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Frequently Asked Questions

Version: January 31, 2019

Please note: These Frequently Asked Questions were prepared by the ARRC for use by market participants and are 

current as of the version date noted above. However, this document will evolve over time as new developments take 

place and new questions are raised. If you have a question to which you are seeking an answer, general ARRC inquiries 

can be directed to the ARRC Secretariat at ARRC@ny.frb.org. The ARRC will endeavor to incorporate those topics 

below. Please also visit the ARRC’s website or sign up to receive alerts from the ARRC. Thank you. 

1. What is the Alternative Reference Rates Committee (ARRC)?

The ARRC, which first met in December of 2014, is comprised of a group of market 

participants initially convened by the Board of Governors of the Federal Reserve System 

(Federal Reserve Board) and the New York Fed in cooperation with the U.S. Department of 

the Treasury (Treasury), the U.S. Commodity Futures Trading Commission (CFTC), and the 

U.S. Office of Financial Research (OFR) to identify an alternative reference rate for use 

primarily in derivatives contracts. The ARRC was charged with finding a rate that was more 

firmly based on transactions from a robust underlying market and that would comply with 

certain standards, including the IOSCO Principles for Financial Benchmarks. The ARRC 

was also tasked with preparation of a plan to facilitate the acceptance and use of the selected 

alternative reference rate on a voluntary basis. Finally, the ARRC was tasked with 

considering best practices related to robust contract design to ensure that contracts are 

resilient to the possible cessation or material alteration of existing or new benchmarks.

Given the focus on alternative reference rates for derivatives at the time of its inception, the 

ARRC initially consisted of representatives from fifteen large global dealers in U.S. dollar 

interest rate derivatives. As its work progressed, the ARRC invited several central 

counterparties (CCPs) and other organizations to join. Following the release of its Interim 

Report and Consultation in May 2016, the ARRC formed an Advisory Group of key end 

users across a variety of market sectors in order to ensure that its recommendations reflected 

a wide consensus of market participants. 

The ARRC has also held three public roundtables, in June 2016, November 2017, and July 

2018 to inform market participants and seek their views. The ARRC’s Interim Report in May 

2016 also included a request for comments in order to consult widely and closely with a wide 

range of market participants with exposure to LIBOR as it sought to finalize a choice of 

alternative rate and transition strategies. The ARRC’s progress in meeting its initial objectives 

is summarized in its Second Report, issued in March of 2018. 

Andrew Bailey’s speech in July 2017 called into question the availability of LIBOR post-2021 

and pushed a wider segment of market participants to focus on their long-standing exposure 

to LIBOR. After publication of its Second Report, the ARRC was reconstituted in 2018 

with an expanded membership to facilitate the much broader interest in mitigating risks 

related to LIBOR. 

2. Why does the market need a new benchmark interest rate?
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The ICE LIBOR is the most widely used interest rate benchmark in the world. LIBOR is 

calculated and published daily across five currencies and seven maturities by ICE Benchmark 

Administration and based on submissions by panel banks. This benchmark is meant to 

reflect the cost at which large, globally-active banks can borrow on an unsecured basis in 

“wholesale” markets, which include borrowing from other banks as well as using commercial 

paper or uninsured certificates of deposit. U.S. dollar (USD) LIBOR is used as a reference 

rate for more than $200 trillion in notional amount of financial contracts in the cash and 

derivatives markets.

LIBOR is increasingly based on the expert judgment of panel banks due to the declining 

amount of unsecured, wholesale borrowings by banks since the financial crisis. For this 

reason, LIBOR is increasingly less of a robust, transactions-based market interest rate as 

envisioned by international standards for benchmarks as set forth in the International 

Organization of Securities Commissions’ (IOSCO) Final Report: Principles for Financial 

Benchmarks and the Financial Stability Board’s (FSB) Report: Reforming Major Interest 

Rate Benchmarks, published in July 2013 and 2014 respectively. As noted by the Financial 

Stability Oversight Council, the scarcity of underlying transactions also makes LIBOR 

potentially unsustainable, as many banks have grown uncomfortable in providing 

submissions based on expert judgment and may eventually choose to stop submitting 

altogether. Two banks have already stopped submitting to USD LIBOR since 2016. The 

relatively small number of transactions underpinning LIBOR has been driven by changing 

market structure, regulatory capital, and liquidity requirements as well as changes in bank risk 

appetite for short-term funding, and is unlikely to change.

