The end of LIBOR: Which benchmark rate for pre-award interest?

March 1, 2023
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In this article published in ITA in Review from the Institute for Transactional Arbitration, Aaron Dolgoff, Tiago Duarte-Silva, and Julian DiPersio provide insight into which benchmark lending rate will replace LIBOR, particularly with USD LIBOR set to be discontinued in 2023.

LIBOR was discontinued for most currencies at the end of 2021, with only USD LIBOR set to be discontinued in 2023.1 LIBOR has been widely accepted as a reference by tribunals in their decisions on pre-award interest rates.2 The question now is what will replace it as the new benchmark lending rate. The Secured Overnight Financing Rate (SOFR) has emerged as a leading benchmark in financial markets.

SOFR shares considerable similarities with LIBOR. It is based on the rates that large financial institutions pay to one another for overnight loans.3 Because LIBOR was an unsecured rate and SOFR is secured, SOFR is associated with lower risk than LIBOR.  This fact is illustrated by, for example, SOFR rates being lower than LIBOR rates in both the overnight and 12-month tenors.

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