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LIBOR And SOFR: Buy-Side, Take Over

Kurt Dew profile picture
Kurt Dew


  • Why is it so hard to find a three-month interest rate to replace the fallen LIBOR?
  • The problem results from a sea change in the sources of funds supporting commercial term borrowing.
  • Forced by circumstance to replace LIBOR, the Fed fell back on SOFR, a measure of overnight secured borrowing.
  • The Fed is the wrong group to find a rate for unsecured commercial credit.
  • It's the buy-side that has a dog in this fight.

Put yourself first, girl. Worry ‘bout yourself."

- Crazy Ex-Girlfriend Cast

Never have so many borrowers made such a simple request of the global financial system, only to be told they are asking the impossible. How is it that a simple, fundamental-to-lending, act - providing borrowers with an index that measures the cost of unsecured credit to finance a three-month loan – became too much for our financial system? Why is it that an army of quants, the cream of our global system of higher education for decades, steeped in mathematical and computer training, cannot devise a way for banks to price three-month money?

The reason is simple. There is no such thing as a single cost of short-term unsecured money at present. What the world had with LIBOR was a markup on the cost of money to the average megabank. LIBOR was killed in two strokes.

  • First, the banking system is no longer the primary source of commercial loan finance.
  • Second, the buy-side has not stepped up to deal with the problem. The need for a single cost of wholesale term debt is, after all, a need of the buy-side. The sell-side is predictably more concerned since the Crisis with defending its own tenuous survival.

The reason no bank-sourced interest rate meets the buy-side need is that each bank’s cost of money is unique. Each bank pays a different rate as changing financial conditions impact each bank differently. When the 18 banks that provide LIBOR submissions (guesses) today were truly 18 global-scale financial institutions, and when individual large banks were less vulnerable, the world could get away with averaging three-month rates from 18 different, but like, sources. But the realities have changed. Most of these banks are now global wannabes. The number of for-real global wholesale dealer banks is closer to four. Too few.

This article was written by

Kurt Dew profile picture
My primary interest is financial market structure. I write about market platforms, index instruments, and exchange management firms primarily. I was a member of the team that introduced index trading at the CME. Later, I pioneered the secondary market trading of OTC interest rate swaps.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (4)

Kurt Dew profile picture
And quickly getting crowded. http://bit.ly/2GTtERH
Donald van Deventer profile picture
Great read, Kurt. It's a whole new ballgame.
So what will happed to fix-to-float preferred whose dividend rate is tied to LIBOR?
Kurt Dew profile picture
As with everything else tied to LIBOR, it will still be based on LIBOR.
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