Nov
18
Originally published by Lisa Pendergast in NAIOP's Fall 2020 Issue.
SOFR, the new U.S. dollar replacement rate, differs in crucial ways from its longstanding forerunner.
The London interbank offered rate, or LIBOR, is a critically important number in the world of finance. It is the basis for hundreds of trillions of dollars in contracts around the world. These include everything from complex derivatives to home mortgage loans.
According to calculations from the Federal Reserve, the estimated exposure for U.S. dollar LIBOR alone is approximately $200 trillion. Despite that large number, the underlying transactions that help determine LIBOR are a mere fraction of this amount. The rate is primarily based on submissions by certain banks based on what they estimate they would be charged to borrow from one another.
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