Advocate Capital CEO on How SOFR Could Skew Markets

The video discusses the transition from LIBOR to SOFR, highlighting the differences and challenges faced by investors, issuers, and banks. It explains the regulatory restrictions on term SOFR and the resulting basis risk, which could lead to systemic issues if not addressed. The video also covers market reactions and the potential for increased risk over time due to the inability to offset basis risk effectively.

What is one major difference between Libor and SOFR that has caused concern among issuers and investors?

• SOFR is an overnight rate, unlike Libor which had multiple tenors.

• SOFR is only used in the US, while Libor is global.

• SOFR is a fixed rate while Libor is variable.

• Libor is based on actual transactions, while SOFR is not.

Why was Term SOFR created by the market?

• To replace Overnight SOFR.

• To mimic the term structure of Libor.

• To provide a fixed interest rate option.

• To comply with new regulations.

What is a key regulatory restriction on trading Term SOFR derivatives?

• They can only be traded with end users who have pre-existing Term SOFR liabilities.

• They are restricted to domestic markets only.

• They can only be traded on weekends.

• They must be traded in pairs with Overnight SOFR.

What is 'basis risk' in the context of SOFR?

• The risk of interest rates fluctuating unexpectedly.

• The risk of SOFR being discontinued.

• The risk of not being able to offset Term SOFR with Overnight SOFR.

• The risk of regulatory changes affecting SOFR.

What prevents banks from creating synthetic Term SOFR liabilities?

• Technological limitations.

• Regulatory recommendations.

• Lack of demand.

• Market volatility.