Abstract
The Alternative Reference Rates Committee (ARRC) has recently announced statements encouraging market participants to continue the Libor Transition without reliance on forward-looking term SOFR. This indicates the uncertainty and potential issues around the SOFR term rate. In this paper we present paradoxes that will result from publishing term SOFR: complexity versus transparency of the methodology, the derivatives transaction-based term SOFR versus transaction tri-party repo based daily SOFR, the hedging inefficiency between the cash market versus the derivative market and the outcome of a rising systematic risk. We believe that term SOFR does not possess the same economic justification as Libor, nor will it provide the necessary incentives for trading. The following sections will discuss methodologies for publishing term SOFR, followed by detailed discussion of the paradoxes. It is our view that these paradoxes of forward-looking term SOFR give rise to significant drawbacks in the applications and no reliable term SOFR can be developed without addressing the issues.
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