As expected, the Federal Reserve Bank of New York today announced plans to publish daily three compounded averages of the Secured Overnight Financing Rate, with tenors of 30, 90 and 120 days, as well as a daily SOFR index to allow users to calculate average rates over custom time periods. The New York Fed released its methodology for calculating the compounded averages and index. Comments on the methodology and other aspects of the SOFR averages are due by Dec. 4.
The publication of term SOFR is a key development in the transition away from the London Interbank Offered Rate as a benchmark by making it easier for financial instruments to reference SOFR in contracts while avoiding the volatility of SOFR’s daily movements. SOFR is based on repo transactions secured by Treasurys.
The New York Fed’s Alternative Reference Rates Committee—of which the American Bankers Association is a member—has identified SOFR as its preferred alternative for U.S. dollar Libor, which is not guaranteed to be available after the end of 2021. The ARRC is releasing resources to support the financial sector’s transition away from Libor. For more information, contact ABA’s Hu Benton.