What is ‘Secured Overnight Financing Right’ (SOFR)?
The State Bank of India (SBI) has recently executed two inter-bank money market (short term) deals linked to the Secured Overnight Financing Rate i.e. SOFR.
Key Points
- SBI has recently executed two inter-bank money market transactions linked to SOFR.
- These transactions were executed by the SBI Branch in Hong Kong.
- These transactions show the progress of SBI in embracing the Alternate Reference Rates (ARRs).
- SOFR is the replacement for the USD LIBOR rate which will not be used after 2021.
- The decision to phase out LIBOR has been taken by the Financial Conduct Authority (FCA) of the United Kingdom in 2017.
- LIBOR is being phased out due to many errors in the rate in the past years.
- As LIBOR is going away, SOFR has gained momentum.
- Also, in 2017, the Alternative Reference Rates Committee selected SOFR as an alternative for LIBOR.
LIBOR
LIBOR i.e. London Inter-bank Offered Rate is an average interest rate that is calculated on the basis of estimates provided by the leading banks in London. It came into use in the 1970s. LIBOR affects both investors and customers. It is used as a reference rate in different types of loans.