SOFR

The Secured Overnight Financing Rate (SOFR) is the benchmark interest rate that replaced LIBOR for U.S. dollar-denominated derivatives and loans. Published daily by the New York Fed, SOFR reflects the cost of borrowing cash overnight collateralized by Treasury securities. Unlike LIBOR (based on unsecured lending estimates), SOFR is based on actual transactions worth over $1 trillion daily, making manipulation nearly impossible. For example, a new corporate loan might be priced at SOFR + 150 basis points. Key differences from LIBOR include: SOFR is fully transaction-based, secured (lower risk), and backward-looking. The transition created challenges since SOFR lacks forward-looking term rates and credit risk components that LIBOR included. Markets developed Term SOFR for loans needing forward rates. As of 2024, SOFR underpins trillions in derivatives, loans, and bonds. The transition required extensive system updates, contract amendments, and operational changes across financial markets. Other countries adopted similar risk-free rates.