Accelerating concerns about LIBOR’s viability, on July 27, 2017, Andrew Bailey (the Chief 

Executive of the United Kingdom’s Financial Conduct Authority, or FCA, the regulator of 

LIBOR) publicly stated in a speech about the future of LIBOR that the FCA had to exert 

significant effort in convincing banks to remain on the LIBOR panels and that it would not 

persuade or compel LIBOR panel banks to make LIBOR submissions beyond the end of 

2021. As a consequence, the future of LIBOR beyond 2021 is uncertain. Bailey has advised 

that firms should treat LIBOR’s end as something that will occur and not as a remote “black 

swan” event.

Because USD LIBOR is used in such a large volume and broad range of financial products 

and contracts, the uncertainty surrounding LIBOR’s sustainability poses a potential threat to 

the safety and soundness of individual financial institutions and to the financial system. 

Without advance preparation, a sudden cessation of such a heavily-used reference rate would 

cause considerable disruptions to, and uncertainties around, the large gross flows of USD 

LIBOR–related payments and receipts among many firms. It would also impair the normal 

functioning of a variety of markets, including business and consumer lending.

Hence, financial markets need a durable and more robust alternative interest rate benchmark.

3. Which organizations are members of the ARRC?
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The ARRC’s structure facilitates collaboration between the market and the official sector. 

ARRC members currently include both banks and a number of non-banks. The full list of 

members are here on the ARRC’s website. 

4. What is the recommended alternative for USD LIBOR and what other rates were 

considered?

On June 22, 2017, the ARRC identified the Secured Overnight Financing Rate (SOFR), as its 

recommended alternative to USD LIBOR. The ARRC considered a comprehensive list of 

potential alternatives, including other term unsecured rates, overnight unsecured rates such 

as the Effective Federal Funds Rate (EFFR) and the Overnight Bank Funding Rate (OBFR), 

other secured repo rates, Treasury bill and bond rates, and overnight index swap rates linked 

to EFFR. After extensive discussion, the ARRC preliminarily narrowed this list to two rates 

that it considered to be the strongest potential alternatives: OBFR and some form of 

overnight Treasury repo rate. The ARRC discussed the merits of and sought feedback on 

both rates in its 2016 Interim Report and Consultation and in a public roundtable. The 

ARRC made its final choice of SOFR after incorporating feedback from the consultation 

and from the members of its Advisory Group. 

5. What is SOFR and why is it more robust than LIBOR?

SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. 

Treasury securities. SOFR is published by the Federal Reserve Bank of New York and is 

determined based on transaction data composed of: (i) tri-party repurchase agreements 

(repo), (ii) General Collateral Finance (GCF) repo, and (iii) bilateral Treasury repo 

transactions cleared through Fixed Income Clearing Corporation (FICC). In terms of the 

transactions underpinning SOFR, it has the widest coverage of any Treasury repo rate 

available. The transaction volumes underlying SOFR are far larger than the transactions in 

any other U.S. money market and dwarf the volumes underlying LIBOR.

SOFR is a good representation of general funding conditions in the overnight Treasury repo 

market. As such, it will reflect an economic cost of lending and borrowing relevant to the 

wide array of market participants active in the market, including not only broker-dealers, but 

also money market funds, asset managers, insurance companies, securities lenders, and 

pension funds.

The ARRC believes that SOFR is the most appropriate reference rate for wide-spread and 

long-term adoption as market participants seek to transition from LIBOR because, among 

other reasons, it:

 is IOSCO compliant; 

 is fully transaction-based; 

 encompasses a robust underlying repo market with more than $700 billion in 

daily transactions; 

 is an overnight nearly risk-free reference rate that correlates closely with 

other money market rates; and

 covers multiple repo market segments allowing for future market evolution.
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6. What is the timeline for the transition from LIBOR to SOFR? Will there be a “term 

SOFR”?

To facilitate a smooth and orderly transition from USD LIBOR to SOFR, the ARRC 

published a plan (the Paced Transition Plan), which outlines the key milestones until the end 

of 2021. 

The first steps in the Paced Transition Plan, targeted for 2018 and early 2019, are focused on 

creating a baseline level of liquidity for derivatives contracts referencing SOFR. End users 

cannot be expected to choose or transition cash products to a benchmark that does not have 

at least a threshold level of liquidity in derivatives markets required for hedging of interest 

rate risk. 

