What Is SOFR (Secured Overnight Financing Rate)? (Rate Specs)
SOFR is the Secured Overnight Financing Rate, a measure of the cost of borrowing cash overnight when U.S. Treasury securities serve as collateral. The New York Fed calculates and publishes it on U.S. government securities business days. A contract may use overnight SOFR, a compounded average, or Term SOFR; these rates are related but not interchangeable.
A familiar-looking rate label can hide important details. When you review a loan document or financial table, “SOFR” may not tell you which version applies, how the rate is set, or when it affects a payment. I use a simple check: identify the rate, its observation dates, and the contract’s calculation rules before comparing costs.
SOFR Overview: Definition, Administrator, and Market Basis
SOFR measures the cost of borrowing cash overnight in transactions secured by U.S. Treasury securities. The Federal Reserve Bank of New York, or NY Fed, calculates and publishes the rate using transaction data from parts of the Treasury repurchase-agreement market. It is a secured overnight benchmark, not a general bank lending rate.
How repo transactions support SOFR
A repurchase agreement, often called a repo, is a short-term transaction in which one party receives cash and provides securities as collateral. The parties agree to reverse the transaction later. In a typical overnight repo, cash is borrowed for one night, and Treasury securities help secure repayment.
The NY Fed calculates SOFR as a volume-weighted median of rates from eligible Treasury repo transactions. In plain terms, the calculation gives greater weight to rates associated with larger transaction volumes, then selects the middle rate in the weighted distribution. It is not a simple average of every reported rate.
The calculation includes eligible transactions from tri-party repo, GCF Repo®, and qualifying cleared bilateral Treasury repo markets. These segments capture different types of market activity. The methodology sets out which transactions qualify and how the data are processed.
Who publishes SOFR, and when?
The NY Fed is the administrator of overnight SOFR. It generally publishes the rate at about 8:00 a.m. Eastern Time on each U.S. government securities business day. Publication schedules, calculation details, and revision procedures are governed by the NY Fed’s methodology, so check its current materials when timing or precision matters.
SOFR is based on transactions from the prior business day. A Saturday, Sunday, or market holiday does not create a new overnight SOFR observation. Contracts must account for non-business days when they calculate interest or set payment dates.
Key takeaway: SOFR’s market basis is overnight borrowing secured by Treasuries. Its exact calculation comes from a defined set of repo transactions, not from an unsecured bank borrowing survey.
SOFR Rate Specifications: Overnight Rate, Compounded Averages, and Term SOFR
“SOFR” can refer to different rate forms. The overnight rate is a daily measure; the NY Fed also publishes backward-looking compounded averages and an index. CME Term SOFR is a separate forward-looking rate. The contract must identify which form to use before you can interpret a quoted percentage.
Compare the main SOFR rate forms
| Rate form | What it represents | How it is used or interpreted |
|---|---|---|
| Overnight SOFR | A rate for overnight Treasury-secured borrowing, calculated from eligible repo transactions | A daily input; a loan may use it under a specified daily or compounded convention |
| 30-, 90-, or 180-day compounded average | A compounded SOFR rate over the stated number of calendar days | A backward-looking measure over a past period, not a forecast of a future term rate |
| SOFR Index | A published index that reflects the cumulative effect of compounded SOFR | Can help calculate compounded SOFR over a selected period by comparing index values |
| CME Term SOFR | A forward-looking term reference rate derived from SOFR futures-market data | Used in some contracts that specify a term rate; it is not the NY Fed overnight rate |
The NY Fed publishes compounded averages for 30, 90, and 180 calendar days, as well as the SOFR Index. These products help users apply SOFR across longer periods, but they do not turn the daily overnight rate into the same thing as a forward-looking rate.
CME Term SOFR is based on SOFR futures-market data and looks ahead over a stated term. It differs from both the NY Fed’s overnight rate and its compounded averages. Do not substitute one form for another just because a document uses the broad label “SOFR.”
Why SOFR replaced LIBOR in many U.S.-dollar contracts
Many U.S.-dollar contracts moved away from LIBOR toward SOFR, but SOFR is not a direct, unchanged replacement for every LIBOR tenor. LIBOR represented unsecured bank borrowing rates across multiple terms. SOFR is secured by Treasury collateral and is fundamentally an overnight rate.
As a result, contracts often specify added conventions or a spread adjustment. The required terms depend on the contract and its fallback language. A benchmark name alone does not tell you the full interest rate or how to calculate it.
Key takeaway: First find the exact rate form in the contract. Then check whether it specifies a spread, an averaging method, or a term.
Reading SOFR Conventions: Observation Periods, Compounding, and Resets
A SOFR convention is the set of contract rules that turns a benchmark rate into an interest amount or payment rate. It may define the observation dates, day-count method, compounding, reset schedule, and payment timing. Two contracts can refer to SOFR yet produce different results because their conventions differ.
What to check in a SOFR contract
Look for these items in the loan agreement, note, or rate schedule:
- Rate type: Is the contract using overnight SOFR, a compounded average, the SOFR Index, or CME Term SOFR?
- Observation period: Which dates supply the SOFR values for the interest period?
- Compounding method: Are daily rates compounded, or does the contract use another stated calculation?
- Business-day calendar: How are weekends and U.S. government securities market holidays handled?
- Lookback or payment delay: Are rate observations taken before the interest period ends, or is payment made after a stated delay?
- Reset frequency: How often does the applicable rate or margin reset?
- Spread or adjustment: Does the contract add a margin or a benchmark transition adjustment, and how is it applied?
