The London Interbank Offered Rate has been replaced, currency by currency, with benchmarks built on actual overnight lending transactions. In U.S. dollars, the replacement is the Secured Overnight Financing Rate (SOFR), administered by the Federal Reserve Bank of New York. Four other currencies that had LIBOR settings moved to their own overnight rates: SONIA for the British pound, €STR for the euro, TONA for the Japanese yen, and SARON for the Swiss franc. All five are published daily by central banks or their authorized administrators and draw on real transaction data rather than the bank estimates that undid LIBOR.
For U.S. borrowers and counterparties, SOFR is the number that matters, and federal law now dictates how legacy contracts convert.
How SOFR Differs From LIBOR
SOFR and LIBOR both serve as reference rates for loans and derivatives, but they measure different things.
LIBOR was unsecured. It reflected what banks said they would pay to borrow from each other with no collateral, so it carried the credit risk of the banking sector along with it. When banks worried about each other’s health, LIBOR spiked even without any change in monetary policy. SOFR is secured. It measures the cost of borrowing cash overnight against U.S. Treasury securities as collateral, so it carries almost no credit risk. That is why it is often called a risk-free rate.
The other difference is timing. Three-month LIBOR was forward-looking: set today, it told you the rate for the next three months, so borrowers knew their payment at the start of each period. SOFR in its base form is a single overnight rate. In loans, it is typically compounded across the interest period and calculated in arrears, meaning the exact rate is not known until the period ends.
Term SOFR
To restore the predictability LIBOR offered, CME Group publishes forward-looking Term SOFR rates for one-month, three-month, six-month, and twelve-month tenors, derived from SOFR futures trading.1CME Group. Term SOFR The Alternative Reference Rates Committee endorsed Term SOFR for business loans and credit facilities, and it has become the most widely used version for commercial lending. If you have a floating-rate commercial loan that used to price off three-month LIBOR, it now most likely prices off three-month Term SOFR.
Transaction Volume Behind the Rate
Daily transaction volumes in the Treasury repo market underlying SOFR exceeded $3.2 trillion in early 2026.2Federal Reserve Bank of St. Louis. Secured Overnight Financing Volume In LIBOR’s final years, some currency-tenor combinations had days with no actual interbank trades at all. The volume of real transactions behind SOFR is what makes it far harder to manipulate.
The Credit Spread That Gets Added
Because SOFR is a secured risk-free rate and LIBOR included credit risk, SOFR runs lower than LIBOR under normal conditions. Dropping SOFR into an existing contract in place of LIBOR without adjustment would change the economics of the deal. To keep the substitution economically equivalent, a fixed credit spread is added to SOFR when it replaces LIBOR in legacy contracts. The Federal Reserve set these adjustments through Regulation ZZ:3eCFR. 12 CFR Part 253 – Regulations Implementing the Adjustable Interest Rate (LIBOR) Act (Regulation ZZ)
- Overnight LIBOR: SOFR plus 0.00644%
- One-month LIBOR: CME Term SOFR plus 0.11448%
- Three-month LIBOR: CME Term SOFR plus 0.26161%
- Six-month LIBOR: CME Term SOFR plus 0.42826%
- Twelve-month LIBOR: CME Term SOFR plus 0.71513%
These figures were calculated using the median of the historical differences between each LIBOR tenor and the corresponding SOFR-based rate over a five-year lookback. They are permanently fixed and do not change over time. The Alternative Reference Rates Committee recommended the same adjustments for contracts falling back to SOFR voluntarily.4Federal Reserve Bank of New York. ARRC Recommended Fallbacks for Implementation of Its Hardwired Fallback Language
These spread adjustments apply only when SOFR replaces LIBOR in a legacy contract. Newly written SOFR-based agreements do not carry them; the parties simply negotiate their own margin over SOFR.
How Legacy Contracts Got Switched
Millions of contracts drafted before the transition contained no clear instructions for what would happen if LIBOR disappeared. Congress addressed those “tough legacy” contracts through the Adjustable Interest Rate (LIBOR) Act, enacted as part of Public Law 117-103 in March 2022.5Office of the Law Revision Counsel. 12 USC Ch 55 – Adjustable Interest Rate (LIBOR)
The law gives the Federal Reserve Board authority to select replacement benchmark rates for contracts without workable fallback language, substitutes those rates into the contracts automatically by operation of law, and provides a broad safe harbor for anyone who uses the Board-selected replacement. Under 12 U.S.C. § 5804, no one can be held liable for using the Board-selected rate, and the switch cannot be treated as a breach of contract, a discharge of obligations, or grounds for terminating the agreement.6Office of the Law Revision Counsel. 12 USC 5804 – Continuity of Contract and Safe Harbor The statute declares the replacement to be a “commercially reasonable” and “commercially substantial equivalent” to LIBOR, foreclosing arguments that the substitution fundamentally changed the deal.
