What Replaced LIBOR? SOFR, Term SOFR, and Credit-Sensitive Rates

LIBOR was replaced by a set of transaction-based overnight benchmarks, one for each major currency: the Secured Overnight Financing Rate (SOFR) for U.S. dollars, the Sterling Overnight Index Average (SONIA) for British pounds, the Euro Short-Term Rate (€STR) for euros, and the Tokyo Overnight Average Rate (TONA) for Japanese yen. Unlike LIBOR, which relied on bank estimates, each of these rates is calculated from real overnight lending transactions in deep markets. The last LIBOR settings were published on September 30, 2024, ending the benchmark’s role in global finance.¹

Why a Replacement Was Needed

LIBOR, the London Interbank Offered Rate, was built on daily submissions from a panel of major banks estimating what it would cost them to borrow unsecured from one another. Those estimates were averaged into a single rate that ended up embedded in roughly $300 trillion of financial contracts worldwide, from mortgages to derivatives.²

The flaw was structural. Because the rate came from what banks said rather than what they paid, it could be gamed, and starting around 2012 regulators found that traders at several large banks had done exactly that. Enforcement actions produced billions in fines. Regulators concluded that a benchmark resting on expert judgment rather than observable transactions was too fragile to underpin the global financial system, and coordinated the move to new rates built on real activity.

The Four Replacement Rates

The new benchmarks are collectively called Risk-Free Rates, or RFRs. Each one is anchored in a large, liquid overnight market, and each deliberately strips out the bank credit risk premium that LIBOR carried.

U.S. dollar — SOFR. The Secured Overnight Financing Rate measures the cost of borrowing cash overnight against U.S. Treasury collateral. The Alternative Reference Rates Committee (ARRC) selected it in 2017 as the recommended USD LIBOR replacement.³
British pound — SONIA. The Sterling Overnight Index Average tracks unsecured overnight sterling deposit rates. It is administered by the Bank of England.⁴
Euro — €STR. The Euro Short-Term Rate reflects wholesale unsecured overnight borrowing by euro-area banks and is published each business day by the European Central Bank.⁵
Japanese yen — TONA. The Tokyo Overnight Average Rate measures uncollateralized overnight transactions in the Japanese call money market and is published by the Bank of Japan.

All four are overnight rates, and that is deliberate. Overnight markets carry enormous transaction volumes, which makes the resulting benchmark extremely difficult to manipulate.

How SOFR Works

If you deal with dollar-denominated loans, bonds, or derivatives, SOFR is the rate you’ll encounter. It measures the cost of borrowing cash overnight in the U.S. Treasury repurchase agreement market, where one party lends cash and receives Treasury securities as collateral in return. That collateral is why SOFR is called a “secured” rate, and it is the biggest structural difference 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 pulls together transaction data from three parts of the Treasury repo market — tri-party repo, general collateral finance repo, and bilateral repo cleared through the Fixed Income Clearing Corporation — and applies a volume-weighted median. That statistical choice resists manipulation by outliers far better than a simple average.⁷

Daily transaction volume behind SOFR regularly exceeds $1 trillion, dwarfing every other U.S. money market.³ A rate built on that much real activity per day is orders of magnitude harder to push around than one built on a handful of bank estimates.

SOFR Averages and the SOFR Index

A single overnight rate is not directly useful for a loan or a bond that accrues interest over months. To bridge the gap, the New York Fed publishes compounded SOFR averages over rolling 30-, 90-, and 180-day windows, along with a daily SOFR Index. The Index tracks the cumulative effect of compounding SOFR daily since April 2, 2018, so market 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 awkward for business loans, where borrowers and lenders want to know the interest payment at the start of each period. LIBOR handled this naturally because it was published 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. It is derived from trading activity in SOFR futures and is administered by CME Group. The ARRC formally endorsed CME Term SOFR in 2021 for use in business loans, and it has since been adopted by more than 2,870 firms globally.⁹ For a corporate borrower, Term SOFR feels much like LIBOR did: the rate is set at the start of the accrual period, and payments can be planned accordingly.

Why a Spread Adjustment Was Added

Switching a LIBOR contract to SOFR without any adjustment would have been unfair to lenders. LIBOR included a premium for unsecured bank credit risk. SOFR, backed by Treasury collateral, carries almost none, and it runs lower than LIBOR as a result. Dropping SOFR straight into an old LIBOR contract would have quietly transferred value from the lender to the borrower.

To prevent that, the ARRC and the International Swaps and Derivatives Association (ISDA) fixed credit spread adjustments based on the five-year historical median difference between each LIBOR tenor and compounded SOFR. The values were locked in 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 numbers are permanent. They do not change over time or with market conditions. 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 that once referenced 3-month LIBOR typically now references 3-month Term SOFR plus 0.26161%, designed to produce an economically equivalent rate.