During the course of the year in 2019, increased trading activity in SOFR-linked futures and 

OIS markets should foster accumulation of price histories and in turn help market 

participants develop an understanding of the term-structure dynamics of longer-dated 

exposures in SOFR. As liquidity develops, as the next step, CCPs are expected to provide 

their members with a choice of clearing instruments using discounting curves based on 

SOFR and paying SOFR as interest on collateral posted by the first quarter of 2020. As 

liquidity in longer-term SOFR derivatives develops further, CCPs would then move to 

exclusively using SOFR discount curves and paying SOFR as interest on collateral for all 

new trades.

Once these initial steps of the Paced Transition Plan are successfully accomplished, which is 

expected in 2021, and liquid derivative markets referencing SOFR have developed, the final 

step in the Paced Transition Plan calls the creation of a forward-looking term rate based on 

SOFR-linked derivative markets. Availability of a forward-looking term structure for SOFR 

may be necessary to transition some cash products from USD LIBOR to SOFR to ensure 

certainty of cash flows for retail and corporate end users. With the availability of SOFR term 

rates and liquid derivative markets, it is expected it will be possible to use SOFR for cash 

products before the end of 2021.

Subsequent to the publication of SOFR on April 3, 2018, there have been a number of 

notable steps made by the industry in line with the Paced Transition Plan, certain elements 

of which are now ahead of schedule. These include CME Group successfully launching 1-

month and 3-month SOFR futures on May 7, 2018, clearing of SOFR OIS and basis swaps 

at LCH beginning July 18, 2018, and the announcement that CME Group will clear SOFR

swaps in the third quarter of 2018.

7. Who administers and produces SOFR and how is the rate production process 

reviewed?

The New York Fed is the administrator and producer of SOFR. The New York Fed 

publishes SOFR on a daily basis on its website at approximately 8:00 a.m. eastern time. 
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An internal New York Fed Oversight Committee periodically reviews the rate production 

process. The Oversight Committee consists of members from across the New York Fed 

organizational structure who are not involved in the daily production of SOFR. It is chaired 

by the New York Fed’s Chief Risk Officer and includes senior staff from various control 

areas of the New York Fed, in addition to a representative from the OFR.

The New York Fed has endeavored to adopt policies and procedures consistent with best 

practices for financial benchmarks, including the IOSCO Principles for Financial 

Benchmarks. In June 2018, the New York Fed updated its IOSCO Statement of Compliance

to cover SOFR, Broad General Collateral Rate, and the Tri-Party General Collateral Rate. 

More information is available at: https://www.newyorkfed.org/markets/treasury-reporeference-rates-information

To view the rate, visit: https://apps.newyorkfed.org/markets/autorates/sofr

8. Is SOFR meant to co-exist with LIBOR, or is it meant to replace LIBOR?

The ARRC’s focus is to encourage voluntary adoption of SOFR, rather than to mandate a

transition away from USD LIBOR. SOFR, therefore, will co-exist with USD LIBOR as long 

as USD LIBOR is published, offering market participants an alternative reference rate for 

new transactions. 

Although the adoption of SOFR is voluntary, the heightened risk of discontinuation of 

LIBOR after the end of 2021 makes it essential that market participants consider moving to 

alternative rates such as SOFR and that they have appropriate fallback language in existing 

contracts referencing LIBOR. In its 2018 Second Report, the ARRC estimated that only 

82% of contracts referencing USD LIBOR as of December 31, 2016 will have matured by 

2021. The ARRC is currently working to promote the use of SOFR on a voluntary basis as 

well as to recommend more robust fallback language in new contracts referencing LIBOR. 

9. Who will be impacted by this transition from LIBOR to SOFR?

The total exposure to USD LIBOR, as of the end of 2016, is close to $200 trillion, roughly 

equivalent to 10 times U.S. Gross Domestic Product. Although the notional size of the 

derivatives markets accounts for 95 percent of the outstanding gross notional value of all 

financial products referencing USD LIBOR, it is also referenced in several trillion dollars of 

corporate loans, floating-rate mortgages, floating rate notes, and securitized products. Due to 

the broad use of USD LIBOR as a reference rate, all financial market participants including 

retail customers, corporations, issuers, investors, asset managers, service providers of 

financial products, and large financial institutions are impacted by the risks associated with 

USD LIBOR.

In addition, LIBOR is extensively used across a range of business processes (for example, 

accounting, valuation, and financial modeling) across many industries. Hence, beyond 

financial products and legal contracts, businesses that have exposure to USD LIBOR 

embedded in their business processes are also likely to be impacted.
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10. What sort of financial products are expected to reference SOFR?

