Banking Law: LIBOR to SOFR Transition Explained
- Francesca Lee
- Oct 8, 2021
- 3 min read
Updated: 3 days ago
Author: Stefan Schmierer, Managing Partner
“The LIBOR system is structurally flawed. It is a major problem for our financial system and for the confidence in the financial system. We need to address it.” - Ben Bernanke
The Alternative Reference Rates Committee (the “ARRC”), representing a group of private-market participants convened by the Federal Reserve Board and Federal Reserve Bank of New York, has announced on 29 July 2021 that it would be formally recommending CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) term rates. That signifies the heyday of USD LIBOR is going to end and here comes the era for the SOFR.
LIBOR and SOFR explained
LIBOR (London Interbank Offered Rate) has historically been the globally accepted benchmark interest rate for measuring borrowing costs among banks. It is published daily by the Intercontinental Exchange and calculated across five major currencies and seven maturities.
LIBOR has been widely used in interbank lending, derivatives, mortgages, bonds, and consumer loan products, and has served as a macro‑level indicator of interest rate conditions and banking system health.
SOFR as an Alternative Reference Rate
Alongside USD LIBOR, SOFR has been published by the Federal Reserve Bank of New York since 2018. It measures the cost of overnight borrowing collateralised by U.S. Treasury securities in the repurchase agreement market.
SOFR is derived from actual transaction data, including tri‑party repo, general collateral finance repo, and bilateral Treasury repo transactions cleared through the Fixed Income Clearing Corporation, providing a comprehensive view of funding market conditions.
Why SOFR Over USD LIBOR
“We urge the Department of Justice to carefully investigate and aggressively prosecute all senior bank officials who participated in manipulating the London interbank offered rate throughout the financial crisis.” - Peter Welch
The LIBOR to SOFR transition stems largely from the 2008 financial crisis, LIBOR manipulation scandals, and declining underlying interbank borrowing activity.
Limitations of LIBOR
Diminishing underlying transactions
Banks increasingly rely less on unsecured wholesale borrowing, leaving LIBOR unsupported by sufficient transaction volume.
Unreliable Estimates
LIBOR is based on bank estimates, creating vulnerability to manipulation, unlike SOFR’s transaction‑based methodology.
Strengths of SOFR
Robust underlying transaction
SOFR reflects extensive activity in the repo market, which exceeds traditional interbank borrowing volumes.
Actual Transactions to Support the Rate
SOFR is underpinned by observable market transactions, enhancing reliability.
“None of this represented the glorious next stage of human evolution, but I was learning things. I was moving up.” - Robin Sloan
Practical Tips for the LIBOR to SOFR Transition
Watch the deadlines: USD LIBOR new contracts ceased after 31 December 2021, with remaining USD tenors ending 30 June 2023.
Incorporate fallback triggers and rates: Contracts should specify fallback mechanisms for discontinuation or non‑representativeness.
Beware of jurisdictional differences: In Hong Kong, HIBOR and HONIA coexist alongside SOFR‑based references.
Key Takeaway
With the completion of the LIBOR to SOFR transition, financial institutions must reassess legacy contracts, update documentation, upgrade internal systems, and communicate with counterparties. As a leading financial centre, Hong Kong practitioners must be prepared.
How Ravenscroft & Schmierer Can Help
The LIBOR to SOFR transition raises complex contractual, regulatory, and operational issues for banks and financial institutions. Ravenscroft & Schmierer advises on contract remediation, fallback drafting, regulatory compliance, and risk assessment for benchmark transitions. If your organisation is reviewing legacy LIBOR exposure or implementing SOFR‑based frameworks, contact us to discuss your circumstances and available options.
FAQ: The LIBOR to SOFR Transition
What is LIBOR?
LIBOR is a benchmark interest rate based on estimated interbank borrowing costs.
What is SOFR?
SOFR is a transaction‑based benchmark measuring overnight borrowing costs collateralised by U.S. Treasury securities.
Why is LIBOR being replaced?
LIBOR lacked sufficient underlying transactions and was vulnerable to manipulation.
Does SOFR replace all benchmark rates?
No. Other benchmarks such as HIBOR and HONIA continue to apply in certain jurisdictions.
How can Ravenscroft & Schmierer assist with the LIBOR to SOFR transition?
Ravenscroft & Schmierer advises on benchmark replacement strategies, contract amendments, and regulatory compliance.
Does Ravenscroft & Schmierer advise on fallback rate drafting?
Yes. We assist with drafting and reviewing fallback provisions in financial contracts.
Can Ravenscroft & Schmierer advise on Hong Kong benchmark issues?
Yes. We advise on the interaction between SOFR, HIBOR, HONIA, and other benchmark rates.
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
This article was first published in the October 2021 issue of the Hong Kong Lawyer, the official journal of The Law Society of Hong Kong. Please check it here: http://www.hk-lawyer.org/content/important-banking-law-update-libor-sofr-basics-explained-and-tips-provided
This article is co-authored by Joshua Chu from ONC Lawyer.
For specific advice about your situation, please contact:
Managing Partner
+852 2388 3899
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