How SOFR Is Calculated From Repo Transactions
SOFR isn't a rate anyone quotes — it's a volume-weighted median computed each morning from hundreds of billions of dollars of actual overnight Treasury repo trades the night before, across three distinct segments of the market.
Prerequisites: Repo and Reverse Repo, SOFR and Risk-Free Rate Benchmarks
LIBOR was set by a small panel of banks answering a survey question: "at what rate could you borrow?" No trades had to actually happen. SOFR, the Secured Overnight Financing Rate, was built to replace that with something a survey can't fake — an interest rate computed directly from real, transacted repo trades, in volumes that dwarf anything LIBOR was based on.
SOFR is the volume-weighted median rate across roughly a trillion dollars of actual overnight Treasury repo transactions each day, pulled from three separate market segments and published by the New York Fed every morning for the previous business day.
The three segments that feed into it
SOFR is built from overnight Treasury-collateralized repo trades in three buckets. First, tri-party repo data, sourced from the clearing banks (excluding trades with the Fed itself). Second, GCF (General Collateral Finance) repo, an interdealer market cleared through FICC where dealers trade GC anonymously. Third, bilateral Treasury repo that is centrally cleared, sourced from FICC's DVP repo service. Each segment contributes its transaction volumes and rates for that day; the Fed pools every trade across all three, sorts them, and calculates the volume-weighted median — the rate at which exactly half the dollar volume traded above it and half below.
Worked example
Suppose (in a simplified toy example) the day's Treasury repo trades sort, by rate, into: $300 billion at 5.28%, $500 billion at 5.30%, and $250 billion at 5.32%, total volume $1.05 trillion. The median dollar sits at $525 billion into the sorted list. Working from the bottom, $300 billion gets you through the 5.28% bucket, and the next $225 billion of the 5.30% bucket reaches $525 billion — so the volume-weighted median, and hence SOFR for the day, is 5.30%. Any single large trade at an outlier rate barely moves the number, unlike a small LIBOR panel where one bank's quote could swing the average meaningfully.
What this means in practice
Because SOFR is transaction-based and enormous in volume, it is very hard to manipulate — a lesson learned directly from the LIBOR-rigging scandals — but it also means SOFR is inherently backward-looking: today's published SOFR describes what repo actually cost yesterday, not what it will cost tomorrow. This is why derivatives referencing SOFR typically compound it in arrears over an interest period rather than fixing it in advance the way LIBOR loans did.
If you ever see SOFR spike sharply on a single day, check the calendar first — quarter-end and mid-month Treasury settlement dates are the most common causes, not a change in the risk-free rate itself.
Practice in interviews
Further reading
- Federal Reserve Bank of New York, 'A User's Guide to SOFR'
- ARRC, 'SOFR Production Methodology'