Understanding these can provide valuable insights for market participants. HighRadius stands out as an IDC MarketScape Leader for AR Automation Software, serving both large and midsized businesses. The IDC report highlights HighRadius’ integration of machine learning across its AR products, enhancing payment matching, credit management, and cash forecasting capabilities.

• As SOFR gains prominence, it has been integrated into these instruments, offering a more stable basis for managing interest rate exposure.
• Basically, the LIBOR rate was whatever the 17 institutions responsible for setting it said it was, regardless of whether market activity supported that rate.
• As an example, an alternative in the mortgage space is the 1-year constant maturity treasury.
• Concerning Indian firms, those engaged in U.S. markets (like the IT giants Infosys or the Pharma sites like Dr. Reddy’s Pharma) are converting their dollar loans and derivatives to SOFR.

Understanding the concept of Secured Overnight Financing Rate (SOFR)

LIBOR differs from SOFR as the latter is based on actual transactions within the Treasury repurchase agreement (repo) market whereas LIBOR is based on estimates. On the contrary, it takes data from real transactions, which makes it more precise. SOFR captures the cost of borrowing on an overnight basis and in a manner that is secure.

SOFR Averages and Index Data

Similarly, the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE) have introduced SOFR futures contracts, offering new options for hedging and speculation. These contracts enhance liquidity and facilitate efficient price discovery and risk management. SOFR can also be used to calculate floating rates based on reference rates. This can be achieved by either referencing daily compounding interest during the interest period or by utilizing the published daily SOFR index values at the period’s outset and conclusion. This type is calculated daily and takes into account the interest accrued — providing a comprehensive view of the total borrowing cost over a particular interest period. Use cases for daily compounded SOFR include financial products and contracts where the interest is expected to compound daily.

Because it deals with movements in the treasury market, it’s going to change any day that market is open. An ARM has a fixed rate for some time near the beginning of the loan – usually 5, 7 or 10 years. At the end of that time, it adjusts up or down based on market rates at specified intervals for the remainder of the loan, subject to caps and floors on movement. The current SOFR rate as of July 18, the latest available at the time of writing, was 5.34%. Along with the main rate, rates are published based on negotiated treasury prices in various percentiles – 25th, 75th, etc. – so that the rate may be higher or lower depending on what’s being used.

The shift from LIBOR to SOFR posed challenges, particularly in the derivatives market, where trillions of dollars’ worth of contracts were tied to LIBOR. Additionally, the transition affected consumer credit products, such as adjustable-rate mortgages and private student loans. Moreover, SOFR is collateralized by the United States Treasury, adding a strong layer of security and functionally making SOFR a risk-free rate. For these reasons, SOFR has emerged as the gold standard for pricing financial products, including both corporate and consumer loans, as well as dollar-based derivatives. A transparent global financial market is good for economies, businesses, and individuals alike.

Financial

Loan agreements often include fallback provisions to address situations where SOFR may be unavailable, ensuring continuity in interest rate determination. Incorporating SOFR requires updates to loan documentation and systems to accommodate its unique characteristics, such as compounding conventions and daily rate updates. Legal teams play a critical role in drafting these agreements to meet regulatory requirements.

Get Forbes Advisor’s expert insights on investing in a variety of financial instruments, from stocks and bonds to cryptocurrencies and more. XYZ’s chief financial officer (CFO) realizes that interest rates are increasing and sets up a hedge. The FOMC directs the Desk to conduct SRF operations as detailed in its Continuing Directive for Domestic Open Market Operations Narrative and Numbers and implementation note. Any changes to the operational parameters not provided by the FOMC’s Continuing Directive for Domestic Open Market Operations and implementation note will be announced on the New York Fed’s website.

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She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.

Sources for Rate Data

In the world of finance, there are numerous key indicators and rates that play a significant role in shaping the financial landscape. This glossary entry aims to provide a comprehensive understanding of SOFR, its history, calculation, role in the financial market, and its advantages and disadvantages. To calculate SOFR, we first need to calculate the weighted average of these interest rates, where the weight is determined by the size of each transaction. Another SOFR transition challenge is that many countries have identified their own alternatives to LIBOR. Meanwhile, the Bank of Japan has chosen the Tokyo Overnight Average Rate (TONAR) as its policy interest rate.

The 2008 financial crisis underscored the need for a more reliable benchmark than LIBOR, which was vulnerable to manipulation. Treasury repo market, emerged as a sturdy alternative, signifying a move towards more transparent, market-based benchmarks. The Secured Overnight Financing Rate (SOFR) stands as a crucial benchmark in financial markets, representing the cost of borrowing cash overnight, collateralized by Treasury securities. Its advent marks a shift from legacy benchmarks like LIBOR to a more transparent, transaction-based model, enhancing its reliability in financial operations.

In 2017, ARCC officially endorsed SOFR as its preferred benchmark rate. The company is taking out a $100 million floating-rate loan to fund its expansion efforts. The bank loan will have an interest rate that rests periodically based on SOFR. If all banks follow this practice, the average SOFR then goes up in this scenario. In a hypothetical scenario where a large majority of banks are struggling for some reason, one bank would likely only lend to another at a very high rate, Gandhi explains.

• This type is calculated daily and takes into account the interest accrued — providing a comprehensive view of the total borrowing cost over a particular interest period.
• The NY Federal Reserve is, in fact, next in line with the top regulatory banks in the United States banking system.
• The minimum proposition size is $1 million, and propositions must be submitted in $1 million increments.
• The SOFR calculation is based on data from three broad categories of the U.S. repo market.
• The next day, on the 13th of December, ABC Bank returned the money with the SOFR rate declared by the New York Federal Reserve that morning to XYZ Bank.
• The ISDA also offered a protocol allowing parties to include these rules in existing contracts.

With fewer transactions, he says, the index began reflecting quoted rates, rather than actual rates from transactions. And “this self-reported Libor rate may not accurately represent the true cost of borrowing,” notes Weller. SOFR’s establishment, grounded in actual market transactions, marks a significant evolution in financial benchmarks. Its role in providing stability and transparency is growing, poised to become a foundational element in financial markets and shaping a more resilient and transparent financial future. The move to SOFR not only impacted U.S. financial markets but also brought increased stability and transparency to the broader global financial landscape.

However, as mentioned above, SOFR is relevant if you have an adjustable-rate mortgage. The very nature of SOFR implies that the rate is a reflection of the market mood or the market’s current status. Let us understand the historical movement of SOFR in terms of price and volume of transactions through the chart below, published by the New York Federal Reserve’s official website. To meet its reserve and liquidity requirements, they secured an overnight loan from XYZ bank for $30 million, for which they produced government bonds they held as collateral.

The latest published SOFR 1-month, 3-month, and 6-month averages are for July 8, 2025. Note these term rates are calculated in arrears (they average historical SOFR rates) as opposed to being forward-looking like swap rates. SOFR plays a pivotal role in the pricing of various financial products. It is most commonly used in interest-rate swaps, where two parties agree to exchange interest payments based on fixed and floating rates. For example, in a standard swap, one party agrees to pay a fixed interest rate, while the other party pays a floating rate based on SOFR.

“So, an increase in SOFR can sometimes—not always—indicate that banks are finding it hard to borrow money from other banks and it could indicate trouble ahead for banks and the economy,” Gandhi says. If you take out a HELOC, the loan’s variable rate might be based on SOFR. The interest rates on some home equity lines are updated monthly, and lenders apply the new rates to both our current balance and new draws. When SOFR rises, you’ll accrue more interest and your monthly payment could increase.