SOFR

Blazing demand for leveraged loans is allowing companies to reduce borrowing costs by tinkering with a provision many viewed as key to weaning the industry off the London interbank offered rate.

JPMorgan Chase executed a novel trade-finance transaction tied to the CME Group’s forward rates for the Secured Overnight Financing Rate, marking an advancement in the use of the Libor replacement.

The legislation would establish a quick process for legacy financial contracts to swap in the Secured Overnight Financing Rate after the London interbank offered rate all but expires in 2023.

Federal Reserve Vice Chair Randal Quarles has made it clear that banks failing to make the transition away from the benchmark rate could face supervisory consequences.

Zions Bancorp. CEO Harris Simmons says the Secured Overnight Financing Rate is more suited for derivative traders than regional banks as a replacement for Libor. His bank this week became the largest to say it would use the alternative developed by the American Financial Exchange.

Starting Thursday, firms should stop issuing new loans, bonds and securitizations tied to the discredited benchmark, according to the Bank of England.

The heads of the Federal Reserve and Treasury are urging passage of legislation that would replace Libor with the Secured Overnight Financing Rate in certain contracts. That would spare banks litigation over trillions of dollars of contracts when Libor expires in 2023.

The Secured Overnight Financing Rate stemmed from years of discussion between regulators and a broad group of industry stakeholders about a safer alternative to Libor. Critics who say big-bank control of the new benchmark exacerbates risk are wrong.

Providing incentives for banks to transition legacy loan contracts from the London interbank offered rate to the new Secured Overnight Financing Rate, as New York Gov. Andrew Cuomo’s proposed budget does, is a gift to megabanks and limits pricing options for smaller lenders.

The statement comes after multiple small and midsize institutions earlier this year warned the agencies that the secured overnight financing rate was ill-suited to them.