The Fed Officially Endorses SOFR for Trade Finance

By Dominic Capolongo • Published August 9, 2021 • 4 minute read

The last few weeks have brought positive news to those monitoring the transition away from LIBOR to an alternative rate. On July 29th, the Fed’s Alternative Reference Rates Committee (ARRC) announced it is now formally recommending CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) for the U.S. dollar. This official endorsement is a major milestone in a years-long transition plan that started in 2017, and it opens the door for wider adoption of the new rate by banks.

One noteworthy aspect of the ARRC’s endorsement is its language regarding support of forward-looking SOFR for areas where use of overnight rates has proven to be difficult – which includes trade finance.

ARRC supports the use of SOFR Term Rate in addition to other forms of SOFR for business loan activity — particularly multi-lender facilities, middle market loans, and trade finance — where transitioning from LIBOR to an overnight rate has been difficult and where use of a term rate could be helpful in addressing such difficulties.”

This language marks the first time the ARRC has specifically called out trade finance, which has historically not been subject to federal guidelines. As a result, more banks are seeking licensing for CME’s SOFR term.

That’s not to say there aren’t a few wrinkles that need ironing out. Despite encouraging developments, some major banks have stated that they would need to see a 12-month forward rate in place by CME before adopting SOFR term rates. Unlike LIBOR, CME Term SOFR only offers a one-, three- and six-month rate – and some banks have expressed concerns about fully adopting SOFR until that longer term rate is established.

With that in mind, most banks have indicated they will likely offer clients alternative rate options (such as BSBY, which is developed by Bloomberg) that can be used on a complimentary basis to the endorsed term rate.

In the meantime, CME is working to provide a 12-month rate. The timing is still unclear, but our sources tell us they are optimistic it could be ready before the end of the year.

Even after CME develops a 12-month rate, there is a good possibility that we are moving toward a world where more than one rate is used simultaneously as banks strive to align with clients’ needs. Thankfully to those on the PrimeRevenue platform, we have the flexibility to adapt to whichever rate the banks and clients choose to use.

We remain involved in discussions with our colleagues at BAFT and other financial organizations, and we continue to advocate for rate structures that allow for easy transition and maximum flexibility for our clients and funding partners.

Overall, these updates are a positive step in the right direction toward a more seamless transition away from LIBOR. With SOFR term rates officially endorsed, banks are able to prepare for the transition at a faster rate. And with a variety of alternative rates available across the globe, we are prepared to hit the ground running as our funding partners make these changes. We will continue to monitor the situation and provide updates as they come.