Secured Overnight Financing Rate (SOFR)
The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate used in U.S. dollar-denominated financial transactions, including loans, bonds, and derivatives. SOFR measures the broad cost of borrowing cash overnight against U.S. Treasury securities in the repurchase agreement (repo) market. Specifically, SOFR is based on actual overnight repo transactions collateralized by U.S. Treasury securities, such as Treasury bills, notes, and bonds. Because SOFR is based on transactions secured by U.S. Treasury securities, it is broadly considered a nearly risk-free reference rate.
As part of the phaseout of the London Interbank Offered Rate (LIBOR), Congress enacted the Adjustable Interest Rate (LIBOR) Act (codified at: 12 U.S.C., Ch. 55 §§ 5801 – 5807) to establish a uniform process for replacing LIBOR in certain contracts that did not contain adequate provisions for selecting a replacement benchmark. The LIBOR Act directed the Federal Reserve Board to identify benchmark replacements for these contracts. In December 2022, the Federal Reserve adopted a final rule identifying SOFR-based benchmark replacements for certain LIBOR contracts. The rule became effective in 2023, and the Board-selected replacements applied following the June 30, 2023 end of the relevant U.S. dollar LIBOR settings.
For more information, see the Federal Reserve Bank of New York Secured Overnight Financing Rate Data, Additional Information about Reference Rates Administered by the New York Fed.
[Last reviewed in August of 2026 by the Wex Definitions Team]
Wex