The Secured Overnight Financing Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. SOFR is the overnight interest rate for US dollar-denominated loans and derivatives; it represents the amount of interest that a bank will have to repay to the lender the following day.
While the London Inter-Bank Offer Rate (LIBOR) is based on estimates provided by banks, SOFR is based on actual transactional data in the American treasuries market.
Various papers have been published to facilitate the transition from the USD LIBOR including A User’s Guide to SOFR published by the Alternative Reference Rates Committee (ARRC), which explains how SOFR must be used in cash products.
Term SOFR rates have also been developed as additional tools in the LIBOR transition. These rates are different from overnight SOFR and the SOFR averages published by the Federal Reserve Bank of New York. The ARRC published Summary and Update of its Term SOFR Scope of Use Recommendations that provides detailed summary and examples of the ARRC’s existing recommendations.
This transition away from LIBOR, regulated by the UK's Financial Conduct Authority, has been considered essential to a more sound and resilient financial system.
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