The Federal Reserve on Friday announced final details of its plan to launch an alternative to the U.S. dollar London interbank offered rate (Libor) that was ubiquitous on financial contracts until plagued by scandal during the financial crisis.
In a release, the Fed said it now plans to publish the rate — the Secured Overnight Financial Rate or SOFR — no later than 8 a.m. Eastern each day beginning on April 1. The rate will be a broad measure of overnight Treasury financial transactions, or repos.
Libor is calculated each day by taking a poll of bank borrowing rates. During the financial crisis, banks were found to be rigging the rate by submitting false data because lending had dried up. This led U.S. regulators to develop an alternative. U.K. regulators are still seeking alternatives to other Libor rates.
U.S. regulators say the new rate cannot be rigged because it is based on the cost of short-term borrowing in highly liquid and robust markets.
“Because these rates are based on transactions securities by Treasury securities, they are essentially risk-free rates, providing a valuable benchmark for market participants to use in financial transactions,” the Fed said.
Phasing in the new rate by financial institutions is voluntary.