On November 4, 2019, the Federal Reserve Bank of New York ("FRBNY") published a request for comment on the proposed publication of three compounded averages of the SOFR and also a daily SOFR index.1 The three compounded averages of SOFR would have tenors of 30, 90 and 180 days.
Both the compounded averages and the index would use daily compounding. Simple interest would apply to non-business days, such as weekends and holidays. Because SOFR is backward looking, the averages and the index would use the SOFR value from Friday for Friday, Saturday and Sunday, multiplying that value by the three days, and compounding the rates/index once by that adjusted term.
One difference from the daily SOFR rate would be that the published values of the averages and the index would be for that day. A published daily SOFR rate reflects the rate that was used in trades the day prior; e.g., Tuesday's daily SOFR rate reflects transactions that occurred on Monday.
The SOFR index would measure the cumulative impact of compounding SOFR over time, with the initial value set to 1 on April 2, 2018, when daily SOFR was first published. Investors could use the index to calculate compounded SOFR averages over custom time periods.
The averages and the index would be published by the FRBNY at 8:00 a.m. each business day with, if necessary due to an error or revision to the daily SOFR rate, a revised value being published at 2:30 p.m. on that day.
The request contains a number of questions for the public's consideration and response. The request is another step in encouraging acceptance of SOFR in the market.
Originally published in REVERSEinquiries: Volume 2, Issue
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1. The FRBNY Operating Policy can be found at: https://nyfed.org/33KTzG5.
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