What Happened to Existing Contracts

The hardest part of the transition was not choosing a new rate. It was rewiring hundreds of trillions of dollars in existing contracts that specifically referenced a benchmark about to disappear.

Contracts With Fallback Language

Well-drafted contracts included fallback provisions specifying what happens if LIBOR became unavailable. For derivatives, ISDA published the 2020 IBOR Fallbacks Protocol, and parties that adhered to it 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 their fallback pointed to something unhelpful like “the last available LIBOR rate,” which would have frozen interest at an arbitrary level forever. Fixing these one by one was impractical, and in many cases legally impossible because amendment required unanimous consent from thousands of bondholders or counterparties. These became known as “tough legacy” contracts.

Congress addressed the problem with the Adjustable Interest Rate (LIBOR) Act, signed in March 2022. For tough legacy contracts governed by U.S. law that lacked a workable fallback, the SOFR-based rate selected by the Federal Reserve Board steps in automatically on the LIBOR replacement date, with no consent from any party required.¹²

The Federal Reserve implemented the Act through Regulation ZZ, which specifies exactly which SOFR-based rate applies to each contract type. Commercial loans move to the corresponding CME Term SOFR tenor plus the applicable spread adjustment. Derivatives move to the ISDA Fallback Rate based on compounded SOFR. Consumer loans received a one-year transition during which the spread adjustment migrated linearly from the actual LIBOR-to-SOFR difference on the last day before cessation to the permanent static spread, cushioning the payment impact for borrowers.¹³ The Act also protects parties from being sued for breach of contract simply because LIBOR was replaced with the federally selected rate.¹⁴

When LIBOR Actually Ended

LIBOR wound down in stages:

December 31, 2021. All GBP, EUR, CHF, and JPY LIBOR settings ceased, along with certain less-used USD LIBOR tenors.
June 30, 2023. The USD LIBOR panel stopped submitting rates, ending representative publication of the overnight, 1-month, 3-month, 6-month, and 12-month USD LIBOR settings.¹⁵
September 30, 2024. The FCA stopped requiring publication of the remaining synthetic USD LIBOR settings (1-, 3-, and 6-month), which had continued on a non-representative basis to wind down stubborn legacy contracts. This was the permanent end of all 35 LIBOR settings across every currency.¹

What Consumer Mortgage Borrowers Saw

If you had an adjustable-rate mortgage tied to LIBOR, your loan transitioned to a SOFR-based index. The Consumer Financial Protection Bureau confirmed that when a lender replaces LIBOR with a “comparable” index, the change does not count as a refinancing. That means no new origination disclosures, no fresh ability-to-repay analysis, and no disruption to the existing 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 replacement indices.¹⁶

For most borrowers the switch was operationally seamless. The adjustment schedule stayed the same, and the spread adjustment was designed to produce an equivalent rate. Regulation Z governs the required notice: for a home-equity line of credit, at least 15 days before the change takes effect; for a credit card account, at least 45 days.¹⁷

Credit-Sensitive Alternatives to SOFR

SOFR is not the only dollar benchmark in use, though it is by far the dominant one. Regional and community banks argued that a near-risk-free rate doesn’t capture their actual funding costs, which rise during periods of financial stress even when Treasury repo stays calm. That concern produced Ameribor, a credit-sensitive benchmark built from actual unsecured overnight loan transactions on the American Financial Exchange. It is calculated as a volume-weighted average and remains in use among a network of roughly 160 banks representing about 22% of U.S. banks by count.¹⁸

A more prominent credit-sensitive alternative, the Bloomberg Short-Term Bank Yield Index (BSBY), was designed as a broad-market complement to SOFR. Bloomberg announced its permanent cessation effective November 15, 2024, after a consultation concluded that insufficient market support existed to sustain it.¹⁹ BSBY’s discontinuation reinforced what regulators had signaled for years: SOFR is the dominant dollar benchmark, and credit-sensitive alternatives face an uphill climb.

Where to Find the Current Rate

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

1
Bank of England. The End of LIBOR
2
Federal Reserve Bank of New York. LIBOR: Origins, Economics, Crisis, Scandal, and Reform
3
Federal Reserve Bank of New York. About Transition From LIBOR
4
Bank of England. SONIA Interest Rate Benchmark
5
European Central Bank. Overview of the Euro Short-Term Rate
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
FCA. The USD LIBOR Panel Ceases at End-June 2023 – Are You Ready
16
Consumer Financial Protection Bureau. LIBOR Transition FAQs
17
Federal Register. Facilitating the LIBOR Transition Consistent With the LIBOR Act (Regulation Z)
18
ICE Data Indices, LLC. AMERIBOR Index Series Methodology
19
Bloomberg Index Services Limited. Future Cessation of the Bloomberg Short-Term Bank Yield Index