NEW YORK (S&P Global Ratings) July 30, 2018--The first floating-rate security to use the secured overnight financing rate (SOFR) as a benchmark is currently coming to market. SOFR is based on transactions in the Treasury repurchase agreement market, where banks and investors borrow or loan Treasuries overnight. Today, S&P Global Ratings said SOFR is consistent with what it refers to as an "anchor money market reference rate" in its principal stability fund ratings (PSFR) criteria. In our view, SOFR meets all the conditions outlined in our PSFR criteria (see " Principal Stability Fund Rating Methodology," published June 23, 2016). For PSFR purposes, since SOFR is considered an "anchor money market reference rate," floating-rate securities referencing SOFR would not be classified as higher-risk investments. When determining an anchor money market reference rate, we typically assess correlation to a core local currency anchor money market reference rate over a sustained period, trading history, market acceptance, and maturity profile. We also look at whether the rate is reflective of the movements in the short-term money markets. Indicative SOFRs show a high correlation to recognized anchor money market reference rates, such as the federal funds rate and one-month London Interbank Offered Rate (LIBOR). SOFR has an extremely short maturity profile, and given it is expected to replace LIBOR in the coming years, it has gained wide market acceptance with hundreds of billions of dollars' worth of trading volume since its inception. As a broad measure of the overnight Treasury repurchase agreement (repo) market, we believe SOFR's performance is reflective of the movements in short-term money markets. Additionally, the daily reset of SOFR floating-rate securities minimizes the index/spread risk that funds may experience.
This report does not constitute a rating action.
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