Secured Overnight Financing Rate

The **Secured Overnight Financing Rate (SOFR)** is a U.S. benchmark interest rate that measures the cost of borrowing cash overnight against U.S. Treasury securities in the repurchase-agreement, or repo, market. The Federal Reserve Bank of New York calculates and publishes it each business day from transaction data, using a volume-weighted median. SOFR is used as a reference rate in financial contracts and markets and was selected as the recommended alternative to U.S. dollar LIBOR. ^[1][2][3]

Definition and underlying market

A repo is a transaction in which one party obtains cash while providing securities as collateral, with an agreement to reverse the transaction later. Economically, a Treasury repo functions as a short-term, collateralized loan: the cash borrower provides Treasury securities and pays a rate for the overnight financing. SOFR summarizes rates from a broad set of such overnight transactions; it is not the rate on a loan made by the Federal Reserve, nor is it the policy rate set by the Federal Open Market Committee. ^[1][4]

The New York Fed describes SOFR as a broad measure of the general cost of financing Treasury securities overnight. Its calculation combines transactions included in the SOFR data set’s underlying general-collateral repo rates with eligible bilateral Treasury repo transactions cleared through the Delivery-versus-Payment service of the Fixed Income Clearing Corporation. The general-collateral market concerns financing against a range of securities that meet collateral requirements, rather than borrowing a particular security. ^[1][2]

Some repo transactions involve “specials”: a cash lender may accept a lower rate to obtain a particular Treasury security that is in especially strong demand. The New York Fed filters out a portion of these transactions when constructing SOFR, because their rates reflect demand for specific securities as well as the general cost of overnight Treasury financing. ^[1]

Calculation and publication

SOFR is calculated as a volume-weighted median of eligible transaction-level data. The data include tri-party repo transactions collected from Bank of New York Mellon, transactions in the General Collateral Finance Repo service, and bilateral Treasury repo transactions cleared through the Fixed Income Clearing Corporation’s Delivery-versus-Payment service. The New York Fed obtains relevant data from the U.S. Department of the Treasury’s Office of Financial Research and other specified data providers. ^[1]

The rate for a given value date reflects repo transactions conducted for that date; the rate is generally published on the following U.S. business day. The New York Fed publishes SOFR at approximately 8:00 a.m. Eastern Time on business days. Because the rate is based on completed transactions, it reports observed financing conditions rather than a panel of banks’ estimates of their own borrowing costs. ^[1][citation needed]

The volume-weighted median is intended to represent the central rate of eligible market activity while giving greater weight to the transactions with larger dollar volumes. SOFR is therefore distinct from a simple arithmetic average of quoted rates and from rates based on unsecured interbank borrowing. Its level can move in response to supply and demand for cash and Treasury collateral in repo markets, as well as market-wide financing conditions. ^[1][2]

History and relationship to LIBOR

The Alternative Reference Rates Committee (ARRC), a group convened by the Federal Reserve Board and the New York Fed, selected SOFR in 2017 as its recommended alternative to U.S. dollar LIBOR. The committee cited characteristics including the depth of the underlying Treasury repo market and the rate’s transaction-based construction. The New York Fed began publishing SOFR in April 2018; its first value date was April 2, 2018, and that value was first published on April 3. ^[3][citation needed]^[5]

LIBOR and SOFR reflect different kinds of borrowing. LIBOR was an unsecured bank funding benchmark published for several currencies and terms, while SOFR is an overnight secured rate tied to Treasury repo transactions. Consequently, replacing LIBOR with SOFR was not simply a change of name: contracts and market conventions had to address differences in credit exposure, term structure and calculation. ^[3][6]

The remaining panel-based U.S. dollar LIBOR settings ceased after June 30, 2023. The transition involved amendments to existing contracts, fallback provisions specifying replacement rates, and adoption of new reference-rate conventions. SOFR became a central U.S. dollar reference rate through this transition, but individual financial products may use different SOFR averages, term rates, or contractual spread adjustments rather than the overnight rate as published each day. ^[6][7]