Contracts that already contained effective fallback provisions generally follow their own terms rather than the statutory replacement. The LIBOR Act targets only contracts that would otherwise be left without a workable rate.
Which Replacement Rate Applies to Which Contract
Regulation ZZ does not apply one rate to everything. The specific replacement depends on the product:3eCFR. 12 CFR Part 253 – Regulations Implementing the Adjustable Interest Rate (LIBOR) Act (Regulation ZZ)
- Derivatives use the Fallback Rate (SOFR) as defined in the ISDA protocol, meaning compounded SOFR in arrears plus the spread adjustment.
- Commercial loans and most non-consumer contracts use CME Term SOFR (for one-month through twelve-month tenors) or plain SOFR (for overnight), plus the applicable spread adjustment.
- Consumer loans use the same formula after a one-year transition period, described below.
- Contracts held by Fannie Mae, Freddie Mac, and Federal Home Loan Banks generally use 30-day Average SOFR plus the spread adjustment, with FHLB advances following the ISDA protocol instead.
- Federal student loan asset-backed securities use 30-day or 90-day Average SOFR plus the applicable spread adjustment, depending on the original LIBOR tenor.
What This Means for Consumer Borrowers
If you have an adjustable-rate mortgage, private student loan, or variable-rate credit card that used to reference LIBOR, your loan now references SOFR (typically CME Term SOFR at the same tenor), plus the fixed spread adjustment above, plus whatever margin your loan agreement always added on top.
Regulation ZZ gives consumer borrowers a cushion that commercial contracts do not get. During the first year after the LIBOR replacement date, the consumer replacement rate transitions linearly from the actual SOFR-to-LIBOR difference measured on the last day before LIBOR ceased to the permanent spread adjustment.3eCFR. 12 CFR Part 253 – Regulations Implementing the Adjustable Interest Rate (LIBOR) Act (Regulation ZZ) This prevents an abrupt jump in the rate on day one and eases into the permanent spread over twelve months. After the first year, consumer loans follow the same CME Term SOFR plus fixed spread formula as commercial contracts.
Existing Rate Caps Still Apply
For FHA-insured adjustable-rate mortgages, HUD has confirmed that per-adjustment caps and lifetime caps on total interest rate changes continue to apply through the transition.7Federal Register. Adjustable Rate Mortgages: Transitioning From LIBOR to Alternate Indices If your ARM had a 2% annual cap and a 6% lifetime cap under LIBOR, those same limits govern under SOFR. The benchmark change does not reset or eliminate those protections.
Notices From Your Mortgage Servicer
Mortgage servicers must follow specific disclosure timelines when adjusting an ARM. The initial interest rate adjustment notice must be sent at least 210 days, and no more than 240 days, before the first payment at the new adjusted level is due. Subsequent adjustment notices require at least 60 days but no more than 120 days of advance warning.8Consumer Financial Protection Bureau. LIBOR Transition FAQs Information about the LIBOR transition itself cannot be inserted into the required disclosure forms; it must appear on separate documents.
You Cannot Contest the Benchmark Selection
Regulation ZZ does not provide any mechanism for consumers to challenge or appeal the selection of the Board-selected benchmark replacement. The LIBOR Act treats that selection as final. If your lender applies the correct replacement rate and the correct spread adjustment, you have no basis to demand a different benchmark. Settling that question for everyone at once was the point of the legislation.
Tax Treatment of the Switch
Changing the reference rate on a contract could, in theory, look like a modification significant enough to trigger a taxable event, with the IRS treating the modified contract as if the old one had been exchanged for a new one. Treasury regulations prevent that outcome.
Under 26 CFR § 1.1001-6, a “covered modification” (replacing LIBOR with a qualified rate like SOFR, adding a fallback provision, or making the technical changes needed to implement the swap) is not treated as an exchange of property for tax purposes.9eCFR. 26 CFR 1.1001-6 – Transition From Certain Interbank Offered Rates For debt instruments, that means the modification is not a “significant modification” that would create a deemed reissuance. The safe harbor covers any qualified replacement rate (SOFR, SONIA, €STR, TONA, SARON, or any rate recommended by a central bank or the Alternative Reference Rates Committee) and extends to reasonable technical adjustments like changes to day-count conventions or payment dates.
The protection has limits. Modifications that go beyond the benchmark swap, such as concessions to a distressed borrower, changes made to induce a party to consent, or alterations to payment amounts unrelated to the rate change, fall outside the safe harbor and are analyzed under the normal tax rules for contract modifications. If your lender used the LIBOR transition as an occasion to restructure other terms of the deal, those additional changes can have tax consequences even though the rate swap itself does not.