Why the transition from LIBOR -> SOFR, rather than EFFR?
I wonder why the effective federal funds rate (EFFR) was not chosen to replace LIBOR starting 2021 as the benchmark interest rate? Points for EFFR: 1. Like EONIA and SONIA, it is the reference rate on overnight index swaps and represents an unsecured, fixed lending rate. 2. SOFR instead represents a secured rate, making it an awkward replacement for LIBOR (unsecured) 3. With the underlying repo mess compounded by regulation and bank balance sheet restrictions, SOFR is way more volatile, spiking seasonally (around year-end) and recently (2017-2019) during the Fed's BS normalization.
I get that SOFR is derived from a functionally much more liquid Treasury market, but surely with EFFR's stability, comparability and unsecured nature, it's the better alternative to replace LIBOR?
Any thoughts are appreciated!
Hi no arb baby please, check out these threads:
I hope those threads give you a bit more insight.
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