SOFR

What is SOFR?

The Secured Overnight Financing Rate, or SOFR rate, is published daily by the Federal Reserve Bank of New York and is based on overnight transactions in the U.S. Treasury repurchase agreement (repo) market. Repos effectively are collateralized loans in which people borrow money using Treasury debt as collateral, similar in practice to how homeowners borrow money using their homes as collateral for mortgages.

How is it set?

SOFR is a fully transaction-based rate reflecting roughly $1 trillion of daily transactions in a market with a diverse set of borrowers and lenders, including asset managers, banks, broker-dealers, corporate treasurers, insurance companies, money market funds, pension funds, and securities lending agents.

The Federal Reserve Bank of New York sets the SOFR rate based on the daily transactions of the repo market with a methodology and governance structure consistent with international best practices.*

Why is it important?

SOFR, the Standard Overnight Financing Rate, is important because it is the designated replacement index for LIBOR, which will no longer be published as of June 30, 2023.

In 2014, global regulators saw the need to transition away from LIBOR due to financial stability risks. A specific concern was that changes in the way banks fund themselves had caused the volume of transactions underlying LIBOR to decline considerably. Due to these concerns, the Federal Reserve convened the Alternative Reference Rates Committee (ARRC) and tasked the group with identifying an alternative to LIBOR.
In 2017, the AARC announced it had selected SOFR as its preferred alternative to LIBOR. Produced daily by the New York Fed, SOFR is a robust, International Organization of Securities Commissions (IOSCO) compliant, transaction-based rate derived from a deep, active market with a diverse set of borrowers and lenders. SOFR is not at risk of being discontinued due to a scarcity of underlying transactions, and meets international best practices.

The Secured Overnight Financing Rate (SOFR) data is calculated by using data obtained under license through application programming interface (API) issued by CME Group.

CME GROUP MARKET DATA IS USED UNDER LICENSE AS A SOURCE OF INFORMATION FOR CERTAIN SENTINEL SECURITY LIFE INSURANCE COMPANY PRODUCTS. CME GROUP HAS NO OTHER CONNECTION TO SENTINEL SECURITY LIFE INSURANCE PRODUCTS AND SERVICES AND DOES NOT SPONSOR, ENDORSE, RECOMMEND OR PROMOTE ANY SENTINEL SECURITY LIFE INSURANCE COMPANY PRODUCTS OR SERVICES. CME GROUP HAS NO OBLIGATION OR LIABILITY IN CONNECTION WITH SENTINEL SECURITY LIFE INSURANCE PRODUCTS AND SERVICES. CME GROUP DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF ANY MARKET DATA LICENSED TO SENTINEL SECURITY LIFE INSURANCE AND SHALL NOT HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. THERE ARE NO THIRD-PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN CME GROUP AND SENTINEL SECURITY LIFE INSURANCE COMPANY.

 

*Alternative Reference Rates Committee (2023, May 20). SOFR Starter Kit Part II. https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Factsheet_2.pdf 

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