medium · Debt Capital Markets
What is the economic significance of 'Secured' in the Secured Overnight Financing Rate (SOFR)?
- The rate can only be used by 'Primary Dealers' who have secured a seat on the New York Fed's trading floor.
- The transactions are backed by Treasury collateral, virtually eliminating the counterparty credit risk in the rate itself.
- The rate is guaranteed by the U.S. Treasury to never fall below 1% annually.
- The interest payments are 'secured' against the issuer's fixed assets via a Negative Pledge covenant.
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