The credit spread adjustment

The credit spread adjustment is a fixed number of basis points added to SOFR when a legacy USD LIBOR contract falls back to SOFR. It exists because LIBOR almost always sat above SOFR, so swapping one for the other without an add-on would have handed every borrower and fixed-rate payer a windfall. For 3-month LIBOR the adjustment is 0.26161%, or 26.161 bp. ISDA's method set it as the five-year median of the difference between each LIBOR tenor and SOFR compounded over that tenor, and the value was frozen on March 5, 2021, when the UK Financial Conduct Authority (FCA) announced the end dates for LIBOR. The ARRC adopted the same values for non-consumer loans and notes, and Federal Reserve Regulation ZZ wrote five of them into U.S. law.

The official documents call it simply the "spread adjustment" (ISDA, Bloomberg) or the "tenor spread adjustment" (Regulation ZZ). "Credit spread adjustment", or CSA, is the market's shorthand. As the next section shows, the name only tells half the story.

Why SOFR sits below LIBOR

Two features of the rates create the gap: what backs the loan, and how long the money is lent for.

Collateral: Treasury repo versus bank credit

The New York Fed describes SOFR as "a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities." A cash lender in a SOFR trade holds Treasuries against its money, so the rate carries very little credit risk. When the Federal Reserve and the New York Fed convened the ARRC in 2014, its first task was to identify "risk-free alternative reference rates" for USD LIBOR, and a Treasury repo rate fit that brief.

USD LIBOR was an interbank offered rate produced from a panel of banks. There was no collateral behind it, so it priced the credit of the banks themselves. A lender at LIBOR was exposed to a bank; a lender at SOFR is exposed to a Treasury-secured repo counterparty.

Term: overnight money versus three, six or twelve months

Collateral alone does not explain the size of the spreads. The overnight data show why. The effective federal funds rate (EFFR) is the volume-weighted median of overnight unsecured fed funds trades, and in our New York Fed snapshot the average daily gap between SOFR and EFFR has stayed within a few basis points in every year since 2018, sometimes positive and sometimes negative: +4.2 bp in 2019, −4.5 bp in 2022, +0.2 bp so far in 2026. For one night, secured and unsecured money cost nearly the same. The overnight LIBOR spread adjustment, 0.644 bp, says the same thing.

The adjustment then climbs with tenor: 11.448 bp at 1 month, 26.161 bp at 3 months, 42.826 bp at 6 months and 71.513 bp at 12 months. The 12-month value is about 2.7 times the 3-month value. A bank that borrowed unsecured for a year was asking the lender to carry its credit risk for a year, and to commit funds for a year, and LIBOR priced both. SOFR compounded over the same period carries neither. So a better name might be "credit and term spread adjustment". The secured vs unsecured rates guide covers the overnight gap in detail, and the benchmarks page charts SOFR against EFFR day by day. The latest prints are SOFR 3.87% and EFFR 3.88% for October 8, 2026.

How ISDA fixed the spreads

ISDA had to pick one number per tenor to stand for a gap that moved every day. Its November 15, 2019 consultation results settled the method. A majority of respondents preferred "a historical median approach over a five-year lookback period", and a "clear majority favored a two-banking-day backward shift adjustment" for the compounded SOFR leg. Respondents also preferred no transitional period and no exclusion of outliers. A median over five years already limits how far a short stress episode can pull the result.

The ISDA IBOR Fallbacks Supplement and Protocol took effect on January 25, 2021. Under them, the spread is fixed once, when an "Index Cessation Event" occurs. That event came on March 5, 2021. The FCA announced that the overnight, 1-, 3-, 6- and 12-month USD LIBOR settings would cease or stop being representative immediately after June 30, 2023, and the 1-week and 2-month settings immediately after December 31, 2021. ISDA treated the statements as an Index Cessation Event, and Bloomberg Index Services Limited, which publishes the fallbacks, named "today (5 March 2021)" the "Spread Adjustment Fixing Date" for every LIBOR tenor in every currency. The FCA's own release noted that the spread adjustments "will be fixed today as a result of the FCA's announcement."

Regulation ZZ (12 CFR 253.4(c)) repeats the overnight, 1-, 3-, 6- and 12-month values exactly. The 1-week and 2-month tenors are not in it because those settings had already ended in 2021. Bloomberg's notice carries this disclaimer on the values: "The Data, including any sample calculations, are for illustrative purposes only. Neither Bloomberg nor ISDA guarantees the timeliness, accurateness, completeness of, or fitness for a particular purpose with respect to, the Data and each shall have no liability in connection with the Data." The Bloomberg technical notice and the Regulation ZZ final rule are the primary sources.

