1 / 2

Secured Overnight Financing Rate: A Benchmark for Business

The London Inter-bank Offered Rate, or Libor, used to be the primary benchmark for determining interest rates on both consumer and business loans. However, Libor was doomed due to several scandals and its pivotal role in the 2008 financial crisis. In the US, the Secured Overnight Financing Rate (SOFR) has replaced Libor.

360TF
Download Presentation

Secured Overnight Financing Rate: A Benchmark for Business

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Secured Overnight Financing Rate: A Benchmark for Business The London Inter-bank Offered Rate, or Libor, used to be the primary benchmark for determining interest rates on both consumer and business loans. However, Libor was doomed due to several scandals and its pivotal role in the 2008 financial crisis. In the US, the Secured Overnight Financing Rate (SOFR) has replaced Libor. What is SOFR? Financial organizations use SOFR as a benchmark for determining the cost of loans to individuals and companies. The term “overnight financing” refers to the way SOFR determines interest rates for lenders: The rates that big financial institutions pay one another for overnight lending serve as its foundation. How Does SOFR Work?

  2. Large financial organizations use Treasury bond repurchase agreements, or repos, to lend money to one another. With the use of Treasury's as collateral, these repo agreements enable banks to lend money overnight in order to satisfy reserve and liquidity needs. The weighted averages of these repo transactions’ rates make up SOFR. The SOFR rate for repo transactions from the previous business day is released each morning by the New York Federal Reserve Bank. Benefits of SOFR • The way that SOFR is generated is considered to make it more robust and resilient than LIBOR. The foundation of SOFR is an extensive underlying market made up of real repurchase transactions. The SOFR rate is based on about $1 trillion in daily transactions, whereas the three-month USD LIBOR has an estimated transaction volume of $500 million. • It is believed that SOFR is a better market representative. Compounded SOFR approximates the cost of maintaining bank accounts, according to the ARRC. Additionally, SOFR more precisely represents the expense of carrying risk-free assets. Because LIBOR is determined using an estimate of the cost for banks to lend to other banks, it is believed to be less reflective of the market. The anticipated rates that LIBOR panel banks report ahead of time are not derived from actual transactions. • One of the drawbacks of LIBOR was that it was easier to manipulate SOFR. Instead of using projected borrowing rates, SOFR is based on actual transactions. Because of its strong underlying market and compliance with global best practices for interest rates, SOFR is not in danger of ceasing operations.

More Related