SOFR is a fully transaction-based, overnight near risk-free reference rate and is a good 

representation of general funding conditions in the U.S. money markets. As such, SOFR is 

suitable to be used across a broad range of financial products, including but not limited to, 

derivatives (listed, cleared, and bilateral-OTC), and many variable rate cash products that 

have historically referenced LIBOR. The ARRC’s Paced Transition Plan also contemplates 

the development of term SOFR rates to better accommodate certain cash products (e.g. 

corporate loans) that may require a forward-looking term rate. In addition, SOFR is also 

suitable as a reference rate to be used as a general proxy for interest rates in a range of 

business processes (accounting, valuation, and financial modeling).

The heightened risk that LIBOR will stop after 2021 makes it essential that market 

participants consider moving to alternative rates. SOFR should be considered for use in both 

new products and as a fallback for USD LIBOR in existing contracts that reference USD 

LIBOR. 

11. What is “fallback language”?

In this context, “fallback language” refers to the legal provisions in a contract that apply if 

the underlying reference rate in the product (e.g. LIBOR) is discontinued or unavailable. The 

FSB’s Official Sector Steering Group (OSSG) has recommended that market participants 

both understand their contractual fallback arrangements and ensure that those arrangements 

are robust enough to prevent potentially serious market disruptions in a LIBOR cessation 

event. The ARRC supported this recommendation in its Second Report, and in July 2018, 

the ARRC released its guiding principles for the development of fallback language in new 

financial contracts for cash products. Because LIBOR is a heavily-used reference rate, its

permanent cessation without viable fallback language in contracts would cause considerable 

disruption to financial markets and uncertainties around the large gross flows of USD 

LIBOR–related payments and receipts between many financial participants. It would also 

impair the normal functioning of a variety of markets, including business and consumer 

lending.

12. What should market participants do to strengthen fallback language in derivatives?

Fallback provisions for LIBOR in derivatives contracts currently trigger only if a temporary 

cessation of LIBOR occurs (e.g., a computer glitch) and may not be workable and could lead 

to an unintended economic outcome if LIBOR ceases to be published. Accordingly, in July 

2016, the OSSG requested that the derivatives industry trade group (the International Swaps 

and Derivatives Association, or ISDA) lead a cross-currency initiative to improve derivatives

contract robustness to address risks of discontinuance of widely-used interest rate 

benchmarks, including LIBOR. As such, ISDA is in the process of updating the definitions

of USD LIBOR and other key benchmarks tied to interbank funding markets used in 

derivatives contracts to include new fallbacks (SOFR with certain contemplated adjustments

for USD LIBOR) in the event of a permanent discontinuation of the relevant benchmark. 

ISDA also plans to publish a multilateral protocol to assist market participants in including 
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the amended definitions (i.e., the definitions with fallbacks for benchmark cessations) in 

legacy swap contracts. In contrast to non-derivatives (cash products), because of the 

standardization of derivative contracts and the leadership of ISDA described above, 

updating fallbacks in LIBOR-based derivatives contracts should be relatively straightforward. 

ISDA has not yet finalized its fallback language primarily because of plans to apply both a 

credit spread adjustment and a term fixing adjustment at the time of the fallback to SOFR. 

In order to select the best methods for calculating such adjustments, ISDA will be inviting 

market participants to weigh in on a number of proposed methodologies during market-wide 

consultations, the first of which is open until October 12, 2018.

13. What should market participants do to strengthen fallbacks in cash products?

As discussed above, in order to protect against a potential cessation of LIBOR, it is 

recommended that market participants include more robust fallback language in LIBORbased non-derivatives contracts, including loans, bonds, securitizations, consumer 

mortgages, etc. (collectively, “cash products”). The challenge of preparing consistent and 

durable new fallback language for various cash products has drawn the attention of the 

ARRC, which has formed a number of cash product-focused working groups leveraging 

experts in its expanded membership to review alternative fallback language. Although the 

timing and method of implementing new fallbacks in cash products will vary with the 

product type, the ARRC plans to consult on standardized fallback language available for 

voluntary adoption for a variety of cash products by the end of 2018. 

