We discuss the transition in interest rates from LIBOR model to SOFR which will potentially affect $200 trillion in financial transactions.
We discuss the key differences in the two rates, the pros and cons of each. We discuss why the actual transition is probably not that risky, given that we have procedures we need to enact it.
And the Dec 31 2021 target date is NOT a hard date for the transition. The REAL risk lies in what happens to the economy where derivatives (which can be manipulated) are used to determine the future SOFR rate.
And we also discuss why the Fed can never stop supporting the REPO market going forward. EVER.
This means the risks of US Treasuries are now directly affecting a much broader market through potential mis-pricing interest on $200 trillion in financial assets.
And why the SOFR system could REDUCE liquidity during a shock, at EXACTLY the time when liquidity is needed most.
And most importantly, it means we are lacking a key barometer of system risk to tell us when the system is going through a crisis.
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