The transition away from LIBOR has been a coordinated global effort, not just affecting USD LIBOR but most IBOR’s around the world. In most jurisdictions, the regulatory body, such as a central bank or a committee appointed by the regulatory body, such as the US Federal Reserve’s appointed Alternative Reference Rates Committee (“ARRC”), has recommended replacing the LIBOR benchmarks. SOFR measures the cost of overnight borrowing collateralized by US Treasuries in the overnight repo market.

Use of any data published by the New York Fed is subject to their Terms of Use for Select Rate Data. Miranda Marquit has been covering personal finance, investing axitrader review and business topics for almost 15 years. She has contributed to numerous outlets, including NPR, Marketwatch, U.S. News & World Report and HuffPost.

  1. However, Patel expects some rates based on SOFR to add a credit spread to make it more closely reflect the need for pricing in adjustable-rate products.
  2. The announcement was determined to be a Benchmark Transition Event, a defined term in ISDA and the ARRC’s recommended language for LIBOR fallback provisions in loan and derivative contracts.
  3. The most commonly quoted LIBOR was the three-month U.S. dollar rate, at the time referred to as the current LIBOR rate.
  4. Since the AlternativeReference Rates Committee’s (the”ARRC”) initial selection of SOFR as thepreferred alternative to USD LIBOR in 2017, much progress has beenmade in the transition from USD LIBOR to SOFR, and many creditfacilities have adopted LIBOR fallback language that referencesSOFR.
  5. These repo agreements allow banks to make overnight loans to meet liquidity and reserve requirements, using Treasurys as collateral.

The change will mostly impact financial institutions, though if you look at loan interest rates you may find a notation that they’re now calculated based on SOFR, rather than Libor. Regardless of the SOFR transition, loan rates overall have jumped due to the Fed’s battle against inflation. This objective has caused the central bank to hike the federal funds rate 10 consecutive times since early 2022. The most notable change borrowers will see from the transition to SOFR will be its effect on loans with an adjustable rate, like a mortgage or a private student loan. It came from interest rate quotes that lenders claimed they would offer each other for short-term loans, making it highly susceptible to manipulation.

The repo market averages more than $800 billion of transactions per day and represents a vast body of participants not limited to banks. As a result, the repo market is far more robust than the London interbank market and the SOFR rate is not subject to private sector manipulation. I firmly believe that supply and demand and a competitive process between borrowers and lenders will dictate the spread adjustments to SOFR in the short run. Having to incorporate a spread adjustment to SOFR to achieve an all-in credit spread to the benchmark should be temporary in the market and for new loans ideally ignored (i.e., there should be one spread to SOFR). SEC-filed documents revealed much when Ford Motor came to market in September 2021 with its much-anticipated broadly syndicated SOFR-based global multi-currency facility.

Latest SOFR rate

For one, it was based largely on estimates from global banks that were surveyed—but not necessarily on actual transactions. The announcement was determined to be a Benchmark Transition Event, a defined term in ISDA and the ARRC’s recommended language for LIBOR fallback provisions in loan and derivative contracts. Additionally, Patel points out, Libor was unsecured—the loans it was based on didn’t use collateral—so it included a credit risk premium. SOFR is a secured rate, based on transactions that involve collateral, in the form of Treasuries, so there’s no credit risk premium baked into the rates. Once upon a time, Libor—the London Interbank Offered Rate—was the most important benchmark for setting interest rates on commercial and consumer loans.

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There were very few SOFR-based corporate loan facilities in those early years (e.g., Royal Dutch Shell in 2019). Corporate volume finally picked up the summer of 2021 following the regulators’ Statement on the LIBOR Transition on November 30, 2020, and momentum increased after the ARRC formally recommended forward-looking Term SOFR  rates on July bdswiss review 29, 2021. Since September 2021, Riverside has tracked public market issuers representing over $52 billions of SOFR-based debt and has directly advised on dozens of private market SOFR-based loans. The SOFR benchmark is based on the interest rates that large banks pay each other on overnight loans that are collateralized by Treasury securities.


However, it should also play an important role in consumer credit products—including some adjustable-rate mortgages and private student loans—as well as debt instruments such as commercial paper. Unlike the LIBOR, there’s extensive trading in the Treasury repo market—roughly $4.8 trillion in June 2023—theoretically making it a more accurate indicator of borrowing costs. The downside of giving banks that much Binance cryptocurrency exchange freedom became apparent in 2012 when it was revealed that more than a dozen financial institutions fudged their data in order to reap bigger profits from LIBOR-based derivative products. Benchmark rates such as the SOFR are essential in derivatives trading—particularly interest-rate swaps, which corporations and other parties use to manage interest-rate risk and to speculate on changes in borrowing costs.

Secured Overnight Financing Rate Data

As noted above, a key difference between SOFR and Libor is the fact that the former is based on completed financial transactions while the latter relied on quotes from reporting banks that were not necessarily from actual financial transactions. “SOFR provides a robust and transparent method for determining a common benchmark rate based on observed, cleared transactions in the marketplace,” says Sam Weller, Senior Vice President and Director of Capital Markets at Bryn Mawr Trust. SOFR measures the broad cost of overnight cash borrowing, using Treasury securities as collateral. LIBOR was the rate banks used to borrow from each other internationally—it was sunsetted in June 2023. The European Central Bank (ECB), on the other hand, opted to use the Euro Overnight Index Average (EONIA), which is based on unsecured overnight loans, while Japan applied its own rate, called the Tokyo overnight average rate (TONAR). For instance, the United Kingdom chose the Sterling Overnight Index Average (SONIA), an overnight lending rate, as its benchmark for sterling-based contracts going forward.

The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans that replaced the London Interbank Offered Rate (LIBOR). “The recommended spread adjustments would not and are not intended to apply to new contracts referencing SOFR.” Also, most U.S. lenders have been transitioning to SOFR since 2020, when the financial regulators warned them to move away from Libor before the June 30, 2023 deadline. Financial analysts see SOFR as a big improvement to Libor because it’s based on concrete data from actual lending transactions between institutions. Lenders use it to determine the base rate on loans to consumers and businesses, in addition to looking at the borrower’s credit profile and other loan factors. SOFR’s establishment, grounded in actual market transactions, marks a significant evolution in financial benchmarks.

The SOFR is an influential interest rate banks use to price U.S. dollar-denominated derivatives and loans. The daily SOFR is based on transactions in the Treasury repurchase market, where investors offer banks overnight loans backed by their bond assets. Big financial institutions lend money to each other using Treasury bond repurchase agreements, which financial pros call repos. These repo agreements allow banks to make overnight loans to meet liquidity and reserve requirements, using Treasurys as collateral. Libor was based on the rates that financial institutions said they would offer each other for short-term loans.