Interbank overnight interest rate and reference rate
Secured Overnight Financing Rate (SOFR) is a secured overnight interest rate. SOFR is a reference rate (that is, a rate used by parties in commercial contracts that is outside their direct control) established as an alternative to LIBOR. LIBOR had been published in a number of currencies and underpins financial contracts all over the world. Deeming it prone to manipulation, UK regulators decided to discontinue LIBOR in 2021.[1]
In 2022, the LIBOR Act passed by the U.S. Congress established SOFR as a default replacement rate for LIBOR contracts that lack mechanisms to deal with LIBOR's cessation.[2] The Act also grants a safe harbor to LIBOR contracts that transition to SOFR.[2] Previously, SOFR was seen as the likely successor of LIBOR in the US since at least 2021.[1]
SOFR uses actual costs of transactions in the overnight repo market, calculated by the New York Federal Reserve.[1] With US government bonds serving as collateral for borrowing, SOFR is calculated differently from LIBOR and is considered a less risky rate.[1] The less risky nature of SOFR may result in lower borrowing costs for companies.[1] In addition, unlike the forward-looking LIBOR (which can be calculated for 3, 6 or 12 months into the future), SOFR is calculated based on past transactions, which limits the rate's predictive value on future interest rates.[1] In addition, SOFR is overnight, whereas LIBOR can have longer tenors.
^ abcdefTrentmann, Nina (2020-12-30). "Finance Executives Look to Advance Libor Transition in 2021". Wall Street Journal. ISSN 0099-9660. Retrieved 2021-01-24.
^ abCite error: The named reference :3 was invoked but never defined (see the help page).
Secured Overnight Financing Rate (SOFR) is a secured overnight interest rate. SOFR is a reference rate (that is, a rate used by parties in commercial contracts...
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Forward Invariance". LIBOR is being phased out, with replacements including SOFR and TONAR ("market reference rates", MRRs, as based on secured overnight...
banks, either non-secured or secured, for example the Federal funds rate or SOFR for US dollar, €STR (formerly EONIA) for Euro or SONIA for sterling. The...
Interbank Offered Rate. LIBOR was terminated in June 2023. SOFR - Secured Overnight Financing Rate. SOFR is a reference rate established as an alternative to...
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consumer. These short-term loans may have an interest rate based on the SOFR rate or prime rate and are secured by collateral owned by the business requesting...
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and who are paying spreads (premiums or margins above the reference rate SOFR in the U.S., Euribor in Europe or another base rate) sufficient to attract...
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