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SOFR: the benchmark rate that replaced LIBOR
Since 2018; sole benchmark 2023· Concept
Fact, law or dataA rule, statute, definition or measured number.
SOFR, the Secured Overnight Financing Rate, is the main US benchmark for floating-rate loans, based on real overnight lending backed by Treasuries.
See it on the Money & Finance map →How it works
The New York Fed publishes it each morning as the median rate on the prior day's overnight repo trades, more than $2 trillion a day. It replaced LIBOR, a rate built from banks' estimates that traders rigged. A Fed-convened committee chose SOFR in 2017; publication began in April 2018, and US dollar LIBOR ended in June 2023. Loans now float at 'SOFR plus a spread'; many commercial real estate loans use Term SOFR, a forward-looking version from CME.
Why it matters
Trillions in loans, adjustable mortgages and derivatives reset off it, so a Fed move reaches floating-rate borrowers through SOFR within days.
Think of it like
Like the CPI index in a lease escalation clause: the contract says 'index plus X', and a neutral party publishes the index from real data.
Facts, rules and data
The New York Fed's daily publication, with volumes; the Alternative Reference Rates Committee's records; and the federal LIBOR Act of 2022, which switched old contracts.
Debates and risks
SOFR has no bank-credit component, so it can fall in a crisis while banks' own funding costs rise; whether lenders need a supplement is still argued.
Connections (10)
▸LIBOR rate-rigging scandal led to the switch to SOFR: the benchmark rate that replaced LIBORFact, law or data
The connection
Once LIBOR was shown to rest on bankers' guesses, regulators wanted a rate built from real trades. After 2008, banks also lent each other so little unsecured money that few real trades existed to anchor LIBOR. A Fed-convened committee picked SOFR, based on trillions of dollars a day of overnight Treasury-backed loans.
When and why
The committee chose SOFR in 2017; the UK regulator said that year it would stop compelling LIBOR after 2021; US dollar LIBOR ended June 30, 2023.
How we know
Records of the Alternative Reference Rates Committee, UK regulator Andrew Bailey's July 2017 speech, and the 2022 federal LIBOR Act that moved old contracts to SOFR.
Debates and risks
SOFR has no bank-credit element, so some lenders argue it can fall in a crisis while their own funding costs rise; rival credit-sensitive rates mostly faded.
▸SOFR: the benchmark rate that replaced LIBOR sets rates on adjustable Mortgages and the 30-year fixed-rate loanFact, law or data
The connection
Most new adjustable-rate mortgages reset off the 30-day average of SOFR plus a fixed margin, often about 2.75 points, after an initial fixed period of 5, 7 or 10 years. Because SOFR follows the Fed's rate, a hike flows into ARM payments at the next reset. Fixed-rate loans instead follow the 10-year Treasury.
When and why
Fannie Mae and Freddie Mac began buying SOFR-based ARMs in 2020 and stopped taking LIBOR ARMs after 2020; LIBOR ended in June 2023.
How we know
Fannie and Freddie ARM specifications and loan notes name the index; the 2022 LIBOR Act moved older loans to SOFR.
Debates and risks
Whether ARMs regain market share when fixed rates are high, and how lenders handle SOFR's lack of a bank-credit component in a crisis.
▸SOFR: the benchmark rate that replaced LIBOR is calculated from rates in The repo market: overnight loans backed by TreasuriesFact, law or data
The connection
Each morning the New York Fed takes the previous day's overnight repo trades backed by Treasuries, more than $2 trillion, and publishes the volume-weighted median rate as SOFR. Because it comes from real trades rather than bank estimates, it is hard to rig, but repo squeezes move it: on September 17, 2019 it jumped to 5.25%.
When and why
Published by the New York Fed, with the Office of Financial Research, since April 3, 2018.
How we know
The New York Fed publishes its method, daily volumes and rate percentiles alongside each SOFR value.
Debates and risks
Whether a rate that spikes at quarter-ends and tax dates, reflecting collateral and cash shortages, is the right benchmark for long-term loans.
▸Bridge loans: short-term, floating-rate transition financing float over SOFR: the benchmark rate that replaced LIBORFact, law or data
The connection
A bridge loan's rate is one-month Term SOFR plus a spread, reset monthly. When SOFR rose from near zero in early 2022 to about 5.3% by mid-2023, a loan at SOFR plus 3.5 points went from about 3.5% to nearly 9%, more than doubling interest. Lenders require rate caps to limit that risk.
When and why
US bridge lending; borrowers who bought cheap caps in 2021 often faced far costlier replacement caps when extending in 2023–24.
How we know
CME Term SOFR data, the Fed's rate history, and mortgage REIT and CRE CLO reports showing floating-rate loan stress.
Debates and risks
How far the Fed's rate cuts since 2024 will rescue floating-rate borrowers, versus how many loans still need losses taken, remains unclear.
