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2 min readTapeboard Staff

What is the SOFR Rate? Definition, Formula, and Example

The Secured Overnight Financing Rate (SOFR) is the benchmark U.S. dollar interest rate derived from actual overnight repo transactions collateralized by Treasury securities, and it replaced LIBOR as the reference rate for trillions of dollars in loans, swaps, and derivatives.

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What is the SOFR Rate?

The Secured Overnight Financing Rate (SOFR) is the benchmark overnight borrowing rate for U.S. dollars, calculated from actual transactions in the Treasury repurchase agreement (repo) market. The New York Fed publishes it every business morning at 8:00 AM ET. SOFR replaced LIBOR in 2023 as the reference rate underpinning floating-rate loans, interest rate swaps, futures, and an estimated $70+ trillion of dollar-denominated contracts. Unlike LIBOR, which was based on bank estimates and proved manipulable, SOFR is built entirely from observed transactions — roughly $1.5 trillion of daily repo volume feeds the calculation.

How SOFR is Calculated

SOFR is a volume-weighted median of overnight repo transactions collateralized by U.S. Treasuries, sourced from three segments:

1. Tri-party repo (excluding Fed trades)

2. GCF repo (General Collateral Finance)

3. Bilateral FICC-cleared repo

The New York Fed ranks all eligible transactions by rate and takes the volume-weighted 50th percentile — the rate at which half of the day's dollar volume traded above and half below. Related published variants include the 30-, 90-, and 180-day SOFR Averages and the SOFR Index used to compute compounded interest over a period.

Worked Example

Suppose overnight SOFR prints at 4.32%. A corporation with a $100 million floating-rate loan priced at SOFR + 150 basis points pays an annualized rate of 5.82% for that accrual period. On a 90-day accrual, the interest is:

$100,000,000 × 0.0582 × (90/360) = $1,455,000

In the futures market, CME 3-month SOFR futures (SR3) trade at a price of 100 minus the implied rate. A contract quoted at 95.70 implies a forward rate of 4.30% for that reference quarter — traders read the entire forward curve of Fed expectations directly off the strip.

When Traders Use It

  • Fed policy trading: SOFR futures and OIS swaps are the cleanest instruments for expressing views on the FOMC path.
  • Stress detection: SOFR spiking above the fed funds target range signals repo market stress — the September 2019 repo blowout, when SOFR jumped to 5.25%, forced the Fed to inject reserves.
  • Floating-rate valuation: Every SOFR-linked loan, CLO, and ARM resets off this print.
  • Basis trading: The SOFR–fed funds basis and the SOFR–IORB spread are watched as plumbing indicators of reserve scarcity.

Limitations and Common Misconceptions

  • SOFR is risk-free by design: It embeds no bank credit risk, so it falls in a crisis while unsecured rates spike. Loan spreads had to be widened to compensate when LIBOR died.
  • Overnight only: Term SOFR (1M, 3M, 6M) is derived from futures, not transactions — it is a forecast, not an observed rate.
  • Repo quirks distort it: Quarter-end and year-end balance-sheet constraints push SOFR around for technical reasons unrelated to policy.
  • Not the same as the fed funds rate: Fed funds is unsecured interbank lending; SOFR is secured repo. The spread between them is itself a signal.