What the fixing date looked like

The spreads were frozen at a time when SOFR was close to zero. SOFR printed 0.02% for March 5, 2021, and the 90-day Average SOFR published that day was 0.06223%. The 3-month spread of 0.26161% was more than four times the 90-day average it would sit on top of. Since then, SOFR has ranged up to its all-time high of 5.40%, first printed on December 28, 2023, and the 90-day Average SOFR is now 3.70963%. The spread has not moved by a basis point through any of it. That was the point of fixing it. Contracts got certainty about the add-on, and the floating part still moves with the market.

Where the spread applies

The same five numbers turn up in every route from LIBOR to SOFR. What changes is the SOFR-based rate they are added to, and whether they applied in full straight away.

The ARRC set out the cash-product position on June 30, 2020. Its spread would use "a historical median over a five-year lookback period calculating the difference between USD LIBOR and SOFR", which "matches the methodology recommended by ... ISDA for derivatives." Of the 49 responses to its supplemental consultation, a clear majority favored using ISDA's values, and respondents were unanimous that the timing should match ISDA's. For consumer products, though, the ARRC recommended a one-year transition period toward the five-year median spread. Regulation ZZ applied the same one-year phase-in to consumer loans that had no workable fallback and moved to the Board-selected replacement. During the year starting on the LIBOR replacement date (July 3, 2023, the first London banking day after June 30, 2023), the spread moves linearly, each business day, from the spot LIBOR–SOFR difference observed the day before the replacement date to the fixed tenor spread. Our restatement of that rule, not the regulation's wording:

That transition year ended in July 2024. Every consumer loan that used the Regulation ZZ replacement now carries the full fixed spread, the same as a commercial loan. In effect, the phase-in kept a borrower's rate from jumping or dropping on the replacement date when spot LIBOR–SOFR differed from the five-year median. The ISDA respondents had rejected that kind of transition for derivatives.

Worked example: a 3-month LIBOR + 200 bp loan

Take a $25,000,000 commercial term loan written as 3-month USD LIBOR + 2.00%, interest on an actual/360 basis. Assume its fallback language, as amended, replaces LIBOR with SOFR compounded in arrears over each interest period with a two-business-day backward shift, plus the 3-month spread adjustment. That is the ISDA-style structure. Other loans will name a different base rate. We look at the quarter from Thursday, January 8, 2026 to Wednesday, April 8, 2026, which is 90 days.

The shift moves the observation window back two U.S. government securities business days at each end: January 6 to April 6, 2026, also 90 days. The New York Fed's SOFR Index was 1.22722174 on January 6 and 1.23848362 on April 6, 2026.

Compounding the daily SOFR prints over the same window gives the same 3.67069% to five decimals. The compounded SOFR line is shown at $229,418.12 rather than the half-cent-up $229,418.13 so the column adds to the exact total. The spread adjustment is worth $654.03 per $1,000,000 of principal per 90-day quarter. That is a small line next to the margin, but across a large book and several years it adds up. The borrower now quotes the loan as SOFR + 226.161 bp: the 200 bp it negotiated, plus the 26.161 bp that stands in for the LIBOR–SOFR gap.

One other thing changed. The rate is no longer known at the start of the quarter. The first rate in the window is the 3.66% SOFR for January 6; the last is the 3.66% for April 2, which accrues for four days because April 3, 2026 (Good Friday) had no SOFR print. The compounded rate is known only once the SOFR Index is published for April 6, the end of the observation window, two business days before the interest period ends on April 8. The daily rates are on the 2026 SOFR history page. If the same loan had instead moved under Regulation ZZ with no workable fallback, the base would have been 3-month CME Term SOFR, set in advance, plus the same 0.26161% and the same 2.00%. We describe Term SOFR but do not publish its values, because it is a CME Group benchmark that requires a license. To rerun the in-arrears version for your own dates, use the LIBOR fallback calculator. The SOFR Index calculator checks the compounded leg on its own, and the compounding in arrears guide explains the shift.

The LIBOR to SOFR transition timeline puts the March 5, 2021 fixing in the sequence of dates that led to it. For a SOFR loan written from scratch, with no LIBOR history and no spread adjustment, the floating-rate loan calculator builds the payment schedule from SOFR plus the margin alone.