Recent money market conditions that have seen the Federal Reserve resume regular repo operations for the first time in years should not delay market participants’ preparations to transition away from the London Interbank Offered Rate, New York Fed President and CEO John Williams said today.
The Alternative Reference Rates Committee’s preferred alternative to Libor—which is not guaranteed to exist beyond 2021—is the Secured Overnight Financing Rate, which is based on overnight treasury repo transactions. Amid September’s repo market turmoil, SOFR at one point spiked 300 basis points to 5.25% before returning to previous levels.
Williams said this should not be a surprise, since SOFR—unlike Libor—reflects rates on actual transactions. “Focusing on overnight SOFR isn’t particularly useful in this context, as financial contracts will generally refer to an average of SOFR over many weeks or months,” he said. “Don’t let last month’s temporary spike in SOFR, or hope for the creation of some other replacement reference rate, become an excuse for delaying your transition away from Libor.”