Secured Overnight Financing Rate (SOFR)


  • Recently, State Bank of India (SBI) has executed two inter-bank short term money market deals with pricing linked to Secured Overnight Financing Rate (SOFR).

What Is the Secured Overnight Financing Rate (SOFR)?

  • SOFR was selected by the Alternative Reference Rates Committee (ARRC) chaired by the New York Federal Reserve in 2017.
  • It is a benchmark interest rate for dollar-denominated derivatives and loans.
  • It is based on transactions in the Treasury repurchase market.
  • Similar to a mortgage rate, SOFR is a secured borrowing rate in the sense that collateral is provided to borrow cash.
  • It is seen as preferable to London interbank offered rate (LIBOR)since it is based on data from observable transactions rather than on estimated borrowing rates.

Back to Basics

What is LIBOR?

  • London Inter-bank Offered Rate is an average interest rate that is calculated based on estimates provided by the leading banks in London.
  • It is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.
  • It came into use in the 1970s. 
  • It affects both investors and customers.
  • It is used as a reference rate in different types of loans.

What is MIBOR?

  • MIBOR is the acronym for Mumbai Interbank Offer Rate, the yardstick of the Indian call money market.
  • It is the rate at which banks borrow unsecured funds from one another in the interbank market.
  • At present, it is used as a reference rate for floating rate notes, corporate debentures, term deposits, interest rate swaps and forward rate agreements.
  • The pricing of overnight indexed swaps, a type of overnight interest rate swap used for hedging interest rate risk is based on overnight MIBOR.

Source: The Hindu 

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