The London Inter-bank Offered Rate (LIBOR) is used as a reference rate for more than $200 trillion of financial contracts in the cash and derivatives markets. LIBOR is based on daily submissions of estimated borrowing rates by a panel of banks. Due to changes in the financial markets, the regulator of LIBOR – the United Kingdom’s Financial Conduct Authority – announced that panel banks voluntarily agreed to submit rates through the end of 2021, but that these submission and the publication of LIBOR could cease after that, potentially resulting in the phase out of LIBOR as a widely-used benchmark interest rate.
In the United States, the Federal Reserve formed the Alternative Reference Rates Committee (ARRC) in 2014 to determine the implications of a LIBOR phase out and identify an alternative reference interest rate that can be used for a large volume and broad range of financial products and contracts. The committee was also charged with creating a plan that would facilitate the transition from LIBOR to an alternative rate. This transition is now underway.
SOFR is an alternative index that has the support of the ARRC and the U.S. Federal Reserve. This index is based on a broad measure of the overnight cash lending that is collateralized by U.S. Treasury securities in the repurchase agreement (repo) market. This rate is produced by the New York Fed in cooperation with the Office of Financial Research. To facilitate a smooth transition from LIBOR to SOFR, the ARRC published a Paced Transition Plan that outlines the development of a forward-looking SOFR term reference rate by the end of 2021.
For additional details on the ARRC’s transition plan, how the rates are calculated and a general overview of SOFR, read the ARRC’s April 2019 “A User’s Guide to SOFR”.
Freddie Mac is a member of the ARRC and actively engaged in conversations with FHFA and other ARRC members on this issue.
We are currently developing a strategy to address the transition from LIBOR to alternate indices, including the development of new SOFR-based loan and securitization offerings. Check back here for the latest information or contact us with questions.
On February 12, 2020, Freddie Mac priced a new offering of K Certificates that includes a class of floating-rate bonds indexed to SOFR. The K-F74 Certificates are backed by floating-rate multifamily mortgages with 7-year terms, which are currently LIBOR-based.
On December 12, Freddie Mac Multifamily brought to market the first multifamily real estate securitization with bonds indexed to SOFR. This offering, K-F73, was comprised of $765 million 10-year floating-rate bonds, of which $200 million were indexed to SOFR and $565 million were indexed to LIBOR.