The London Interbank Offered Rate (LIBOR) was a key global benchmark interest rate for decades, used to set rates on trillions of dollars in loans, mortgages, derivatives, and other financial products. However, LIBOR was based on estimates from a panel of banks rather than actual transactions, leaving it prone to manipulation and inaccuracies. Following a major scandal and a decline in interbank lending activity, global regulators decided to phase out LIBOR and replace it with more robust, transaction-based rates.
The primary LIBOR Replacement Index in the U.S. is the Secured Overnight Financing Rate (SOFR). SOFR is derived from real transactions in the U.S. Treasury repurchase (repo) market, where financial institutions borrow cash overnight using Treasury securities as collateral. This secured, transaction-based approach makes SOFR a more reliable and transparent benchmark.
The transition from LIBOR to SOFR was carefully managed over several years to update contracts, loan agreements, and financial products. LIBOR publication ceased mostly by the end of 2021, with some USD LIBOR settings available until mid-2023 for legacy contracts. Financial institutions had to “repaper” billions in existing contracts to reference SOFR or other alternative rates.
Most variable-rate loans, such as adjustable-rate mortgages (ARMs), private student loans, corporate loans, and floating-rate bonds, now use SOFR as their index. Borrowers have seen their interest rates reset based on SOFR plus a margin, usually designed to maintain economic neutrality relative to LIBOR.
Understanding the differences between LIBOR and SOFR is crucial:
- LIBOR was an unsecured, estimate-based rate available in various terms (overnight to one year).
- SOFR is a secured, overnight rate based on actual transactions, with term rates derived.
For consumers, the LIBOR transition aimed to be seamless, with lenders notifying borrowers of new benchmarks. If you have a LIBOR-linked loan, review your loan documents and statements to understand the new index and consider refinancing options if desired.
For more details, see our related glossary entries on LIBOR-Based Loan Transition and Adjustable-Rate Mortgage (ARM).
Authoritative resources include the Alternative Reference Rates Committee (ARRC) and the Consumer Financial Protection Bureau’s guide on LIBOR.
