SOFR stands for Secured Overnight Financing Rate, which is a benchmark interest rate for dollar-denominated derivatives and loans that replaced the London Interbank Offered Rate (LIBOR) . It is a secured overnight interest rate that measures the cost of borrowing cash overnight collateralized by Treasury securities. SOFR is a reference rate used by parties in commercial contracts that is outside their direct control. It is calculated differently from LIBOR and may result in lower borrowing costs.
SOFR is based on the Treasury repurchase market (repo), where Treasuries are loaned or borrowed overnight. It uses data from overnight Treasury repo activity to calculate a rate published at approximately 8:00 a.m. New York time on the next business day by the US Federal Reserve Bank of New York. The SOFR is calculated as a volume-weighted median of transaction-level tri-party repo data collected from the Bank of New York Mellon as well as GCF Repo transaction data and data on bilateral Treasury repo transactions cleared through FICCs DVP service, which are obtained from the U.S. Department of the Treasury’s Office of Financial Research (OFR) .
The SOFR Index measures the cumulative impact of compounding the SOFR on a unit of investment over time, with the initial value set to 1.00000000 on April 2, 2018, the first value date of the SOFR. The SOFR Averages are compounded averages of the SOFR over rolling 30-, 90-, and 180-calendar day periods.
SOFR is an influential interest rate banks use to price U.S. dollar-denominated derivatives and loans. Benchmark rates such as the SOFR are essential in derivatives trading—particularly interest-rate swaps, which corporations and other parties use to manage interest-rate risk and to speculate on changes in borrowing costs. The change from LIBOR to SOFR mostly impacts financial institutions, and few consumers should notice any impact during the shift from LIBOR to SOFR.