Averages, index and interest conventions

Because SOFR is an overnight rate, many contracts calculate interest using a series of daily observations over an interest period rather than applying a single daily reading to the whole period. The New York Fed publishes compounded SOFR averages for rolling 30-, 90- and 180-calendar-day periods, along with a SOFR Index. The index tracks the cumulative effect of compounding SOFR on a unit of investment and supports calculation of compounded averages over other periods. ^[8]

In a compounded calculation, each day’s interest accrues on the balance that includes previously accrued interest, subject to the contract’s day-count and business-day conventions. Non-business days are treated according to the applicable methodology, which carries the preceding business day’s SOFR across those days. The published averages and index provide standardized reference data, but a contract’s terms determine which observation period, day-count convention and payment schedule apply. ^[8][9]

A contract may use SOFR “in arrears,” using observations from within the interest period, or “in advance,” using observations from before that period begins. In-arrears calculations reflect rates observed during the period, but leave less time to determine the amount due before payment. Conventions such as a lookback, lockout or payment delay can provide additional operational notice. In-advance structures offer earlier certainty about the payment amount but rely on earlier observations. ^[9]

A forward-looking term rate derived from SOFR futures is distinct from the overnight SOFR published by the New York Fed and from its compounded averages. Term rates provide a rate for a future period at the start of that period; whether such a rate is appropriate depends on the product, contract terms and market convention. The ARRC’s published guidance discussed circumstances for use of a forward-looking term rate and distinguished those uses from products that can reference daily SOFR directly. ^[9]

Uses in financial markets

SOFR is referenced in a range of U.S. dollar financial instruments, including derivatives, floating-rate securities, business loans and other credit products. The rate can serve as the floating component in a contract: a borrower’s or security’s interest rate may be defined as SOFR, or an average or term version of SOFR, plus a contractual spread. The spread and method for observing the benchmark are set by the relevant agreement; they are not part of the New York Fed’s daily SOFR calculation. ^[9]

SOFR also underlies exchange-traded derivatives. For example, CME Group’s three-month SOFR futures are cash settled using business-day compounded SOFR over a specified reference quarter, while its one-month contracts use the arithmetic average of daily SOFR over the contract month. These contracts provide standardized exposure to expected or realized SOFR over their defined periods. Contract specifications determine settlement calculations and other terms. ^[10][11]

As a benchmark, SOFR is a measurement of a specific segment of the money market, not a direct statement about every borrower’s cost of credit. A secured overnight repo rate can differ from an unsecured bank borrowing rate, a longer-term lending rate, or the rate offered to a household. Those rates reflect different maturities, collateral, borrowers, credit risks and contractual features. ^[1][3]

Interpretation and limitations

SOFR is transaction-based and secured by Treasury collateral, features that distinguish it from an unsecured benchmark based on bank borrowing. Its overnight maturity also means it does not itself provide a forward-looking term structure. Users of a multi-period contract therefore need an agreed method—such as compounding daily observations or applying an eligible term rate—to determine interest for that period. ^[1][9]

The rate reflects conditions in the Treasury repo market, so its movement can differ from the movement of the federal funds rate. The federal funds rate is based on unsecured overnight lending of reserve balances between depository institutions and is published separately. The Federal Reserve System influences short-term financial conditions through monetary policy, but SOFR is calculated from eligible market transactions and is not administratively set to equal the federal funds rate or a Federal Reserve policy target. ^[1][12]

SOFR data are published under the New York Fed’s stated methodologies and governance arrangements. Market participants using the benchmark must also consider the applicable publication calendar, revisions policy, fallback language, licensing or usage terms, and the conventions written into their contracts. For any particular instrument, the contractual definition—not merely the label “SOFR”—determines how the reference rate is observed and applied. ^[2][8]