WASHINGTON––The Federal Reserve Bank of New York said it will make available a new financial reference rate, published in 30-, 90- and 180-day averages, related to the Secured Overnight Financing Rate (SOFR), which many analysts believe will be the primary replacement for the London Interbank Offered Rate (LIBOR).
LIBOR has long been the standard used by financial institutions as a basis for setting pricing, including for variable-rate loans.
The new guide will become available March 2.
According to the Fed Bank of New York, it is publishing the averages in its role as administrator of SOFR and will also publish a SOFR index.
The bank said it is doing so “in order to support a successful transition away from U.S. dollar (USD) LIBOR.” The new SOFR averages, according to the Fed, will be referred to as “30-day Average SOFR”, “90-day Average SOFR” and “180-day Average SOFR.”
According to a statement from the Fed bank, the SOFR averages and index will employ daily compounding on business days, as determined by the SOFR publication calendar (each business day that is not broadly recognized as a holiday by the Securities Industry and Financial Markets Association (SIFMA) calendar for U.S. government securities). Simple interest will apply to any day that is not a business day, at a rate of interest equal to the SOFR value for the preceding business day, the Fed Bank said. The Consumer Financial Protection Bureau has estimated that there is $1.3 trillion in consumer loans with an interest rate based on LIBOR, most of which are for residential mortgages.
How SOFR Was Developed
SOFR was developed by the Alternative Reference Rates Committee (ARRC) convened by the Federal Reserve. According to the Fed, the rate is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. Specifically, according to the FRBNY, SOFR includes all trades in the “Broad General Collateral Rate” plus bilateral Treasury repurchase agreement (repo) transactions cleared through the Delivery-versus-Payment (DVP) service offered by the Fixed Income Clearing Corporation (FICC), which is filtered to remove a portion of transactions considered “specials.”
As CUToday.info reported here, NCUA Board Member J. Mark McWatters recently shared some thoughts related to LIBOR and credit unions.