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FRM Part I · FRM Exam Part I · Properties of Interest Rates

A risk manager reviews a floating-rate loan that previously referenced USD LIBOR. Which statement best describes SOFR, the main USD replacement reference rate?

SOFR is a secured overnight rate built from actual transactions in the Treasury repurchase agreement market. Unlike LIBOR, which relied on unsecured panel bank submissions, SOFR is transaction-based and nearly risk-free, which makes it more robust and harder to manipulate.

  1. AIt is an unsecured term rate based on panel bank submissions of borrowing costs
  2. BIt is a secured overnight rate based on actual transactions in Treasury repurchase agreementsCorrect
  3. CIt is the rate at which banks lend reserves unsecured to each other overnight, based on a panel's expert judgment
  4. DIt is a forward-looking term rate set by a poll of dealers for one to twelve months

Explanation

SOFR is the Secured Overnight Financing Rate, derived from observed transactions in overnight Treasury repo markets. Unlike LIBOR it is secured, nearly risk-free, and transaction-based rather than submission-based. The other options describe LIBOR-like or fed funds-like features incorrectly.

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