What is SOFR?
The Secured Overnight Financing Rate (SOFR) is the benchmark rate derived from transactions observed in the Treasury “repo” market and is anticipated to replace LIBOR by mid-2023.
SOFR: Secured Overnight Financing Rate
SOFR, which stands for the “secured overnight financing rate”, represents the borrowing costs of cash collateralized by Treasury securities based on transactions in the “repo” market.
The repo market is where short-term borrowing and lending transactions occur, in which agreements are collateralized by highly liquid securities, namely government bonds (i.e. U.S. Treasury securities).
The key participants in the repo market consist of the following:
- Banks and Financial Institutions (i.e. Primary Dealers)
- Corporations
- Governments (e.g. NY Fed, Central Bank, Municipalities)
Each morning, the New York Fed calculates and publishes data on SOFR by taking the volume-weighted median of transaction data from three repo markets:
- Tri-party repo Market: Comprised of three participants: securities dealers, cash investors, and clearing banks, that function as intermediaries between dealers and investors (e.g. money market mutual funds, securities lenders, etc.) in the repo transaction.
- General Collateral Finance (GCF) repo Market: Collateralized repurchase agreements in which the assets pledged as collateral are not specified until the end of the trading day.
- Bilateral repo Market: Transactions in which asset managers and institutional investors borrow securities from broker-dealers and securities lenders either on a bilateral or cleared basis in the absence of a clearing bank – and instead, are cleared by the Delivery vs. Payment (DVP) Service of the Fixed Income Clearing Corporation (FICC).
SOFR Rate One-Year Chart: 2021 to 2022 Time Range
SOFR One-Year Chart (Source: NY Fed)