Context
- Recently, State Bank of India (SBI) has executed two inter-bank short term money market deals with pricing linked to Secured Overnight Financing Rate (SOFR).
What Is the Secured Overnight Financing Rate (SOFR)?
- SOFR was selected by the Alternative Reference Rates Committee (ARRC) chaired by the New York Federal Reserve in 2017.
- It is a benchmark interest rate for dollar-denominated derivatives and loans.
- It is based on transactions in the Treasury repurchase market.
- Similar to a mortgage rate, SOFR is a secured borrowing rate in the sense that collateral is provided to borrow cash.
- It is seen as preferable to London interbank offered rate (LIBOR)since it is based on data from observable transactions rather than on estimated borrowing rates.
Back to Basics
What is LIBOR?
- London Inter-bank Offered Rate is an average interest rate that is calculated based on estimates provided by the leading banks in London.
- It is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.
- It came into use in the 1970s.
- It affects both investors and customers.
- It is used as a reference rate in different types of loans.
What is MIBOR?
- MIBOR is the acronym for Mumbai Interbank Offer Rate, the yardstick of the Indian call money market.
- It is the rate at which banks borrow unsecured funds from one another in the interbank market.
- At present, it is used as a reference rate for floating rate notes, corporate debentures, term deposits, interest rate swaps and forward rate agreements.
- The pricing of overnight indexed swaps, a type of overnight interest rate swap used for hedging interest rate risk is based on overnight MIBOR.