Beginning on March 2, 2020, the Federal Reserve Bank of New York (New York Fed), as administrator of the Secured Overnight Financing Rate (SOFR) and in cooperation with the Treasury Department’s Office of Financial Research (OFR), will publish 30-, 90-, and 180-day SOFR Averages as well as a SOFR Index, in order to support a successful transition away from U.S. dollar (USD) LIBOR. The new SOFR Averages will be referred to as “30-day Average SOFR”, “90-day Average SOFR” and “180-day Average SOFR.” The New York Fed released a consultation on November 4, 2019, requesting public comment on the proposed calculation and publication of the SOFR Averages and Index. Feedback received was broadly supportive of the initiative. The final parameters and a summary of the comments received are detailed below.
The SOFR Averages and Index will employ daily compounding on business days, as determined by the SOFR publication calendar.1 Simple interest will apply to any day that is not a business day, at a rate of interest equal to the SOFR value for the preceding business day.
Summary of Comments
Respondents to the request for public comment broadly supported the effort to provide a benchmark that could be referenced in a variety of products, such as consumer loans and floating rate notes (FRNs). The large majority agreed with the proposed compounding methodology and publication arrangements of the SOFR Averages and Index.
Significant feedback was received suggesting that, rather than fixed 30-, 90-, and 180-calendar-day tenors, the SOFR Averages should use calendar month-based tenors and/or have start dates determined by the “modified following” convention commonly used in derivatives contracts.2 However, the modified following convention is typically applied in a forward-looking context, whereas the SOFR Averages are backward-looking. In attempting to replicate the calendar months determined in a forward-looking context, there are various methodologies that could be used and determining the optimal approach for the public would require additional investigation.
Another common suggestion was to publish an additional SOFR Average with a 360-day, or 1-year, tenor.
Given the broad support for the publication of the SOFR Averages, and in the interest of introducing a set of averages that can be referenced by the public promptly, the New York Fed judges it prudent to begin publishing the 30-, 90-, and 180-day SOFR Averages on March 2. After these tenors are launched, the potential benefit of introducing calendar month-based rates and/or adding one or more additional tenor(s) as additional reference rates will be considered. We note that the SOFR Index will allow for the derivation of calendar month-based rates—or any custom period such as 360-day or 1-year tenors—using any two business dates.
Shortly after the March 2 initial launch, the New York Fed plans to publish an update to the indicative series of data of the SOFR Averages and Index from April 2, 2018 through March 2, 2020.
The full notice is available at https://www.newyorkfed.org/markets/opolicy/operating_policy_200212