The US Federal Reserve established the benchmark interest rate known as the Secured Overnight Financing Rate, or SOFR for short. Recently, the SOFR was introduced in order to more accurately reflect the actual cost of overnight borrowing for major banking and financial institutions. Utilizing information from overnight repurchase agreement (REPO) transactions, the financing interest rate is determined. Transactions in the REPO market are essentially loans between market participants that are secured by Treasury securities.

Participants in the REPO markets include banks, pension funds, insurance firms, brokers, money market funds, and asset management firms, to name a few.

LIBOR is replaced with the Secured Overnight Financing Rate (SOFR).

The SOFR is used in place of the London Interbank Offered Rate (LIBOR) in derivatives and other financial transactions denominated in U.S. dollars. Since LIBOR is not backed by Treasury bonds and is determined by a survey of banks, it is vulnerable to manipulation. In truth, there was a significant controversy involving the LIBOR market, where big banking institutions conspired to manipulate the LIBOR rate to their own advantage. Absent scandals, the value of LIBOR began to decline after 2008 as fewer transactions occurred in the LIBOR markets. A more precise and reliable benchmark loan rate became necessary as a result.

The SOFR has numerous advantages over LIBOR, one of which is that it is based on actual transactions since the REPO markets see daily trades of more than $1 trillion. As a result, the SOFR is a better indicator of how much it costs market players to borrow money. Due to the fact that transactions are backed by US Treasury bonds and notes, it is likewise seen as a risk-free alternative.

In addition, a new overnight repo transaction known as a standing repo facility will use the SOFR as its reference rate. A wide range of counterparties, including banks, broker-dealers, money market funds, and non-bank financial organizations, will have access to the standing repo facility. In the event of market disruptions, the standing repo facility will assist in easing financing difficulties.

Where can I find data on Secured Overnight Financing Rates (SOFR)?

The Federal Reserve Bank of New York or FRED at the Federal Reserve Bank of St. Louis both offer free daily SOFR data downloads and current interest rate references.