What You Need to Know About the Secured Overnight Financing Rate

- 17 January 2022 02:06 WIB
SOFR is now the choice for the interest rates benchmark worldwide. (Unsplash/Ibrahim Boran)
SOFR is now the choice for the interest rates benchmark worldwide. (Unsplash/Ibrahim Boran)

JAKARTADAILY.ID - Delving into the world of trading, it is essential to learn about the benchmarks used to measure interest rates, such as SOFR, or The Secured Overnight Financing Rate.

SOFR is a benchmark interest rate for dollar-denominated derivatives and loans collateralized by Treasury securities, launched in 2018 by the United States Federal Reserve.

Also Read: Bank Negara Indonesia Optimizes LCS Transaction Services in Yen

It was created to replace the London interbank offered rate (LIBOR), which had been proven to be repeatedly abused by many global major banks in the past. The monetary crisis also put the trust in LIBOR wavered, as the overreliance on the benchmark became a concern.

SOFR is more beneficial to Indonesia's finance market, as it is backed up by collateral, and more secure. It is based on data from real observable transactions, rather than on estimated borrowing rates.

In April 2021, CIMB Niaga became the first bank in Indonesia to complete a cross-currency swap transaction between IDR Indonesia Overnight IndexAverage (IndoNIA) with US$ SOFR. Working alongside Standard Chartered Bank Indonesia, a total of US$ 5 million was transferred in 6 months.

Also Read: Bank Negara Indonesia Optimizes LCS Transaction Services in Yen

Such a move is necessary, as The Federal Reserve announced back in November 2020 that LIBOR will be erased and replaced by June 2023. All banks are instructed to stop creating contracts using LIBOR by the end of 2021. All established contracts using LIBOR are asked to be closed before then.

Aside from SOFR, other countries are starting to establish their own alternatives to the LIBOR. The United Kingdom, for example, chose the sterling overnight index average (SONIA). Meanwhile, the European Central Bank 9ECB) chose the euro overnight index average (EONIA).

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Editor: Suksmajati Kumara

Source: Investopedia

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