The Federal Reserve Bank of New York (New York Fed) released a consultation on July 18, 2024, requesting public comment on proposed modifications to the Secured Overnight Financing Rate (SOFR) calculation methodology. The proposed modifications include removing transactions between affiliated institutions and adjusting the mechanism applied to mitigate the influence of “specials” transactions within the centrally-cleared Delivery-versus-Payment (DVP, also known as bilateral) segment of the repo market. Feedback received was broadly supportive of the modifications. The final parameters of the modifications and a summary of the comments received are detailed below.
Given the positive reception to the proposal, the New York Fed, as SOFR’s administrator, will begin publishing SOFR inclusive of the two proposed modifications on November 25, 2024.1 Both changes involve the treatment of transactions within the centrally-cleared 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 will remove transactions between affiliated institutions in the centrally-cleared DVP segment of the repo market. The New York Fed excludes transactions between affiliated institutions when relevant and when the data to make such exclusions are available. The transition to using the U.S. Department of the Treasury’s Office of Financial Research (OFR)’s collection of centrally-cleared repo transactions in the production of SOFR now provides the counterparty data necessary to assess affiliation in the centrally-cleared DVP segment.
The second modification will adjust the mechanism applied to mitigate the influence of “specials” transactions, by removing a consistent 20 percent of the lowest-rate transaction volume from the centrally-cleared DVP segment. This will eliminate the day-to-day variability in the share of centrally-cleared DVP activity removed from the calculation and ensure that SOFR remains a robust benchmark, particularly as the share of Treasury repo activity being centrally cleared continues to increase.
The New York Fed will implement the modifications on November 25, 2024, reflecting transaction data from November 22.2 SOFR values for days prior to November 22 will not incorporate these modifications and will not be adjusted or revised.
Following implementation, the New York Fed will update the historical series of indicative rates and volumes incorporating the changes from July 1, 2024 to November 21, 2024.
Additional Detail Regarding Removing Affiliated Transactions from Centrally-Cleared DVP Repo Segment
Prior to January 24, 2022, the data now collected under the OFR’s authority were sourced from DTCC Solutions LLC, an affiliate of the Depository Trust & Clearing Corporation, under a commercial agreement. To date, the switch to OFR data has only impacted how the data for the General Collateral Finance (GCF) and centrally-cleared DVP repo market segments are collected; the calculation methodology and composition of the Treasury repo reference rates have remained unchanged. However, the OFR data include greater transactional detail, offering the opportunity to identify transactions between affiliated entities in the centrally-cleared DVP repo segment.
The New York Fed will refine SOFR’s methodology by removing transactions between affiliated entities from the centrally-cleared DVP segment. Transactions between affiliated entities have been excluded from the tri-party data provided by the Bank of New York Mellon since SOFR’s launch in 2018, and such transactions are not relevant to the GCF market segment since all trades there are blind-brokered. Similar to the conventional tri-party repo segment, transactions will be excluded on a "best efforts" basis, where neither of the affiliated institutions appears to be acting in a fiduciary capacity, and these exclusions will be applied prior to the application of the mechanism for mitigating the influence of "specials."
Additional Detail Regarding Adjusting Mechanism to Mitigate the Influence of “Specials”
In the DVP repo market, counterparties identify specific securities to settle each trade, rather than a population of acceptable collateral as in the tri-party repo market. Repo transactions motivated by the acquisition of specific-issue collateral may be executed at rates below those for general collateral3 repos when cash providers are willing to accept a lesser return on their cash to obtain a particular security. In this case, the specific securities are said to be trading "special."
SOFR provides a broad measure of the general cost of financing Treasury securities overnight, and is not limited to Treasury general collateral repo activity, but an effort is made to reduce the influence of "specials" on SOFR's published rate via a trim of the transaction-level data.
The New York Fed will adjust the mechanism to mitigate the influence of “specials,” by removing a consistent 20 percent of the lowest-rate transaction volume from the centrally-cleared DVP segment.4
This approach will:
- eliminate the day-to-day variability in the share of DVP activity removed from the calculation associated with the original trim methodology;
- result in published rates that generally are in line with those published with the original trim methodology;
- effectively balance the risks of potentially including “specials” activity and removing activity that is occurring at rates similar to general collateral repos; and
- ensure that SOFR remains a robust benchmark, particularly as the share of Treasury repo activity being centrally cleared continues to increase.
IOSCO Compliance
The design of the Repo Reference Rates and their underlying data are assessed on a regular basis. In line with IOSCO Principles for Financial Benchmarks (the IOSCO Principles), the rates can be modified in response to market evolution to ensure they continue to accurately reflect their underlying interest.
SOFR is in compliance with the IOSCO Principles. Furthermore, as a reference rates administrator, the New York Fed has long maintained that it "may seek to revise the composition or calculation methodology for one or more of the reference rates it administers in response to market evolution or for some other reason." The modifications outlined in this notice will enable SOFR’s calculation methodology to evolve with the changing market, further strengthening SOFR’s compliance with the IOSCO Principles.
In implementing these modifications, the New York Fed will adopt policies and procedures consistent with best practices for financial benchmarks, to the extent appropriate, so that SOFR will remain compliant. For more information about how SOFR complies with the IOSCO Principles, please see the New York Fed’s Statement of Compliance.
Summary of Comments
Respondents to the public consultation broadly supported the proposed modifications to SOFR.
Regarding the proposal to remove affiliated transactions from the centrally-cleared DVP segment, comments noted that the removal of affiliates would align with the practice for the conventional tri-party segment.
Regarding the proposal to adjust the mechanism to mitigate the impact of “specials,” comments noted that the adjustment is necessary given changes in the distribution of centrally-cleared DVP repo activity and the likely continued growth of centrally-cleared repo in advance of the June 2026 deadline to comply with the Securities and Exchange Commission's rule regarding central clearing. Comments noted that removing a consistent 20 percent of the lowest-rate transaction volume from the centrally-cleared DVP segment appears well calibrated to avoid producing consistently higher or lower SOFR prints than historically.
Public Comments on the Proposed Modifications to the SOFR Methodology 
1 The New York Fed, in cooperation with the U.S. Department of the Treasury’s Office of Financial Research (OFR), publishes three Treasury repo reference rates, based on transaction-level data collected under the supervisory authority of the Board of Governors of the Federal Reserve System and the authority of the OFR.
2 The SOFR Averages and Index for November 25 will incorporate daily SOFR values as usual. The contingency methodology used to calculate SOFR in the event that data for a given market segment are unavailable will not change as a result of these adjustments.
3 General collateral transactions are those for which the specific securities provided as collateral are not identified until after other terms of the trade are agreed.
4 In order to ensure that 20 percent of the centrally-cleared DVP volume (after the exclusion of relevant affiliated trades) is removed, a pro rata calculation will be applied to the volume of each transaction occurring at the 20th volume-weighted percentile rate.
