Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate – Does it impact my hedge program?

LIBOR-SOFR-Transition

With the LIBOR rate continuing to phase out, FASB announced last month that they have added the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) rate, as a benchmark interest rate to the list available for fair value hedging. The addition of the OIS rate based on SOFR brings the total number of benchmark rates up to 5 with Treasury, OIS based on Fed Funds, SIFMA and LIBOR.


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A few things to consider for your hedge program in regards to the OIS rate based on SOFR as a benchmark:

  • The rate is immediately available as a benchmark rate for companies who have early adopted ASU 2017-12.
  • When will the OIS rate based on SOFR become liquid and available for everyday over the counter trading?
  • SOFR based swaps are already trading, but the market is not liquid, yet.
  • What happens to your LIBOR instruments if LIBOR is no longer quoted? Look for fall-back provisions in your legal documents and ISDAs.
  • What will happen to your hedge designations? The FASB has not issued any specific guidance on this transition yet.

Although it’s still unclear how the transition will play out, SOFR is expected to replace LIBOR in the United States. British Banks have agreed to continue reporting LIBOR rates through the end of 2021, but whether they continue reporting LIBOR after that date is unknown.

Right now, there are more questions than answers, but here at Hedge Trackers we believe the FASB’s decision to add OIS based on SOFR as an approved benchmark interest rate will help the rate become more widely accepted, which should in turn increase the liquidity and availability of SOFR indexed hedging instruments.

If you have any questions, please Contact Us today.