Now that SOFR has replaced Libor, stewardship of the preferred U.S. credit benchmark rate has passed to a new committee led by a senior Morgan Stanley risk executive.
Patrick J. Howard was designated inaugural chair of the Reference Rate Use Committee (RRUC) when the Federal Reserve Bank of New York launched it last fall. Its predecessor, the Alternative Reference Rates Committee (ARRC), was formed in 2014 and had been chaired by Morgan Stanley vice chairman of institutional securities Tom Wipf, who joined UBS in 2023.
The ARRC spent nine years preparing the way for SOFR – the Secured Overnight Financing Rate – as a superior alternative to the London Interbank Offered Rate, which domestic and overseas regulators had deemed unsustainable because of operational weaknesses and susceptibility to manipulation.
Currently listing 20 market-participant members plus ex-officio representatives from the New York Fed and regulatory agencies, the RRUC has a different mandate from that of the ARRC. It has “much more of a watching brief than trying to solve problems or even looking for problems,” Howard, Morgan Stanley deputy chief risk officer, explained in a recent interview.
RRUC Chair Patrick Howard
Put another way, RRUC aims to bring together perspectives from various stakeholders to track how reference rates, including SOFR, are functioning across markets.
“There’s great value in calm times, when markets are functioning well, to put in place bodies and groups of experts who can come together if they need to at some future date,” said Howard, who before joining Morgan Stanley in 2017 worked as chief market risk officer at BNY Mellon and global head of market risk and quantitative risk at Nomura.
“The RRUC will serve as an essential partnership that builds upon the work and accomplishments of the ARRC, by helping to preserve a robust system of reference rates,” New York Fed president and CEO John C. Williams said at the bank’s Treasury Market Conference last September. “This work will complement international efforts at the Bank for International Settlements and the Financial Stability Board to monitor developments in the use of interest rate benchmarks and ensure that we never have to face a problem like Libor again.”
A three-month SOFR chart (Federal Reserve Bank of New York)
SOFR is a measure of the cost of borrowing via overnight Treasury repurchase agreements, a $1 trillion market whose transaction volume greatly reduces concerns about the rate’s manipulability.
“One of the great values here is that [RRUC] echoes the structure” of the New York Fed’s Foreign Exchange Committee and Treasury Market Practices Group, Howard said. “If we had a set of problems we were looking for, or some major market dysfunction we had identified, then I imagine those meetings would be more frequent” than the currently planned two to three times a year.
According to minutes of the new committee’s first meeting, on October 9, participants discussed movements in SOFR such as quarter-end spikes. These were seen as normal and accurately reflecting market dynamics.
The consensus was that as markets continue to evolve, it will be critical to remain vigilant in the interest of financial stability.
As for future issues to address, SOFR’s lack of a credit-risk component is unlikely to be one of them. In the lead-up to the SOFR transition, regional banks noted that their increased financing costs during periods of volatility were offset by Libor’s credit component, which increased the rate they received on their assets. SOFR was instead likely to tighten during stress scenarios, reducing returns on assets as liability costs rise.
Although some market participants may have expected a Libor replacement to include a credit component, Howard said, the intention behind SOFR was to create a robust risk-free rate that reliably reflected market dynamics.
“SOFR was not designed to be representative of bank credit,” the committee chair went on. “While there may be interest from some to have a measure that is reflective of bank credit, it should not come at the cost of reintroducing some of the vulnerabilities which were historically problematic for Libor.”
Bloomberg and the American Financial Exchange (AFX) each launched floating-rate benchmarks before the June 2023 official introduction of SOFR. They included credit components derived from bank funding sources, including commercial paper and certificates of deposit.
Bloomberg discontinued its Short-Term Bank Yield (BSBY) index last November, more than a year after the International Organization of Securities Commissions (IOSCO) issued a finding that some credit-sensitive rates were not sufficiently robust to replace USD Libor.
AFX’s Ameribor is also calculated from bank financing data, including overnight interbank funding facilitated by the AFX electronic exchange. Founded by longtime derivatives and market technology innovator Richard Sandor, Chicago-based AFX was acquired by fintech growth equity investor 7RIDGE in April 2023 and by Intercontinental Exchange in January 2025.
"Complementing our leading global index business and our best-in-class mortgage technology network, AFX is a natural fit to ICE,” said Christopher Edmonds, president of ICE Fixed Income and Data Services. “AFX’s focus on regional, midsize, community and minority-owned banks covers many of the same customers ICE serves through our mortgage technology network,” he added, alluding to further “innovation and new product development made possible through the addition of AFX to our portfolio."
SOFR Academy, which says it is dedicated to financial market efficiency, stability and transparency and counts former Treasury Secretary Lawrence Summers among its advisers, sent letters in December to the chief executives of the American Bankers Association, Bank Policy Institute and other trade groups “regarding implementation of IOSCO-aligned credit spread reference benchmarks for SOFR which promote banks’ ability to provide credit and support U.S. economic activity.”
SOFR Academy puts forward the USD Across-the-Curve Credit Spread Index (AXI) and its extension, the USD Financial Conditions Credit Spread Index (FXI), maintaining that regulators’ concerns about other credit-sensitive proposals “do not apply,” and that the two indexes adhere to IOSCO’s Principles for Financial Benchmarks.
“The letters emphasize that the introduction of AXI and FXI into U.S. commercial lending markets will enhance the resilience of the banking system and, by extension, the U.S. economy during times of economic stress,” SOFR Academy says.