What Replaced LIBOR? SOFR, Term SOFR, and the LIBOR Act

LIBOR was replaced by a family of overnight benchmark rates, one per major currency, each anchored in actual lending transactions rather than bank estimates. For U.S. dollar contracts, the replacement is the Secured Overnight Financing Rate, or SOFR. The British pound moved to SONIA, the euro to €STR, and the Japanese yen to TONA. The last LIBOR settings were published on September 30, 2024, ending the benchmark’s role in global finance.¹

The Replacement Rate in Each Currency

The four replacements are collectively called Risk-Free Rates (RFRs). Each is based on actual transactions in a deep, liquid overnight market, and each reflects a near-risk-free cost of borrowing. That last point matters: LIBOR baked in a bank credit risk premium that these new rates deliberately exclude.

U.S. dollar — SOFR. The Secured Overnight Financing Rate measures the cost of borrowing cash overnight against U.S. Treasury securities as collateral. The Alternative Reference Rates Committee selected it in 2017 as the recommended replacement for USD LIBOR.²
British pound — SONIA. The Sterling Overnight Index Average tracks what banks pay on unsecured overnight sterling deposits. The Bank of England administers it.³
Euro — €STR. The Euro Short-Term Rate reflects wholesale unsecured overnight borrowing costs of euro-area banks. The European Central Bank publishes it each business day.⁴
Japanese yen — TONA. The Tokyo Overnight Average Rate measures uncollateralized overnight lending in the Japanese call money market, published by the Bank of Japan.

All four are overnight benchmarks by design. Overnight markets carry enormous transaction volumes, which makes rates built on them very hard to manipulate.

Why LIBOR Had to Go

LIBOR — the London Interbank Offered Rate — was set each day by asking a panel of major banks what rate they thought they could borrow at from one another on an unsecured basis. Those submissions were averaged into a single number, and that number priced an estimated $300 trillion of financial contracts worldwide, from home mortgages to complex derivatives.⁵

The problem was structural. Because LIBOR rested on what banks said rather than what they actually paid, it was easy to game. Beginning around 2012, regulators uncovered widespread manipulation by traders at Deutsche Bank, Barclays, UBS, and others who nudged submissions to benefit trading positions, and the resulting enforcement actions produced billions in fines. Regulators concluded that a benchmark built on expert judgment rather than real transactions was too fragile to underpin the global financial system. The fix was to retire LIBOR entirely and replace it with rates anchored in observable, high-volume overnight lending activity.

How SOFR Works

SOFR is the rate most U.S. borrowers, bondholders, and derivatives users will encounter. It measures the cost of borrowing cash overnight in the U.S. Treasury repurchase agreement market, where cash is lent against Treasury securities as collateral. The collateral backing is why SOFR is called a “secured” rate, and it’s the biggest structural break from LIBOR, which was unsecured.

The Federal Reserve Bank of New York calculates and publishes SOFR each business day at approximately 8:00 a.m. Eastern Time.⁶ The rate combines transactions from three segments of the Treasury repo market: tri-party repo, general collateral finance repo, and bilateral repo cleared through the Fixed Income Clearing Corporation. The calculation uses a volume-weighted median, a statistical method that resists manipulation by outliers.⁷

Transaction volumes underlying SOFR regularly exceed $1 trillion per day, dwarfing every other U.S. money market.² That depth is the point. A rate built on a trillion dollars of daily activity is far harder to push around than one built on a handful of bank estimates.

SOFR Averages and the SOFR Index

A single overnight rate has limited use for loans or bonds that accrue interest over weeks or months. To bridge that gap, the New York Fed publishes compounded SOFR averages over rolling 30-, 90-, and 180-day windows, plus a daily SOFR Index. The Index tracks the cumulative effect of compounding SOFR daily since April 2, 2018, so participants can calculate compounded interest over any custom period by dividing two Index values.⁸

Term SOFR

SOFR is backward-looking: it tells you what overnight borrowing cost yesterday, not what it will cost over the next three months. That’s a problem for business loans, where both sides need to know the interest payment at the start of each period. LIBOR handled this naturally because it was quoted in forward-looking tenors like one-month, three-month, and six-month rates.

The answer is Term SOFR, a set of forward-looking rates for one-, three-, six-, and twelve-month periods derived from trading in SOFR futures. It’s administered by CME Group, and the ARRC formally endorsed it in 2021 for use in business loans. Over 2,870 firms globally have adopted it.⁹ For a corporate borrower, Term SOFR feels much like LIBOR did: you know your rate at the start of the accrual period.

The Credit Spread Adjustment

Swapping LIBOR for SOFR straight across would have transferred value quietly from lenders to borrowers. LIBOR carried a premium for unsecured bank credit risk. SOFR, backed by Treasuries, doesn’t, and runs lower as a result. To keep the switch economically neutral, the ARRC and ISDA locked in fixed credit spread adjustments based on the five-year historical median difference between each LIBOR tenor and compounded SOFR. The values were finalized on March 5, 2021, the date the UK Financial Conduct Authority announced USD LIBOR would cease:¹⁰

1-month USD LIBOR: 11.448 basis points
3-month USD LIBOR: 26.161 basis points
6-month USD LIBOR: 42.826 basis points
12-month USD LIBOR: 71.513 basis points

These figures are permanent. They don’t move with the market. A basis point is one-hundredth of a percentage point, so the 3-month adjustment of 26.161 basis points equals roughly 0.26%. A legacy contract originally tied to 3-month LIBOR is typically re-referenced to 3-month Term SOFR plus 0.26161%.

