This week, Fannie Mae issued the market’s first-ever Secured Overnight Financing Rate securities.

The three-tranche SOFR debt transaction is worth $6 billion and is the first step to finding an alternative to the U.S. dollar-denominated London InterBank Overnight Rate — that is the benchmark rate banks use to determine the interest for short-term loans to one another.

“We are proud to lead the market in issuing this landmark transaction. With this milestone, our objective is to accelerate the development of the SOFR market and we encourage other issuers in the debt markets to follow,” said Nadine Bates, Senior Vice President and Treasurer of Fannie Mae.

“As a member of the Federal Reserve’s Alternative Reference Rate Committee, we are honored to demonstrate our support to the ARRC in its tremendous efforts to help develop an alternative to USD LIBOR,” Bates added.

Fannie priced the floating rate notes as follows:

  • $2.5bn in six-month debt at SOFR +8bps.
  • $2bn 12-month at SOFR +12bps.
  • $1.5bn 18 months at SOFR +16bp.

The secondary markets need an alternative to LIBOR and have been searching and trying for an alternative for years and years. However, a transition will be slow-going as Libor serves globally as reference rates on $170 trillion in swaps.

According to this in-depth analysis from the Council on Foreign Relations, Libor’s continued vulnerability to rigging has not deterred its use as the primary benchmark for global lending.

Beginning in 2012, an international investigation into the London Interbank Offered Rate, or Libor, revealed a widespread plot by multiple banks—notably Deutsche Bank, Barclays, UBS, Rabobank, and the Royal Bank of Scotland—to manipulate these interest rates for profit starting as far back as 2003. Investigations continue to implicate major institutions, exposing them to lawsuits and shaking trust in the global financial system.

As a result, a tested replacement could help fix that susceptibility to manipulation whilst also avoiding the appearance of over-reaching reform, which may spook secondary market investors.