Secured Overnight Financing Rate (SOFR) is a secured interbank overnight interest rate and reference rate established as an alternative to Libor.
In June 2017, US Federal Reserve Bank’s Alternative Reference Rates Committee selected SOFR as the preferred alternative to Libor. The committee has noted the stability of the repurchase market on which the rate is based.
New York Federal Reserve began publication of the rate in April 2018.
In August 2018, Barclays became the first bank to issue commercial paper tied to the rate; selling some US $525 million of short-term debt. Previously, Fannie Mae issued $6 billion securities tied to SOFR in July of 2018. Again in October 2018, Fannie Mae issued a second $ 5 billion securities that was also similarly tied to SOFR.
SOFR is based on the Treasury repurchase market (repo), Treasuries loaned or borrowed overnight. SOFR uses data from overnight Treasury repo activity to calculate a rate published at approximately 8:00 a.m. New York time on the next business day by the US Federal Reserve Bank of New York.
Global regulators decided to move away from the London interbank offered rate — a vital part of the financial system given that it’s linked to, at last count, about $350 trillion of loans, derivatives and other instruments across various currencies — after prosecutors found that banks around the world manipulated it. It also didn’t help that volumes underlying the benchmark dried up. For the U.S., a group backed by the Federal Reserve picked something called the Secured Overnight Financing Rate, or SOFR. It launched in April 2018 as above. Nonetheless, weaning off the scandal-plagued Libor benchmark is a gigantic problem for global rates markets, one that increasingly looks too burdensome for a single replacement to handle in the U.S.
The Bank for International Settlements, which serves as the bank for central banks, said in March that a one-size-fits-all alternative may be neither feasible nor desirable. Although SOFR solves the rigging problem, it doesn’t help participants gauge how stressed global funding markets are. That means SOFR is likely to coexist with something else.
- ^“LIBOR: Where Things Now Stand; Insight #124”. Baker McKenzie.
- ^ Jump up to:ab c “What is SOFR? The new U.S. Libor alternative”. Reuters. April 3, 2018.
- ^Tempkin, Adam; McCormick, Liz (August 27, 2018). “Libor Challenger Embraced in Debut Commercial Paper Transaction”. Bloomberg Businessweek.
- ^“SOFR – Fannie Mae Continues to Lead the Secured Overnight Financing Rate (SOFR) Market with Second Issuance of $5B”. Fannie Mae.
- ^“What is SOFR?” (PDF). CME Group. March 2018. Retrieved 2019-01-10.
- ^“Putting Libor Out of Its Misery Is Proving Easier Said Than Done”. Bloomberg. April 2019. Retrieved 2019-10-27.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.