LIBOR Transition Analysis and Calculations

Open Access
Bell, Madison
Area of Honors:
Bachelor of Science
Document Type:
Thesis Supervisors:
  • Jess Cornaggia, Thesis Supervisor
  • Brian Spangler Davis, Honors Advisor
  • SOFR
  • transition
  • interest rates
  • derivative
  • ISDA
The proposed ISDA calculation, compounded setting in arrears with a historical mean or median approach, for 1-month and 3-month Libor to SOFR transitions is not yet equitable for outstanding derivatives contracts maturing after Libor cessation at year end 2021. It is critical to continue both progress on this transition plan and analysis of market needs for a new benchmark rate. Market participants have long called for an alternative reference rate to replace the flawed benchmark rate. Progress towards SOFR yields a rate more appropriate for future transactions but creates barriers for its adoption into legacy Libor contracts. A compounded setting in arrears methodology creates an inherently backward-looking transaction based SOFR that cannot equally substitute into contracts priced off of a forward-looking expectation-based Libor. Systematically, modern derivative payment conventions must be updated to continue operating under the proposed calculation, creating yet another barrier for the adoption of SOFR into outstanding contracts.