SOFR Gains Acceptance as LIBOR Alternative

Credit Suisse, the World Bank and Fannie Mae have now all issued new debt referencing the SOFR, which draws from actual repo market transactions to reflect the cost of borrowing cash secured against US government debt.

Credit Suisse has become the first bank to issue debt tied to the SOFR (Secured Overnight Funding Rate), reported the FT, sending a signal to market participants that the new LIBOR alternative is gaining acceptance.

Following a rigging scandal and a decline in transaction volumes, the UK’s FCA (Financial Conduct Authority) announced it will no longer require financial institutions to make daily submissions for LIBOR calculations after 2021.

As LIBOR is referenced for over USD 260 trillion in financial products, financial institutions have been necessarily concerned about what its replacement will be.

> ALSO READ: LIBOR Transition Programmes Should Mobilise Immediately – Report

The Federal Reserve Bank of New York started publishing the SOFR in April. The new rate draws from actual repo market transactions to reflect the cost of borrowing cash secured against US government debt, which is considered ‘risk-free’.

On Monday, Credit Suisse issued a USD 100 million six-month certificate of deposit, priced at 35 basis points above SOFR, which is said to be in line with expected pricing if it were instead linked to LIBOR.

This follows the recent issuance of Fannie Mae’s USD 6 billion floating-rate debt offering and the World Bank’s USD 1 billion two-year floating-rate bond – both tied to the SOFR.

“With 3 new SOFR-based issuances focused on maturities up to 2 years, out of which some were hedged back into USD 3m LIBOR, the interest for non-liquid reference rate has seen strong momentum among investors with a Hold-to-Maturity or Available-for-Sale portfolios,” says Matthieu Sachot at Chappuis Halder & Co in Hong Kong.

“The Worldbank 2-year issuance at SOFR+23bp got traction from the Americas and Europe, with central banks, financial institutions and corporates representing 79%, and asset managers, insurance and pension funds for the remaining 21%. This trend is likely to be replicated in Asia where sovereign wealth funds, major world pension funds and insurances seem eager to work ahead with the upcoming new global reference rate,” he added.

According to the FT report, Credit Suisse is expected to issue more SOFR-linked debt, with other institutions expected to follow. More than USD 150 trillion of securities are still benchmarked to US LIBOR.

“The opportunity to expand to Asia issuers may take time as the markets are gradually waking up to this rather new rate,” Matthieu Sachot said. “Deploying issuances into longer maturities and building up the reference curves, may see the same players back. But it may need also market liquidity for trading players to join as those require daily MtM [mark-to-market] revaluation and a secondary market to offload part of their investment over time.”


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