Forward-looking Forward Rates : The Term SOFR Paradoxes

The Alternative Reference Rates Committee (ARRC) has recently formally recommended CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) term rates (SOFR Term Rates), following the completion of a key change in interdealer trading conventions on July 26, 2021 under the SOFR First. SOFR Term Rate is the third term RFR that has a dedicated administrator, following term SONIA, and Tokyo Term Risk Free Rate (TORF). This completed the final step of the paced Libor transition plan . In this article we review methodologies of publishing term RFRs, and then present the challenges that will result from them: complexity of the methodology, inconsistent transaction framework between term RFRs and RFRs, the hedging inefficiency and rising operational risk and financial system instability. At the end, we provide possible alternatives and the uncertain future of the term RFRs