Pros and cons of SOFR
Pros of SOFR
As SOFR is based on transactional data, it is less prone to manipulation. This is especially true when compared to LIBOR, which was calculated from an average of the daily estimates for borrowing rates.
SOFR is released by the New York Federal Reserve – the de facto first-among-equals in the US Federal bank system – which implies impartiality and credibility.
Cons of SOFR
SOFR is only an overnight rate which is a serious drawback when compared to LIBOR. This is because LIBOR could be calculated in many different timeframes ranging from overnight to as long as 12 months.
Liquidity in the SOFR market is currently quite low compared to the liquidity levels under the LIBOR system, because LIBOR has been in more widespread use for a longer period of time. There is also a limited cash market under SOFR, but it is likely that this will develop as the rate becomes more widespread.