Tradition SOFR Term Rates
Current overnight indices such as Fed Funds (EFFR) are widely considered to be less than ideal in two ways. Firstly the rate is typically unsecured whereas most short-date funding is secured (e.g. repo). Secondly the pool of available trades on which to base the level of a fixing is shallow compared to, for example, repo-based funding activity.
As of April 2nd 2018 the Federal Reserve Bank of New York began publishing the Secured Overnight Financing Rate (SOFR) index and volumes.
The ARRC is working to introduce a term SOFR rate in 2021 which is critical to LIBOR replacement as USD LIBOR will cease to be quoted in 2023 and new trades should not be executed starting in July 2021 (on a rolling cessation schedule based on type of product).
Tradition has calculated implied 1-month, 3-month, 6-month and 1-year term SOFR rates. These rates are currently derived from multiple sources including our brokerage desks, CME SOFR futures SOFR/Fed Funds Basis, and overlaid with Tradition’s GC/GCF Repo data using a methodology similar to the one outlined by the Federal Reserve.
Tradition Daily SOFR Term Rates - Example
|Tenor||SOFR Term Rate (%)|
As of 2022-05-19 11:00 EST
The adoption of SOFR by interest rate derivative market participants has seen substantial uptake over the past year and will continue to grow ahead of the likely USD LIBOR transition, which is anticipated to take place in early 2022. The following graph illustrates the growth in SOFR volumes in tenors 2Y and under.
Quarterly volume % increase of SOFR trades in tenors under 2Y
pre and post LIBOR transition.
Source: Clarus Financial Technology
Tradition SOFR Sell Sheet