The Secured Overnight Financing Rate Explainer
The Secured Overnight Financing Rate, or SOFR, measures the broad cost of borrowing cash overnight when U.S. Treasury securities serve as collateral. The Federal Reserve Bank of New York calculates and publishes it using transaction data from major segments of the Treasury repo market.
SOFR is an overnight rate based on completed secured transactions rather than bank estimates of unsecured term borrowing. Its calculation uses a volume-weighted median and can reflect day-to-day conditions in funding markets. Publication timing and correction policies are set by the administrator.
Financial contracts use SOFR in several ways. Some compound daily overnight observations in arrears; published averages and an index support standardized calculations. Forward-looking term SOFR rates are separate benchmark products derived from derivatives markets and follow their own licensing and convention rules.
A loan or swap must specify observation shifts, lookbacks, compounding, payment timing, spreads, floors, and fallback language. SOFR does not contain the same bank-credit component as older unsecured benchmarks, so legacy transitions often required spread adjustments. Differences among overnight, average, and term settings can create basis risk.
It measures overnight secured financing backed by Treasury collateral.
The New York Fed uses transaction data.
Contracts may compound daily SOFR or reference a separate term setting.
Conventions determine the payment.
Lookbacks, floors, spreads, and fallbacks matter.
Different benchmarks can create basis risk.
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