A lookback shifts rate observation dates earlier than the days on which interest accrues. A payment delay changes when the borrower pays, not necessarily which rate days are observed. These terms may sound similar, but they describe different timing rules.
For compounded SOFR, a common form of the calculation multiplies daily accrual factors. In simplified notation, each factor is (1 + (r_i \times n_i / 360)), where (r_i) is the daily SOFR rate expressed as a decimal and (n_i) is the number of calendar days that rate applies. The contract defines the exact method and dates.
A simple illustrative interest calculation
Suppose a contract applies a constant annual rate of 5% to $100,000 for 30 days, using a 360-day basis and simple interest. The illustrative interest is:
$100,000 × 0.05 × 30 ÷ 360 = $416.67
That is a teaching example, not a current SOFR quote or a calculation for a particular loan. A real contract may compound daily, use different observation dates, add a spread, or define other rules. Even a small convention change can alter the result.
Key takeaway: Never calculate a payment from the SOFR percentage alone. Confirm the contract’s rate type, dates, day count, compounding, and spread.
SOFR in Practice: Loan Pricing, Financial Careers, and Market Applications
SOFR is used as a reference rate in financial contracts, including loans and other products. The benchmark is only one part of a contract’s pricing. The applicable rate, any added margin, and the calculation rules determine how the benchmark affects interest.
Two practical contract scenarios
Scenario 1: A loan priced from Term SOFR. A borrower sees “Term SOFR plus 2.00%” in a rate schedule. The first task is to confirm which Term SOFR tenor the agreement names and how often the rate resets. The borrower should also check how the contract handles the margin and payment dates. The quoted spread alone does not establish the full borrowing cost.
Scenario 2: A loan using compounded overnight SOFR. A contract may calculate interest from daily SOFR observations over an accrual period. The borrower needs to identify the observation window, compounding formula, day-count basis, and any lookback or payment delay. Using a published 30-day average in place of the contract’s daily calculation could give the wrong answer.
These examples are illustrative. Actual terms vary, and the governing contract controls. If the rate label and calculation section appear inconsistent, ask the lender or contract administrator to explain the applicable benchmark and provide the calculation method in writing.
A step-by-step verification routine
- Find the exact benchmark name. Record whether it says overnight SOFR, a NY Fed compounded average, the SOFR Index, or CME Term SOFR.
- Read the calculation clause. Note the observation dates, compounding approach, calendar, day count, and payment timing.
- Identify added amounts. Check for a loan margin or spread adjustment and whether it is applied as the agreement states.
- Use the right source. Compare the contract’s specified rate with the relevant NY Fed or CME publication. Do not rely on a generic search result if the product or date differs.
- Keep a record. Save the rate type, source, observation dates, and assumptions used in your calculation.
For study or financial work, this routine also helps explain why two SOFR-linked products may show different rates. The difference may reflect their rate form or contract conventions, rather than an error in the benchmark itself.
Key takeaway: Match the publication to the contract. Keep the benchmark, observation period, and calculation assumptions together when you review or communicate a rate.
SOFR FAQs
These answers distinguish the benchmark’s basic features from the contract rules that apply it. For a specific payment, the loan or security document remains the controlling source for the rate form, dates, and calculation method.
What does SOFR stand for?
SOFR stands for Secured Overnight Financing Rate. It measures the cost of overnight cash borrowing secured by U.S. Treasury securities in eligible repo transactions. The NY Fed calculates and publishes the overnight rate, which is distinct from compounded averages and CME Term SOFR.
Is SOFR secured or unsecured?
SOFR is secured. Eligible transactions use U.S. Treasury securities as collateral. This differs from an unsecured borrowing rate, where the borrowing is not backed by that collateral. The secured basis is an important reason not to treat SOFR as identical to LIBOR.
Who publishes the SOFR rate?
The Federal Reserve Bank of New York publishes overnight SOFR. It generally releases the rate at about 8:00 a.m. Eastern Time on U.S. government securities business days. Consult the NY Fed’s current publication materials for the official rate and applicable methodology.
Is SOFR published every day?
Overnight SOFR is published on U.S. government securities business days, not every calendar day. There is no new overnight observation for a weekend or market holiday. A contract’s rules determine how the rate applies across those non-business days.
What is the difference between SOFR and Term SOFR?
Overnight SOFR is a daily, transaction-based rate. CME Term SOFR is a separate forward-looking term rate derived from SOFR futures-market data. They are not interchangeable, and a contract’s wording determines which rate applies.
What are the 30-, 90-, and 180-day SOFR averages?
They are NY Fed-published compounded averages over 30, 90, and 180 calendar days. Each summarizes SOFR over a past period. They are different from the overnight rate and from forward-looking CME Term SOFR.
Does “SOFR plus 2%” tell me my full loan rate?
Not by itself. You need to know which SOFR form and tenor the contract uses, when it resets, and how it calculates interest. Confirm whether the stated 2% is a margin or another adjustment, and check the contract’s other pricing terms.
Can I use the NY Fed 30-day average for any SOFR loan?
No. Use it only if the contract calls for that measure or permits the calculation. A loan may instead require daily compounded SOFR, the SOFR Index, or CME Term SOFR. The contract’s benchmark and observation rules control.
Why can two SOFR-linked loans have different interest costs?
They may use different SOFR forms, reset dates, observation periods, margins, or compounding rules. Even when both contracts reference SOFR, those details can change the rate applied or the amount of interest due. Compare the full calculation terms, not just the benchmark label.
(This article was written by one of our staff writers, Nathan Sterling. Visit our Meet the Team page.)