▸Fixed vs. floating rates on property loans set floating rates as a spread over SOFR: the benchmark rate that replaced LIBORFact, law or data
The connection
Floating loans quote a spread over one-month Term SOFR, or over the Prime rate at many banks. The benchmark resets monthly, so a Fed move reaches the payment within weeks. Prime is set at the top of the fed funds target range plus 3 points; SOFR tracks overnight Treasury-backed borrowing.
When and why
US loans since LIBOR was retired on June 30, 2023; CME has published Term SOFR since 2021.
How we know
Loan agreements, CME and New York Fed rate publications, and the federal LIBOR Act of 2022.
Debates and risks
Term SOFR is derived from futures trading rather than actual loans; regulators limit its use in derivatives, and some question how well it would hold up in severe market stress.
▸Interest-rate swaps: trading floating payments for fixed now mostly reference SOFR: the benchmark rate that replaced LIBORFact, law or data
The connection
Swaps used to pay floating LIBOR. After the LIBOR scandal, dealers moved new swaps to SOFR, and ISDA's fallback protocol converted old ones to SOFR plus a fixed adjustment, about 0.11 points for one-month LIBOR. Today nearly all US dollar swaps reference SOFR.
When and why
ISDA fallbacks took effect January 2021; interdealer trading switched to SOFR in July 2021 ('SOFR First'); LIBOR ended June 30, 2023.
How we know
ISDA's 2020 IBOR Fallbacks Protocol, the CFTC-backed 'SOFR First' initiative, and CME and LCH clearing volumes.
Debates and risks
Loans often use Term SOFR while most swaps use compounded SOFR; mismatches can leave small gaps in a borrower's hedge.
▸Swap loans: a floating bank loan fixed with an interest-rate swap start as loans floating over SOFR: the benchmark rate that replaced LIBORFact, law or data
The connection
The loan floats over one-month Term SOFR and the swap pays the borrower that same rate, so the floating pieces cancel. Before 2022 these loans floated over LIBOR; amendments, ISDA fallbacks and the LIBOR Act moved them to SOFR.
When and why
US bank swap loans from 2021–23 on; the Fed-convened ARRC allowed Term SOFR swaps for end users hedging loans.
How we know
Loan and swap confirmations, the ARRC's 2021 Term SOFR recommendations, and the federal LIBOR Act of March 2022.
Debates and risks
Some loans have a SOFR floor the swap lacks, so when SOFR is very low the hedge leaks; who should bear that is argued.
▸Business loans: credit lines, C&I term loans, equipment and ABL usually float over prime or SOFR: the benchmark rate that replaced LIBORFact, law or data
The connection
Most business lines and term loans float. Smaller loans usually key off prime, which banks set 3 points above the top of the Fed's target range; larger ones use Term SOFR plus a spread. Either way, a Fed hike raises the payment at the next reset, often within a month. Borrowers can fix the rate with a swap.
When and why
US banks since LIBOR ended in June 2023; prime has been the small-business benchmark for decades.
How we know
Loan agreements name the index; the New York Fed publishes SOFR daily, and the Wall Street Journal's survey of big banks publishes prime.
Debates and risks
Whether SOFR, which has no bank-credit component, needs an added spread when banks' own funding costs jump in a crisis.
▸Eurodollars: the offshore dollar banking system priced loans off LIBOR until the switch to SOFR: the benchmark rate that replaced LIBORFact, law or data
The connection
For decades eurodollar loans were priced off LIBOR, the rate London banks said they would pay to borrow from each other. After the 2012 rigging scandal, and as such lending dried up, regulators replaced it with SOFR, built from over $2 trillion a day of overnight Treasury repo trades. Commercial loans moved from LIBOR-plus to Term SOFR-plus spreads.
When and why
The New York Fed's ARRC chose SOFR in 2017; US dollar LIBOR panels ended June 30, 2023, with the 2022 LIBOR Act covering old contracts.
How we know
ARRC reports, the UK Financial Conduct Authority's March 2021 cessation announcement and the Adjustable Interest Rate (LIBOR) Act.
Debates and risks
SOFR lacks LIBOR's bank-credit component; some banks wanted a credit-sensitive rate, but alternatives such as BSBY have faded.
▸CME Group: Chicago's futures giant (CME, CBOT, NYMEX) trades the futures that forecast SOFR: the benchmark rate that replaced LIBORFact, law or data
The connection
Each SOFR futures contract pays off on average SOFR over a future three-month period, so its price shows what traders expect rates to be. CME uses those prices to calculate Term SOFR, the one- and three-month forward rates that most floating-rate CRE loans and swaps quote, as in 'one-month Term SOFR plus 2.5%.'
When and why
CME launched SOFR futures in May 2018 and began publishing CME Term SOFR in April 2021; regulators' rate committee endorsed it that July.
How we know
CME Term SOFR methodology documents, the Alternative Reference Rates Committee's 2021 recommendation, and loan documents referencing it.
Debates and risks
Regulators limited Term SOFR use in derivatives to protect the futures market it is built from; whether that circularity is a risk is debated.