Describes Secured overnight Financing Rate (SOFR)

The Secured overnight Financing Rate (SOFR) is a benchmark interest rate that serves ass a replacement for the London Interbank Offered Rate (LIBOR) in the United States. It is administered by the Federal Reserve Bank of New York and is based on transactions in the U.S Treasury repurchase agreement (repo) market.

SOFR reflects the cost of borrowing cash overnight collateralized by U.S Treasury securities. It is considered a robust and representative benchmark rate because it is based on a large volume of actual transactions in a highly liquid market.

The Secured Overnight Financing Rate is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.

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 FICC’s DVP service, which are obtained from the U.S Department of the Treasury’s Office of Financial Research (OFR)

 

Here are some key features and characteristics of SOFR:

1.     Calculation: SOFR is calculated as a volume-weighted median of transaction-level tri-party repo data, bilateral Treasury repo transactions cleared through the Depository Trust and Clearing Corporation (DTCC), and General Collateral Finance GCF repo data.

2.     Overnight rate: SOFR is an overnight rate, reflecting the interest rate for borrowing or lending cash on an overnight basis. It is published each business day at approximately 8.00 a. am Eastern Time.

3.     Secured Rate: SOFR is a secured rate because it is based on collateralized transactions, where U.S Treasury securities are pledged as collateral. This differs from LIBOR, which is an unsecured rate.

4.     Risk free rate: SOFR is considered a risk-free rate as it is based on the U.S Treasury market, which is considered to have minimal credit risk.

The transaction from LIBOR to SOFR is part of a global effort to reform benchmark rates and establish more reliable and representative alternatives. The use of SOFR helps to mitigate the risks associated with LIBOR discontinuation and ensure a more stable and resilient financial system.