[1] SOFR uses actual costs of transactions in the overnight repo market, calculated by the New York Federal Reserve.
[1] With US government bonds serving as collateral for borrowing, SOFR is calculated differently from LIBOR and is considered a less risky rate.
In 2012, revelations emerged about the manipulation of the London Interbank Offered Rate (LIBOR) by various global banks.
[6] In August 2018, Barclays became the first bank to issue commercial paper tied to the rate; selling some US $525 million of short-term debt.
[7] In July 2019, the SEC and the President of the New York Federal Reserve John Williams called on banks to swiftly transition from Libor to its replacements, such as SOFR, instead of waiting until the 2021 deadline.
[3] If a smooth transition from Libor cannot take place, smaller banks may reduce lending and companies may be less capable of hedging interest rate risks.
[8] It was therefore suggested that the lending costs of individual banks be published to increase transparency and deter manipulation.
Although SOFR solves the rigging problem, it does not help participants gauge how stressed global funding markets are.