SOFR (secured overnight financing rate); is a broad reference rate that measures the cost of borrowing money overnight collateralized by Treasury securities. It is an interbank overnight reference rate that was introduced as an alternative to LIBOR, given the substantial shortcomings (e.g., rate rigging) that had historically engulfed the latter.

The SOFR includes all trades in the so-called “Broad General Collateral Rate” in addition to bilateral Treasury repurchase agreement (repo) transactions cleared through the delivery-versus-payment (DVP) service, in exception of “specials” (specific-issue collateral). The SOFR is complied as a volume-weighted median of transaction-level tri-party repo data collected from the Bank of New York-Mellon as well as relevant repo transaction data and data on bilateral Treasury repo transactions.

The main types of SOFR are:

• Daily simple SOFR.
• Daily compounded SOFR.
• Term SOFR.
• SOFR averages.
• SOFR index.

The most popular types that are quoted or used as reference in syndicated and bilateral credit agreements are daily simple SOFR, daily compounded SOFR, and term SOFR. In loan agreements, the commonly used versions of SOFR are (i) daily simple SOFR in arrears, (ii) SOFR compounded in arrears, (iii) SOFR compounded in advance, and (iv) forward looking term SOFR (term SOFR). In derivatives market, SOFR compounded in arrears is often used.

For example, term SOFR is a period-specific forward-looking term rate that is published for periods of 1, 3, 6 or 12 months. It is derived and implied from futures trading in SOFR, which is used as a measure reflecting the cost of overnight borrowing in the U.S. Treasury repo market. Term SOFR is commonly used in loan agreements as a reference rate for dollar-denominated loans with tenors (terms) of one, three, or six months and up to twelve months.