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Level: Beginner

Contributed By: CME Group

CME Term SOFR Reference Rates provide an indication of the forward-looking measurement of overnight SOFR, based on market expectations implied from derivatives markets.

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Lesson: #1
What is SOFR?

In November 2014, the U.S. Federal Reserve convened the Alternative Reference Rate Committee (ARRC.) The ARRC’s objective was to identify a set of alternative reference interest rates firmly based on transactions from a robust underlying market that comply with the International Organization of Securities Commissions (IOSCO) Principles for Financial Benchmarks and to identify an adoption plan to facilitate the acceptance and use of the chosen rate.

The combination of one-month and three-month contracts is expected to facilitate price discovery at various points of the money market curve. The spreading opportunities against well-established liquidity pools of 30-Day Federal Funds and three-month Eurodollar futures will help develop liquidity in both one-month and three-month contracts based on the overnight SOFR.

In 2021, the Alternative Reference Rates Committee (ARRC) formally endorsed CME Term SOFR Reference Rates. The CME Term SOFR Reference Rates benchmark is a daily set of forward-looking interest rate estimates ‒ calculated and published for 1-month, 3-month, 6-month, and 12-month tenors. Derived from CME SOFR futures, CME Term SOFR provides a robust and resilient underlying data set based on market expectations implied from derivatives markets.

An intercommodity spread (ICS) allows for the simultaneous execution of a buy and sell – or sell and buy – of two different but related futures contracts. The price of the spread is quoted as the price difference between the two contracts.

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