Libor Transition Gets Unforeseen Gift From Repo-Market Turmoil
- Concern over SOFR viability grows following repo-fueled spike
- Pickup in futures trading seen as silver lining for benchmark
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As last month’s funding-market turbulence spurs questions about the viability of the Secured Overnight Financing Rate, a silver lining is emerging for the Federal Reserve’s preferred replacement for dollar Libor.
SOFR more than doubled to a record 5.25% on Sept. 17, as cash reserves in the market for repurchase agreements that underlie the benchmark got out of alignment with the volume of securities on dealer balance sheets. While the volatility hardly inspired confidence among end-users, the greater risk of shocks inherent to the reference rate is fueling a flurry of trading in nascent swaps and futures tied to the benchmark as investors hedge their exposure.