What Happened to Existing LIBOR Contracts

Choosing SOFR was straightforward. Rewiring hundreds of trillions of dollars of contracts that named LIBOR by name was not. How a given contract transitioned depended on how well it was drafted.

Contracts With Working Fallback Language

Better-drafted contracts spelled out what happens if LIBOR disappears. For derivatives, the International Swaps and Derivatives Association published the ISDA 2020 IBOR Fallbacks Protocol; parties that adhered saw their contracts automatically switch to the relevant RFR plus the applicable spread adjustment when LIBOR ceased.¹¹

Tough Legacy Contracts and the LIBOR Act

Many contracts had no workable fallback, or pointed to something unhelpful like “the last available LIBOR rate,” which would have frozen interest payments forever. Fixing them one by one was impractical; some required unanimous consent from thousands of counterparties. These became known as “tough legacy” contracts.

Congress addressed the problem with the Adjustable Interest Rate (LIBOR) Act, passed in March 2022. For contracts governed by U.S. law that lacked a workable fallback, a SOFR-based rate selected by the Federal Reserve Board steps in by operation of law, without any party’s consent.¹²

The Federal Reserve implemented the Act through Regulation ZZ, which specifies which SOFR-based rate applies to each type of contract. Commercial loans go to the corresponding CME Term SOFR tenor plus the applicable spread. Derivatives go to the ISDA Fallback Rate based on compounded SOFR. Consumer loans got a one-year cushion during which the spread adjustment moved linearly from the actual LIBOR-to-SOFR difference on the last day before cessation to the permanent static spread.¹³ The Act also gives parties who use the Board-selected replacement rate a safe harbor against breach-of-contract claims arising solely from the switch.¹⁴

Adjustable-Rate Mortgages and Other Consumer Loans

If you had an adjustable-rate mortgage tied to LIBOR, your loan moved to a SOFR-based index. The Consumer Financial Protection Bureau confirmed that when a lender replaces LIBOR with a “comparable” index, the change is not a refinancing: no new origination disclosures, no new ability-to-repay analysis, no disruption to the adjustment schedule. The CFPB identified specific “USD IBOR Consumer Cash Fallback” rates for 1-, 3-, 6-, and 12-month LIBOR tenors as examples of comparable replacements.¹⁵

For most borrowers, the switch was operationally seamless. The adjustment schedule stayed the same, and the spread adjustment kept the replacement rate economically equivalent. Regulation Z requires advance notice when interest rate terms change: at least 15 days for a home equity line of credit, and 45 days for a credit card account.¹⁶

Credit-Sensitive Alternatives to SOFR

SOFR is dominant, but it isn’t the only U.S. dollar benchmark in use. Because SOFR carries almost no credit risk, regional and community banks argued it doesn’t capture their real funding costs, which rise during periods of financial stress even when Treasury repo stays calm.

That concern produced Ameribor, a credit-sensitive benchmark based on actual unsecured overnight loan transactions on the American Financial Exchange. It’s calculated as a volume-weighted average and is designed to reflect the borrowing costs of small, medium, and regional U.S. banks. Roughly 160 banks use it, representing about 22% of U.S. banks by count.¹⁷

A more prominent credit-sensitive alternative, the Bloomberg Short-Term Bank Yield Index (BSBY), was permanently discontinued on November 15, 2024 after Bloomberg concluded that market support was insufficient to sustain it.¹⁸ SOFR remains the default reference rate for U.S. dollar contracts, with credit-sensitive rates serving a narrower slice of the lending market.

Where to Find Current Rates

The Federal Reserve Bank of New York publishes SOFR, the SOFR averages, and the SOFR Index each business day at approximately 8:00 a.m. Eastern Time on its website.⁶ The same data is available through the St. Louis Fed’s FRED system. If your loan references Term SOFR rather than overnight SOFR, CME Group publishes the 1-, 3-, 6-, and 12-month rates, though real-time access requires a license.⁹

1
Bank of England. The End of LIBOR
2
Federal Reserve Bank of New York. About Transition From LIBOR
3
Bank of England. SONIA Interest Rate Benchmark
4
European Central Bank. Overview of the Euro Short-Term Rate
5
Federal Reserve Bank of New York. LIBOR: Origins, Economics, Crisis, Scandal, and Reform
6
Federal Reserve Bank of New York. Secured Overnight Financing Rate Data
7
Federal Reserve Bank of New York. Alternative Reference Rates Committee Frequently Asked Questions
8
Federal Reserve Bank of New York. An Updated Users Guide to SOFR – The SOFR Index
9
CME Group. CME Term SOFR Rates
10
Federal Reserve Bank of New York. Summary of the ARRCs Fallback Recommendations
11
Board of Governors of the Federal Reserve System. SR 20-22 – ISDA IBOR Fallback Protocol and IBOR Fallback Supplement
12
Office of the Law Revision Counsel. 12 USC Ch 55 – Adjustable Interest Rate (LIBOR)
13
eCFR. 12 CFR Part 253 – Regulations Implementing the Adjustable Interest Rate (LIBOR) Act
14
Federal Reserve Board. Federal Reserve Board Adopts Final Rule Implementing Adjustable Interest Rate (LIBOR) Act
15
Consumer Financial Protection Bureau. LIBOR Transition FAQs
16
Federal Register. Facilitating the LIBOR Transition Consistent With the LIBOR Act (Regulation Z)
17
ICE Data Indices, LLC. AMERIBOR Index Series Methodology
18
Bloomberg Index Services Limited. Future Cessation of the Bloomberg Short-Term Bank Yield Index