The Federal Reserve Bank of New York announced two modifications to the Secured Overnight Financing Rate (SOFR) calculation methodology. Both changes involve the treatment of transactions within the centrally-cleared Delivery-versus-Payment (DvP) segment of the repo market, which is the largest of the three market segments incorporated into the calculation of SOFR. Since this segment is only used in the calculation of SOFR, these changes will have no impact on the Tri-party General Collateral Rate or Broad General Collateral Rate.
The first modification removes transactions between affiliated institutions. The New York Fed excludes transactions between affiliated institutions when relevant and when the data to make such exclusions are available.2 The transition to using the U.S. Department of the Treasury’s Office of Financial Research’s collection of centrally-cleared repo transactions to produce SOFR now provides the counterparty data necessary to assess affiliation in the centrally-cleared DVP segment. Transactions will be excluded on a “best efforts” basis, where neither of the affiliated institutions appears to be acting in a fiduciary capacity. Exclusions will be applied prior to the application of the mechanism for mitigating the influence of “specials.”
The second modification adjusts the mechanism applied to mitigate the influence of “specials” transactions, by removing a consistent 20 percent of the lowest-rate transaction volume.3 This eliminates the day-to-day variability in the share of centrally-cleared DVP activity removed from the calculation and ensures that SOFR remains a robust benchmark, particularly as the share of Treasury repo activity being centrally cleared continues increasing.