Risk-Free Rate (RFR)
A benchmark interest rate — also called a risk-free reference rate — derived from overnight transactions with minimal credit risk, used to replace IBOR rates globally.
Risk-Free Rate (RFR)
A Risk-Free Rate (RFR) — sometimes called a risk-free reference rate, the two terms are used interchangeably in industry literature from ARRC, ISDA, and the FCA — is a nearly risk-free overnight interest rate derived from actual market transactions, used as a benchmark for floating-rate financial contracts. RFRs were developed as robust, transaction-based replacements for the IBOR family of rates (LIBOR, EURIBOR, TIBOR, etc.).
The Global RFR Landscape
| Currency | RFR | Administrator | Day Count |
|---|---|---|---|
| USD | SOFR | NY Fed | Act/360 |
| GBP | SONIA | Bank of England | Act/365 |
| EUR | €STR | ECB | Act/360 |
| CHF | SARON | SIX Swiss Exchange | Act/360 |
| JPY | TONA | Bank of Japan | Act/365 |
| AUD | AONIA | Reserve Bank of Australia | Act/365 |
Why "Risk-Free"?
The term is slightly misleading — no financial rate is truly without risk. However, RFRs carry minimal credit risk compared to IBORs because:
- They are based on overnight transactions (shortest tenor = least credit exposure)
- They are often secured (SOFR uses Treasury repo collateral) or involve highly creditworthy counterparties
- They are transaction-based rather than expert-estimate-based, reducing manipulation risk
RFRs vs IBORs
| Feature | RFRs | IBORs (e.g. LIBOR) |
|---|---|---|
| Tenor | Overnight only | Multiple tenors (1M, 3M, etc.) |
| Calculation | Actual transactions | Panel bank estimates |
| Known when | End of period (in arrears) | Start of period (in advance) |
| Credit component | Minimal | Embedded bank credit risk |
| Manipulation risk | Low | Higher (demonstrated by scandals) |
RFRs in Practice
Because RFRs are overnight rates, using them in a multi-month loan requires a compounding mechanism — specifically compounded in arrears — to produce the equivalent of a term rate. This is the standard approach recommended by regulators and industry groups (ARRC, ISDA, LMA). For USD loans, the New York Fed also publishes a running SOFR Index that lets you calculate a compounded average rate over any period without compounding each daily fixing by hand.
Explore how compounded RFR loans work using our free calculator.