption can be linked to several factors:

• Delayed development of a term SOFR market

• Delayed development of SOFR-linked derivative products

• Low SOFR-based issuance by corporate and municipal entities

• Slow migration of bank asset and liability hedging to SOFR-based securities

• Uncertainty over the transition of existing LIBOR-based contracts

• Lack of operational readiness of financial institutions to transact in SOFR