TL;DR. The Secured Overnight Financing Rate (SOFR) is the volume-weighted median of overnight Treasury repurchase (repo) transactions, published every business day at about 8:00 a.m. Eastern by the Federal Reserve Bank of New York. It replaced U.S. dollar LIBOR as the reference rate for the vast majority of new dollar-denominated loans and derivatives, and it is anchored in more than a trillion dollars of actual daily transactions rather than bank estimates.
What SOFR actually measures
SOFR is an overnight interest rate. Specifically, it is the cost of borrowing cash overnight against U.S. Treasury securities as collateral in the tri-party general collateral (GC), General Collateral Finance (GCF), and Delivery-versus-Payment (DVP) segments of the repo market.
The New York Fed’s published methodology is straightforward:
- Take every eligible repo transaction from the three segments above.
- Remove the lowest 20 percent of DVP volume each day (this filters out trades where a specific Treasury security is trading "on special" and therefore has an artificially low rate).
- Sort the remaining trades from lowest rate to highest.
- Report the rate at the 50th percentile of dollar volume — the volume-weighted median.
That single number, published to two decimal places, is SOFR. The New York Fed also publishes the 1st, 25th, 75th, and 99th percentiles alongside it, plus the total transaction volume that produced the rate. As of September 1, 2026, SOFR stood at 3.66 percent.
Why volume matters
SOFR is underpinned by regularly more than $1 trillion of actual daily repo trades, and volume in the underlying repo markets averaged roughly $3.17 trillion per day in the first half of 2026, according to the CME Group. That is orders of magnitude larger than the interbank market that LIBOR tried to measure. A benchmark rooted in observable transactions is much harder to manipulate than one rooted in hypothetical borrowing quotes, which is exactly why regulators pushed the market toward it.
Why we switched from LIBOR
LIBOR — the London Interbank Offered Rate — was a survey. Every morning, a panel of banks answered, in effect: "At what rate could you borrow unsecured dollars right now?" The answers were trimmed and averaged. That worked when interbank lending was deep. After 2008, actual unsecured interbank lending nearly disappeared, so the survey was answering a hypothetical — and manipulation scandals showed the incentives cut the wrong way.
The Federal Reserve Board and the New York Fed convened the Alternative Reference Rates Committee (ARRC), which chose SOFR as the recommended replacement in 2017. Publication began on April 3, 2018. The transition was staged:
- December 31, 2021 — publication of 1-week and 2-month USD LIBOR settings ended.
- June 30, 2023 — the most-used USD LIBOR tenors (1-month, 3-month, 6-month, 12-month) ended in their representative form, per the Federal Reserve’s Regulation ZZ implementing the LIBOR Act.
- November 2023 — the ARRC concluded its work and disbanded, its transition mission complete.
Analogy: LIBOR was a poll; SOFR is a scoreboard
LIBOR asked banks what they thought their borrowing rate should be. SOFR reads the actual scoreboard of trillions of dollars of real trades. Both produce a number, but only one is auditable against a transaction record.
A worked example: how one day of SOFR is calculated
Suppose on a given morning the New York Fed observes $1.5 trillion of eligible tri-party GC + GCF + DVP transactions. It removes the bottom 20 percent of DVP volume for the "specials" filter, leaving about $1.25 trillion of trades. It sorts them from cheapest to most expensive rate and starts a running total. The rate at which the running total crosses $625 billion — the midpoint of the surviving volume — is the SOFR print. If most of that volume clears between 3.65 and 3.67 percent, SOFR that morning would be around 3.66.
Term SOFR vs overnight SOFR
SOFR itself is an overnight rate. But most loans are not overnight — a floating-rate corporate loan resets monthly or quarterly, not daily. Two solutions exist:
- Compounded-in-arrears SOFR. You take daily SOFR over the loan’s interest period and compound it to a term rate after the fact. This is what the derivatives market and the largest floating-rate note market use. It is transaction-based and robust, but the borrower does not know the coupon until the period ends.
- Term SOFR (1M, 3M, 6M, 12M). A forward-looking rate published by CME Group, derived from SOFR futures. The ARRC formally recommended the 1M/3M/6M CME Term SOFR rates on July 29, 2021, and the 12M tenor on May 19, 2022. Because it is known in advance, most business loans and syndicated credit facilities reference Term SOFR.
When SOFR breaks: the September 2019 spike
The strongest case for watching SOFR is what happens when the repo market seizes. On September 17, 2019, SOFR jumped from 2.43 percent to 5.25 percent in a single day, with intraday repo rates reportedly reaching 10 percent. Several ordinary things collided — a corporate tax payment date, large Treasury settlements, and a drop in reserves — and dealer balance sheets could not absorb the imbalance. The Fed responded with overnight repo operations starting at $75 billion per day, expanding to $120 billion, and restarted balance-sheet growth within weeks.
SOFR did its job in that episode. Because it is transaction-based, it reflected the actual pain in funding markets rather than smoothing it away. That is a feature, not a bug — but it means SOFR-linked products can carry real overnight volatility.
SOFR at the inflection points
| Date | SOFR | Context |
|---|---|---|
| Apr 3, 2018 | 1.83% | First-ever SOFR publication |
| Sep 17, 2019 | 5.25% | Repo spike (from 2.43% the day before) |
| Apr 15, 2020 | 0.03% | COVID zero-bound era; 0.01% low set Mar-Apr 2020 |
| Jan 2, 2024 | 5.40% | All-time high; Fed at 5.25–5.50% target |
| Sep 18, 2024 | 5.33% | Day of the Fed’s first cut of the cycle |
| Sep 1, 2026 | 3.66% | Latest observation |
How SOFR is built (concept diagram)
SOFR since inception
Common mistakes
- Confusing SOFR with the fed funds rate. SOFR is secured (backed by Treasuries) and covers a much bigger transaction pool than the effective federal funds rate, which is unsecured interbank. Both should sit inside the Fed’s target range in normal times, but they can diverge sharply when repo goes tight.
- Assuming Term SOFR equals compounded SOFR. Term SOFR is a forward-looking expectation derived from futures; compounded SOFR is a backward-looking realized rate. They can differ meaningfully across a period with big rate moves.
- Reading a single day’s print as a trend. SOFR can jitter at quarter-end and year-end as bank balance sheets tighten. The SOFR averages and Index published by the NY Fed smooth those wiggles out over 30-, 90-, and 180-day windows.
- Ignoring the credit-spread gap. LIBOR embedded bank credit risk; SOFR is a near-risk-free repo rate. For most loans, lenders now add a fixed credit-spread adjustment on top of SOFR to preserve the economics of legacy LIBOR-referenced contracts.
Related concepts to learn next
- The FOMC target range and how policy transmits into SOFR.
- The repo and reverse-repo plumbing that produces SOFR.
- Interest rate swaps, whose floating leg is now SOFR-based rather than LIBOR-based.
Sources
- Federal Reserve Bank of New York — Reference Rates: Additional Information (methodology, publication start)
- FRED — Secured Overnight Financing Rate (SOFR) (daily series, all quoted values)
- Federal Reserve — Regulation ZZ implementing the LIBOR Act (cessation dates)
- ARRC — Alternative Reference Rates Committee (transition mission and 2023 wind-down)
- ARRC press release, July 29, 2021 — CME Term SOFR recommendation
- Federal Reserve FEDS Notes — What Happened in Money Markets in September 2019
- CME Group — Is the SOFR Benchmark Becoming More Volatile? (2026 repo volumes)
Disclosure: This article is for informational purposes only and is not investment advice.