SOFR
SOFR (Secured Overnight Financing Rate) is the benchmark interest rate that replaced LIBOR in the United States, measuring the cost of overnight borrowing collateralized by U.S. Treasury securities.
The Secured Overnight Financing Rate is administered by the Federal Reserve Bank of New York and is published each morning based on actual transactions in the U.S. Treasury repo market — one of the largest and most liquid funding markets in the world, with daily volumes typically exceeding $1 trillion. Unlike LIBOR, which was based on banks' self-reported estimates of their borrowing costs, SOFR is entirely transaction-based, making it far more difficult to manipulate and more accurately reflective of true market rates.
SOFR measures the cost of borrowing cash overnight using U.S. Treasury securities as collateral (secured lending), distinguishing it from the unsecured, interbank nature of LIBOR. Because it is secured, SOFR incorporates very little credit risk — the rate reflects supply and demand for overnight Treasury-backed funding rather than the creditworthiness of the bank borrowing. This structural difference means SOFR tends to behave somewhat differently from LIBOR in times of market stress, when unsecured bank borrowing rates historically rose more sharply.
The transition from LIBOR to SOFR was a multi-year, globally coordinated effort. LIBOR had underpinned roughly $350 trillion in financial contracts — mortgages, student loans, corporate bonds, derivatives, and floating-rate notes — but the 2012 scandal revealing that banks had manipulated their LIBOR submissions destroyed confidence in the benchmark. The Alternative Reference Rates Committee (ARRC), convened by the Federal Reserve and the New York Fed, selected SOFR as the recommended replacement for USD LIBOR in 2017. USD LIBOR ceased publication in June 2023, completing the transition.
For practical use in multi-period loan contracts and bonds, various term SOFR rates — 1-month, 3-month, 6-month, and 12-month — have been developed and are published by CME Group, providing borrowers and lenders with forward-looking rate certainty similar to what term LIBOR offered.
SOFR is now widely embedded in adjustable-rate mortgages, leveraged loans, and floating-rate notes, making it the dominant short-term benchmark rate in U.S. dollar financial markets.