medium · Debt Capital Markets bond-instruments-structures
Why did the market transition from LIBOR to SOFR, and what is a key structural difference between the two benchmarks?
- SOFR embeds a bank credit premium that rises during financial crises to compensate lenders for risk.
- SOFR is a transaction-based risk-free rate, whereas LIBOR was a survey-based rate embedding bank credit risk.
- SOFR is a forward-looking term rate fixed in advance for a 3-month period, while LIBOR was always an overnight rate.
- SOFR is derived from unsecured interbank lending estimates that major panel banks submit each business day.
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