Sure, the old system was susceptible to widespread and unrelenting fraud, but at least it was predictable.

The efforts of the New York Stock Exchange notwithstanding, Libor is terminally ill. Currently a ward of the British government, it will be euthanized, probably by the end of 2021. The cause of Libor’s final sickness are fairly well established, as is the hopeless of treatment: It turns out that if banks have no pecuniary motive to make up a number, and also a lot of legal liability if they are found to have made up that number for the wrong reasons, they’re not particularly interested in doing so. And so Libor must die.

Now, the real problem: For all of its easy manipulability, Libor is “the most important number in the world.” If it is not going to underlie all of those trillions of dollars in debt, something else is going to have to. And, as it turns out, from the perspective of the people who use Libor and who will have to use its successor, there are way worse things than lazy, slipshod and impossible to calculate fraud across the whole of the financial system when it comes to a benchmark interest rates.

The cost to borrow cash overnight spiked late last year in part of the market for repurchase agreements… That has investors and bankers paying close attention to developments in this obscure yet vital part of the debt market, because repo trades are a key component of a new borrowing benchmark designed by the Federal Reserve Bank of New York. That benchmark, called SOFR, for the secured overnight financing rate, is considered the leading candidate to replace the fading London interbank offered rate, currently used in setting interest rates on hundreds of trillions in debt….

If SOFR proves unusually volatile or hard to predict, it would diminish the benchmark’s appeal to companies that are considering tying their borrowing costs to it, adding uncertainty to the market’s search for a suitable Libor alternative.

If only there were a group of people who might be able to shave a few basis points off their suggestion as to what the made-up number should be to smooth things out.

The Benchmark Set to Replace Libor Suffers Volatility Spike [WSJ]

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