US interest rate swap market embraces new rate as Libor deadline nears
NEW trades in the enormous US dollar interest rate swap market have almost entirely stopped using the London Interbank Offered Rate (Libor) as the deadline for its demise approaches.
A record 91 per cent of new dollar swaps executed in May used the Secured Overnight Financing Rate (SOFR), the newly accepted US benchmark, as their reference rate.
Just 5 per cent of new swaps used Libor, down from 91 per cent two years earlier, according to data from post-trade services provider OSTTRA, which has figures on around 85 per cent of dollar trades.
Investors and companies use interest rate swaps to hedge against risks and to bet on the direction of rates. The Bank for International Settlements estimated that turnover in the US market was about US$2 trillion a day in 2022.
Libor will cease to exist in the coming months, after a years-long push by regulators to move away from a rate that bank traders were caught manipulating. It was once used in pricing everything from derivatives to student loans.
Dollar Libor quotes will end on June 30, although regulators have said a “synthetic” rate will continue for a period.
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SOFR is calculated by the Federal Reserve and is based on the cost of borrowing cash overnight in US repurchase markets.
It was used as the benchmark rate for 53 per cent of the notional amount of US dollar interest rate swaps traded in May, OSTTRA’s data showed.
Libor had a 4 per cent share, down from 67 per cent two years earlier, while the Fed funds rate had a 43 per cent share.
The two main derivatives clearing houses, the CME Group and LCH, have been converting US dollar Libor swaps into cleared SOFR swaps this year, with the process due to finish in July.
Many existing issues across financial markets are still linked to Libor, however. In February, around 80 per cent of institutional loans and collateralised debt obligations were still tied to the tarnished rate, according to private equity firm KKR. BLOOMBERG
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