SOFR
SOFR
SOFR stands for the Secured Overnight Financing Rate. It is a benchmark interest rate that is being promoted as an alternative to LIBOR (London Interbank Offered Rate), which has been used as a key reference rate for various financial contracts globally.
Here's some key information about SOFR:
Calculation: SOFR is based on transactions in the U.S. Treasury repurchase market, specifically repurchase agreements backed by Treasury securities. It reflects the cost of borrowing cash overnight, secured by Treasury securities.
Replacement for LIBOR: The transition from LIBOR to alternative reference rates like SOFR was initiated in response to concerns about the reliability and sustainability of LIBOR, which has been subject to manipulation scandals and lacks active underlying markets. Regulators and industry groups have been encouraging the adoption of alternative rates like SOFR to reduce reliance on LIBOR.
Transparency and Objectivity: SOFR is considered more transparent and objective compared to LIBOR because it is based on actual transactions rather than being dependent on banks' submissions.
Availability: SOFR is published daily by the Federal Reserve Bank of New York, reflecting overnight transactions from the previous trading day.
Variants: Besides the overnight SOFR, there are also SOFR-based rates for longer durations, such as 1-month, 3-month, and 6-month averages. These variants are calculated as compounded averages of the overnight SOFR rates over the respective periods.
Implementation: SOFR is being increasingly used in various financial products and contracts, including derivatives, loans, and bonds. Its adoption is part of a broader global effort to transition to alternative reference rates ahead of the expected discontinuation of LIBOR.
Overall, SOFR is emerging as a critical benchmark interest rate, particularly in the United States, and its adoption is expected to continue growing as markets transition away from LIBOR.