Understanding SOFR in global finance

In global markets, precision matters. For institutions managing interest rate exposure, treasury operations, or structured lending, the Secured Overnight Financing Rate (SOFR) has become one of the most important benchmarks in use today.

SOFR might sound like just another number, but in the world of institutional finance, it plays a central role in how deals are priced, risks are hedged, and decisions are made. From syndicated loans to interest rate swaps, SOFR touches nearly every corner of modern financial infrastructure.

SOFR definition

SOFR is the overnight interest rate used for US dollar-denominated loans and derivatives. It indicates how much a bank will have to pay to borrow cash from another institution.

The rate is underpinned by US treasury securities, which a bank will offer as collateral to secure their overnight cash needs. These transactions are a vital part of financial markets, as they allow parties in need of cash to borrow it in an efficient way.

What is the SOFR rate history?

Up until the 2008 financial crisis, global central banks all used LIBOR as the benchmark interest rate for credit agreements. When dozens of banks were found to be manipulating the data LIBOR was based on, a lot of banks became wary of relying on the benchmark.

The Federal Reserve assembled an Alternative Reference Rate Committee in 2017, the result of which was the selection of SOFR as the new interest rate for dollar-denominated contracts.

The Fed began publishing the SOFR benchmark index in April 2018. While the two rates initially co-existed, in November 2020, it was announced that LIBOR would be completely phased out by June 2023.

Transition from LIBOR to SOFR: what it meant for global markets 

When financial markets began phasing out LIBOR, it marked the end of an era. LIBOR had long served as the global standard for pricing trillions in financial contracts. But after credibility concerns and manipulation scandals, regulators pushed for a replacement.

That replacement was SOFR. More robust, more transparent, and based on a far larger pool of transactions. The transition wasn’t simple. Banks, asset managers, and corporates had to adjust systems, rewrite contracts, and learn how SOFR behaves in different interest rate environments.

Today, SOFR has completely taken LIBOR’s place, and it continues to influence pricing and risk across fixed income and derivatives markets around the world.

What is SOFR and how does it affect institutional trading strategies?

As we've just covered, SOFR is a measure of the cost of borrowing U.S. dollars overnight, using Treasury securities as collateral. It’s based on actual transactions in the repo market, giving it transparency and a strong grounding in observable data. This makes it fundamentally different from LIBOR, which was often derived from estimates.

In institutional trading, SOFR isn’t just a reference point; it’s a building block. It informs the pricing of floating-rate debt, derivatives, and futures, and provides a foundation for interest rate curves that institutions use to manage exposure and structure financial products. It’s a key variable that feeds directly into strategies for trading and hedging short-term interest rate movements.

How SOFR supports interest rate risk management for corporates

For companies borrowing in floating-rate markets or managing large debt portfolios, SOFR is central to risk management. As rates rise or fall, companies need strategies to protect cash flow and earnings.

This is where interest rate derivatives come into play. Through StoneX’s interest rate solutions, institutions can use SOFR-based swaps and other tools to hedge against future rate shifts. Whether locking in fixed costs or offsetting rate exposure on floating liabilities, SOFR enables more targeted, data-driven risk management.

What the SOFR acronym means for treasury and capital markets teams 

SOFR may stand for the Secured Overnight Financing Rate, but for treasury and capital markets professionals, it’s more than just an acronym. It represents a shift toward transparency, data integrity, and alignment with real-world market behavior.

Understanding SOFR allows teams to evaluate risk more accurately, structure more effective hedges, and stay aligned with evolving regulatory expectations. It’s become a central input in the financial decision-making process from the trading desk to the boardroom.

How the Federal Reserve calculates the secured overnight financing rate

The Federal Reserve Bank of New York publishes SOFR each business day, using transaction data from the previous day’s repo market. Specifically, it calculates a volume-weighted median rate based on trades secured by U.S. Treasuries.

Because it pulls from such a deep and liquid market (typically involving over a trillion dollars in daily volume) SOFR is considered a reliable reflection of real borrowing costs. Unlike rates influenced by estimates or less-liquid markets, SOFR is grounded in observable transactions.

You can check the current SOFR rate directly on the New York Fed’s website.

Applications of SOFR in cross-border lending and swaps

SOFR’s influence extends far beyond U.S. borders. In global trade and finance, many loans, bonds, and derivatives are priced in dollars. As a result, SOFR often serves as the base rate in cross-border transactions.

It’s widely used in interest rate swaps, where counterparties in different countries exchange fixed and floating payments tied to SOFR. It also plays a role in structuring dollar-denominated loans to borrowers around the world, ensuring consistent pricing across regions.

For institutions managing international portfolios, adapting to SOFR has become essential.

Understanding SOFR averages in structured lending

Since SOFR is an overnight rate, it doesn’t have built-in term structure the way LIBOR did. To address this, the market has adopted compounded SOFR averages such as 30-, 90-, and 180-day variants.

These averages are especially useful in structured lending, where predictability and alignment with billing cycles matter. Financial institutions use them to smooth out short-term volatility and provide borrowers with clearer expectations for interest payments over time.

Impact of SOFR on fixed rate vs floating rate instruments

With SOFR now the dominant benchmark for floating-rate instruments, many institutions are taking a fresh look at how they balance fixed versus floating exposure. Floating-rate products may offer more flexibility when interest rates are falling but they also introduce uncertainty when rates climb.

This is why SOFR-based derivatives have become a crucial part of fixed income strategy. Whether hedging a bond portfolio or adjusting the profile of a new issuance, the decision between fixed and floating often starts with how SOFR is expected to behave.

Why SOFR is a key input in StoneX’s hedging solutions

At StoneX, we integrate SOFR into our institutional risk management offerings. Our derivatives platform provides access to a full range of SOFR-linked instruments, allowing clients to hedge interest rate exposure with precision.

Through StoneX's dedicated team of interest rate risk experts, we also support clients with real-time pricing, trade execution, and liquidity solutions tailored to individual needs. Our approach is designed to help clients, from financial institutions, family offices, down to main street business owners, make confident decisions in an uncertain market.