July 29 (Reuters) – A group of banks and investors overseeing the trillion-dollar change to the new benchmark SOFR interest rate said on Thursday that they recommend using the CME group’s SOFR rates to an extent of enhancing the move away from Libor.
“This formal recommendation of SOFR Term Rates is a success for the USD LIBOR transition specifically and for financial stability in general,” said Tom Wipf, chair of the Alternative Reference Rates Committee (ARRC) and vice president of institutional securities by Morgan Stanley, in a statement. . “Market participants now have all the tools they need when we enter the homestretch transition.”
Investors are facing a deadline to close the year to stop basing new lending and operations on Libor, the London interbank rate, which is being phased out due to concerns about the amount of derivatives using the rate, which in many cases is based on assumptions about your borrowing costs and not actual transactions.
Libor also lost credibility when it was revealed that large banks manipulated the rate before and during the 2007-2009 financial crisis.
The CME (CME.O) offers reference rates of one month, three and six months of overnight secured financing rate (SOFR). Many companies and investors have sought a forward-looking term to block or cover future interest rate exposures.
The ARC said it recommends the use of term rates for commercial loans and to cover cash products, but not for derivatives markets.
The change in Libor will require more than $ 200 trillion in transactions and loans to move to new benchmarks, and SOFR is expected to take up most of the volume.
SOFR is based on approximately $ 1 trillion in daily loans in the U.S. repurchase agreement (repo) market. The ARRC selected SOFR to replace Libor in 2017.
Reports by Karen Brettell and Jonnelle Mars; Edited by Steve Orlofsky
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