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Secured Overnight Financing Rate (SOFR) Definition and History

Anshika

Understand the meaning, calculation, and history of the Secured Overnight Financing Rate (SOFR), and understand how it differs from LIBOR.

The Secured Overnight Financing Rate, or SOFR, has become one of the most important benchmarks in global finance. It was introduced as a reliable alternative to LIBOR, which faced concerns over manipulation and credibility. SOFR reflects the cost of borrowing cash overnight using U.S. Treasury securities as collateral, making it a transparent and transaction-based rate.

What is SOFR

SOFR, or the Secured Overnight Financing Rate, is a benchmark interest rate that reflects the cost of borrowing cash at midnight, backed by the U.S. Treasury securities as collateral. It is based on actual transactions in the repo market, making it transparent and reliable. Unlike LIBOR, which relied on bank estimates, SOFR is nearly risk-free and free from manipulation concerns. Introduced in 2018, it has become the primary replacement for LIBOR in global financial markets. Today, SOFR is widely used for loans, derivatives, and other financial products to ensure accurate and fair pricing.

SOFR Full Form and Key Facts

The full form of SOFR is Secured Overnight Financing Rate. Key facts about SOFR include:

  • Introduced in April 2018 by the Federal Reserve and the New York Fed.

  • Based on actual repo market transactions, not estimates.

  • Considered a nearly risk-free rate, unlike LIBOR which included credit risk.

  • Widely adopted as the replacement benchmark for LIBOR in the U.S. and globally.

How is the SOFR Rate Calculated

The SOFR rate is calculated using data from overnight repurchase (repo) market transactions, where financial institutions borrow cash by pledging U.S. Treasury securities as collateral. These transactions are aggregated and volume-weighted to reflect the average borrowing cost. The methodology ensures that the rate is based on thousands of actual trades rather than estimates. The Federal Reserve Bank of New York collects this data and publishes the SOFR rate daily. This makes SOFR transparent, reliable, and resistant to manipulation compared to older benchmarks like LIBOR.

History of SOFR Rate

SOFR was first published in April 2018 as part of regulatory efforts to replace LIBOR. Key milestones in its history include:

  • 2012–2014: LIBOR manipulation scandals highlight the need for a new benchmark.

  • 2017: The Alternative Reference Rates Committee (ARRC) recommends SOFR as the preferred replacement.

  • 2018: SOFR is officially introduced and published by the New York Fed.

  • 2021: Transition from LIBOR accelerates, with financial contracts shifting to SOFR.

  • 2023: LIBOR fully phased out, with SOFR becoming the primary benchmark in the U.S.

SOFR vs LIBOR: Key Differences

SOFR and LIBOR differ in several critical ways:

Factor SOFR LIBOR

Basis

Secured by U.S. Treasuries in the repo market.

Unsecured interbank lending estimates.

Nature

Nearly risk-free rate.

Includes credit risk.

Source

Based on actual transaction data.

Based on bank submissions and estimates

Transparency

Highly transparent, daily published by New York Fed.

Vulnerable to manipulation, less transparent.

Adoption

Global standard replacing LIBOR.

Being phased out due to credibility issues.

SOFR is designed to provide a fairer and more reliable reflection of market conditions compared to LIBOR.

Why SOFR Replaced LIBOR

The transition from LIBOR to SOFR was driven by regulatory and market needs. Key reasons include:

  • LIBOR manipulation scandals undermined trust.

  • LIBOR relies on estimates, while SOFR is transaction-based.

  • SOFR reflects a more liquid and secure market.

  • Regulators recommended a risk-free alternative for financial stability.

  • SOFR supports consistent pricing across global financial products.

Conclusion

SOFR has emerged as the new standard benchmark interest rate, replacing LIBOR after years of credibility issues. With its foundation in actual repo transactions and transparency, SOFR ensures accuracy, fairness, and stability in global financial markets. Its adoption marks a significant milestone in strengthening trust in benchmark rates.

Disclaimer

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

FAQs

What does SOFR stand for?

The Secured Overnight Financing Rate (SOFR) reflects the overnight borrowing cost in the U.S. Treasury repo market and serves as a trusted, near risk-free benchmark interest rate.

When was SOFR introduced?

SOFR was officially introduced in April 2018 by the Federal Reserve and the Federal Reserve Bank of New York, following global efforts to replace LIBOR.

Who publishes the SOFR rate?

The Federal Reserve Bank of New York publishes the SOFR rate every business day, based on data from overnight repurchase market transactions.

Why was LIBOR replaced with SOFR?

LIBOR was replaced due to manipulation scandals and lack of transparency, while SOFR is based on actual market transactions, making it more reliable.

Hi! I’m Anshika
Financial Content Specialist

Anshika brings 7+ years of experience in stock market operations, project management, and investment banking processes. She has led cross-functional initiatives and managed the delivery of digital investment portals. Backed by industry certifications, she holds a strong foundation in financial operations. With deep expertise in capital markets, she connects strategy with execution, ensuring compliance to deliver impact. 

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