Bruce Tuckman is a Clinical Professor of Finance at the Leonard N. Stern School of Business at New York University. He has taught courses in Fixed Income, Derivatives, Trading, and Liquidity Risk to undergraduates, MBAs, and Executive MBAs. From fall 2017 to summer 2020, Professor Tuckman took a leave from Stern to be the Chief Economist at the Commodity Futures Trading Commission in Washington, D.C. In that position, he directed a staff of research economists and partnered with the office of the chairman and the rule-making divisions on a variety of policy issues. In this research note for the forthcoming Annual Review of Financial Economics 2023, Tuckman explores Short-Term Rate Benchmarks: the Post-LIBOR Regime.
LIBOR, the predominant family of global short-term rate benchmarks for the past 40 years, ceased to exist in June 2023. Given the low volumes of interbank loans on which LIBOR had been based, the revelations that LIBOR had been manipulated, and the risks that countless LIBOR-dependent financial instruments without fallback rates would be cast into limbo, regulators over the last decade pushed to replace LIBOR with risk-free overnight rate benchmarks. In the United States, the new benchmark, SOFR, is an overnight rate based on U.S. Treasury repo transactions; use of term rates and derivatives on term rates is limited; and use of credit-sensitive term rates is discouraged. This paper recounts the rise and fall of LIBOR; reviews the academic literature on the efficiency benefits of benchmarks, the LIBOR scandal, and the pros and cons of risk-free vs. credit-sensitive rate benchmarks; and calls for further academic work on the current policy of entrenching a single-benchmark SOFR regime relative to the alternative of encouraging a two- or multi-benchmark regime of SOFR and one or more credit-sensitive term rates.
Professor Bruce Tuckman, Stern School of Business at New York University ([email protected]).