14. How do we know SOFR is here to stay?

After more than two years of research and consultation, the ARRC identified SOFR as the 

most suitable alternative reference rate for USD LIBOR. In recommending SOFR as the 

alternative reference rate, the ARRC considered a variety of factors, including the depth of 

the underlying market and its likely robustness over time; the rate’s usefulness to market 

participants; and whether the rate’s construction, governance, and accounting would be 

consistent with the IOSCO Principles for Financial Benchmarks. The ARRC also considered 

the input of a wide range of market participants, including feedback from its Advisory 

Group, in making its recommendations. The overnight U.S. Treasury repo market that 

SOFR is based on is the largest rates market at a given maturity in the world, and SOFR 

encompasses the widest coverage of the market available, which will allow it to evolve with 

the market. The ARRC concluded that SOFR is superior to USD LIBOR, and other 

alternative reference rates considered by the ARRC. The coordination with a broad range of 

financial market participants, and commitments from the private-sector (including the 

financial services industry) will ensure the availability, adoption, and transition to SOFR in a 

smooth and timely manner.

15. How does SOFR compare to other “IBOR” alternatives selected in other countries?

The FSB identified its concerns on the vulnerability of LIBOR across currencies. As a 

result, the need to transition away from LIBOR to alternative reference rates is not limited to 
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USD LIBOR. Most major currency jurisdictions have identified a need for reforming major 

interest rate benchmarks. Public/private-sector working groups similar to the ARRC have 

been formed in the other currencies for which LIBOR is quoted.

The alternative reference rates selected by the major currency areas are outlined in the table 

below. Most have selected some form of overnight rate:

Jurisdiction Working 

Group

Alternative 

Rate

Secured vs. 

Unsecured

Overnight 

vs. Term

Rate 

Administration

U.S. Alternative 

Reference 

Rates 

Committee

Secured 

Overnight 

Financing 

Rate 

(SOFR)

Secured Overnight Federal 

Reserve Bank 

of New York

U.K. Working 

Group on 

Sterling 

Risk-Free 

Reference 

Rates

Reformed 

Sterling 

Overnight 

Index 

Average 

(SONIA)

Unsecured Overnight Bank of 

England

Switzerland The 

National 

Working 

Group on 

Swiss Franc 

Reference 

Rates

Swiss 

Average 

Rate 

Overnight 

(SARON)

Secured Overnight SIX Swiss 

Exchange

Japan Study 

Group on 

Risk-Free 

Reference 

Rates

Tokyo 

Overnight 

Average 

Rate 

(TONAR)

Unsecured Overnight Bank of Japan

Euro area Working 

Group on 

Risk-Free 

Reference 

Rates for 

the Euro 

Area

Euro ShortTerm Rate 

(ESTER)

Unsecured Overnight ECB

16. How volatile is SOFR as a benchmark rate?

Contracts referencing SOFR are usually based on an average of daily interest rates over a given 

period of time. These averages of SOFR are quite smooth and can be easily referenced in financial 

contracts, as demonstrated by the growing use of SOFR in futures, swaps, and floating-rate notes. 

SOFR futures and OIS, and the many SOFR floating rate notes that have been issued all use either a 
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compound or linear average of SOFR over a fixed period of time as the floating rate paid under the 

terms of the contract, not a single day’s realization of SOFR.

Overnight rates in the repo market are inherently somewhat volatile, and the dynamics that generate 

much of the volatility are well-known and somewhat predictable. For example, settlements of 

Treasury securities typically cause fluctuations in rates throughout the month, and in particular on 

coupon settlement dates at the middle and end of months, while balance sheet management by some 

repo market participants contributes to temporary volatility around quarter-end dates. 

While these features of the Treasury repo market can contribute to some day-to-day volatility of 

SOFR, this volatility has little impact on the averages of SOFR that are used in financial contracts. 

These averages of SOFR are less volatile than SOFR itself.

The ARRC’s Second Report emphasized this point, showing that a 3-month average of overnight 

Treasury repo rates has historically been less volatile than 3-month U.S. dollar LIBOR over a wide 

range of market conditions (see Figure 5 of the ARRC’s Second Report). 

The charts below make clear that this remains the case, even given the volatility witnessed in 

Treasury repo rates at the end of 2018. The first chart shows overnight SOFR along with 1-, 3- and 

6-month averages of SOFR. The volatility in overnight SOFR is clearly visible, but it also can be 

seen to have had a negligible impact on the averages of SOFR. The second chart demonstrates that 

the point made in the ARRC’s Second Report remains true: a 3-month average of SOFR is less 

volatile than 3-month LIBOR. 
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