Statement on the Implementation of Modifications to the Secured Overnight Financing Rate (SOFR)
Today, the Federal Reserve Bank of New York (New York Fed), as administrator of the Secured Overnight Financing Rate (SOFR), began publishing SOFR with two modifications to its calculation methodology.1 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. This update follows a consultation and assessment of feedback regarding the modifications.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.
Today’s publication of SOFR reflects transaction data from November 22. SOFR publications before today do not incorporate these modifications and will not be revised.
In implementing these modifications, the New York Fed has adopted policies and procedures consistent with best practices for financial benchmarks, so that SOFR will remain compliant with the IOSCO Principles for Financial Benchmarks (the IOSCO Principles). For more information about how SOFR complies with the IOSCO Principles, please see the New York Fed’s Statement of Compliance.
For more information on SOFR’s composition and methodology, please see Additional Information about Reference Rates.
Lastly, the New York Fed has previously released indicative rates and volumes incorporating the modifications extending from January 2020 to June 2024.4 The remainder of the time series through November 21, 2024 is expected to be published in the coming weeks.