What to know about Fallback Rate (SOFR)
Summary
As the primary regulator of the U.S. Dollar London Interbank Offer Rate (LIBOR), on March 5, 2021, the Financial Conduct Authority (FCA) designated June 30, 2023, as the last date that LIBOR will be published on a representative basis. As the end of LIBOR is rapidly approaching, market participants should be prepared for the cessation’s impact across products. Under U.S. Law derivatives may not utilize synthetic LIBOR which will continue to be published on a non-representative basis by the FCA until September 2024.
What to know about Fallback Rate (SOFR)
To aid in the transition away from LIBOR, the International Swaps and Derivatives Association (ISDA) created the IBOR Fallbacks Supplement to define how legacy LIBOR derivative contracts will transition to the Secured Overnight Financing Rate. Uncleared derivatives referencing LIBOR will transition to the replacement index selected by ISDA and the Federal Reserve Board, Fallback Rate (SOFR), effective July 3, 2023.
As a spread-adjusted compounded average of SOFR, the calculated rate for Fallback Rate (SOFR) that will be used to calculate payments for derivatives will be set at the end of the payment period on the Fallback Observation Day, no less than two business days prior to the payment date. Operationally, this is a change for organizations accustomed to the LIBOR Fixing Date at the start of the calculation period.
Source: Chatham Financial
Learn more about the mechanics of Fallback Rate (SOFR)
Disclaimers
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.
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