SOFR
AdvancedSOFR, the Secured Overnight Financing Rate, is a benchmark interest rate in the United States based on the cost of overnight borrowing secured by US Treasury securities in the repurchase agreement market.
SOFR was chosen to replace US dollar LIBOR, which was based on banks' estimates of their borrowing costs and was vulnerable to manipulation. SOFR is based on actual transactions, measuring the cost of borrowing cash overnight using Treasury securities as collateral.
It is published each business day by the Federal Reserve Bank of New York, based on a very large volume of daily transactions, which makes it robust and hard to manipulate.
SOFR is used as the reference rate for many loans, floating-rate bonds, derivatives such as interest rate swaps, and adjustable-rate mortgages. For example, a business loan might charge SOFR plus 2 percentage points.
Because SOFR is an overnight rate secured by collateral, it does not include the bank credit risk that LIBOR did, and it is backward-looking. Methods such as compounding SOFR over a period, or using term SOFR rates derived from futures markets, are used to set interest for longer periods. Other countries have similar benchmarks, such as SONIA in the United Kingdom and €STR in the euro area.
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