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Background: Alternative Reference Rates

Libor — the London Interbank Offered Rate — underpins more than $350 trillion in mortgages, commercial loans, bonds and derivatives worldwide. U.S. dollar Libor alone is the reference rate for $200 trillion in financial instruments. But while Libor is guaranteed to be sustained through 2021, its lack of depth and transparency makes its long-term viability questionable. Based on the expert judgment of a shrinking panel of banks, the benchmark rate is increasingly less of a robust, transactions-based market interest rate.

For several years, U.S. financial institutions and regulators have been planning for a transition away from Libor. In 2018, the Federal Reserve began publishing three reference rates, including the Secured Overnight Funding Rate, which the Alternative Reference Rates Committee recommended as a replacement for U.S. dollar Libor. SOFR is a broad measure of overnight Treasury financing transactions with about $700 billion in underlying transactions per day. ABA is engaged with regulators and banks in facilitating the transition away from Libor toward more robust benchmarks.