SOFR (SOFR)
SOFR, the Secured Overnight Financing Rate, measures the cost of borrowing US dollars overnight against Treasury securities as collateral. Published daily by the New York Fed, it replaced US dollar LIBOR as the main reference rate for dollar loans and derivatives.
Also called: Secured Overnight Financing Rate · Term SOFR · compounded SOFR
SOFR is calculated from actual transactions in the repo market: tri-party repo, the GCF Repo service and bilateral Treasury repo cleared through the Fixed Income Clearing Corporation's delivery-versus-payment service, with part of the trades in specific collateral filtered out. The rate is the volume-weighted median of those trades, published at about 8:00 am Eastern Time each business day. The New York Fed began publishing it on 3 April 2018, in cooperation with the Treasury's Office of Financial Research.
The Alternative Reference Rates Committee, a group of market participants convened by the Federal Reserve, chose SOFR in June 2017 as its preferred replacement for US dollar LIBOR, which rested on bank estimates rather than trades. Panel-based US dollar LIBOR ended after 30 June 2023. Because SOFR is overnight and secured by Treasuries, it carries almost no bank credit risk, so loans priced on it add a credit spread and use compounded averages or forward-looking Term SOFR to set interest for each period.
SOFR is now the reference for floating-rate dollar loans, interest rate swaps, floating-rate notes and floating-rate sukuk, where the profit rate is set as a margin over a benchmark. It moves closely with the federal funds rate, though pressure on dealer balance sheets around quarter-ends can push it higher for a few days.
In practice
Overnight SOFR, compounded SOFR in arrears, the New York Fed's SOFR Averages and Term SOFR are different calculations. A contract must say which one it uses and how it is observed.
Example
A company borrows US$10 million at compounded SOFR plus 2 percent for a 90-day period. If SOFR compounds to 3.8 percent over the period, the all-in rate is 5.8 percent and interest is about US$145,000 (on an actual/360 basis).
Learn more on Money Wiki
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Commonly confused with
| Term | How it differs |
|---|---|
| Federal funds rate | The federal funds rate is unsecured overnight lending of reserves between institutions. SOFR is secured by Treasury collateral and built on a much larger volume of repo trades. |
See also
- Federal Funds RateThe federal funds rate is the interest rate at which US depository institutions lend reserve balances to each other overnight. The Federal Open Market Committee sets a target range for it, and that range anchors short-term dollar interest rates worldwide.
- Repurchase AgreementA repurchase agreement, or repo, is a short-term loan structured as a sale: one party sells securities for cash and agrees to buy them back later at a slightly higher price. The securities are the collateral and the price difference is the interest.
- Interest Rate SwapAn interest rate swap is a contract in which two parties exchange interest payments calculated on the same notional amount, typically one paying a fixed rate and the other a floating rate, without exchanging the principal itself.
- Yield CurveThe yield curve plots the interest rates on bonds of the same credit quality across different maturities, usually government bonds from one month to thirty years. Its shape shows what markets expect for interest rates, inflation and growth.
- SukukSukuk are certificates representing undivided ownership interests in assets, usufructs, services or ventures, with returns paid from what those underlying interests generate. "Islamic bond" is useful shorthand but not an accurate legal description.