- What is CME Term SOFR?
- What data is used in the calculation of CME Term SOFR?
- How are CME Term SOFR Reference Rates calculated?
- When are CME Term SOFR Rates published?
- How can I access the CME Term SOFR information?
PERMISSIBLE USE AND LICENSING
- Is a License required to use CME Term SOFR?
- How can CME Term SOFR be used?
- Why is use of CME Term SOFR restricted?
- What are the reporting obligations for CME Term SOFR?
- How to submit a report for display devices?
- What information does CME Group collect when onboarding a licensee?
REGULATORY STATUS AND TRADE ASSOCIATION GUIDANCE
- Are CME Term SOFR Reference Rates available for use under Benchmark Regulation (BMR)?
- What happens when the Third Country transition period ends in December 2023?
- Are CME Term SOFR Reference Rates IOSCO compliant?
- Are CME Term SOFR Reference Rates supported by the Alternative Reference Rate Committee (ARRC)?
1. What is CME Term SOFR?
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.
CME Term SOFR Reference Rates are:
2. What data is used in the calculation of CME Term SOFR?
Currently, we use transaction data from thirteen consecutive SR1 futures (1-month CME SOFR futures contracts) and five consecutive quarterly SR3 futures (3-month CME SOFR futures contracts).
3. How are CME Term SOFR Reference Rates calculated?
A set of Volume Weighted Average Prices (VWAP) are calculated using transaction prices observed during several observation intervals throughout the trading day. These are then used in a projection model to determine CME Term SOFR Reference Rates. Full details of the calculation methodology are available on the Term SOFR webpages.
4. When are CME Term SOFR Rates published?
CME Term SOFR Reference Rates will be calculated for each day the New York Federal Reserve calculates and publishes SOFR, in accordance with the recommended SIFMA US Holiday Schedule. There will be no data sampling, calculation, or publication on a SIFMA US Holiday.
Publication will occur on each day at 5:00 am CT (US Central Standard Time).
As described in the calculation methodology, publication of CME Term SOFR takes place on day T based on the data sampling on T-1. The start date of the reference period for the Term SOFR rates is T+2, as illustrated below:
5. How can I access the CME Term SOFR information?
CME Term SOFR is available via information redistribution partners, CME DataMine, and CME’s Market Data Platform.
PERMISSIBLE USE AND LICENSING
6. Is a License required to use CME Term SOFR?
- Use of CME Term SOFR Reference Rates as a data input or reference in valuation, pricing, transactional or benchmarking activities and in the provision of a service requires a Use License, in the form of an Information License Agreement (ILA), obtained directly with CME Group.
- An End User does not require a Use License by merely being the borrower or counterparty. However, other activities to manage assets referenced or priced to CME Term SOFR may require a license.
- Use of CME Term SOFR in a Display Device for internal business purposes may be licensed directly with CME Group or an authorized distributor/vendor, by means of a standard internal use subscriber agreement.
- Non-Display use of CME Term SOFR must be licensed directly with CME Group.
- A Distribution License, available directly from CME Group, is required for any party that distributes CME Term SOFR Reference Rates to third parties.
- A license is further required for any party wishing to access historical CME Term SOFR Reference Rates information via CME DataMine.
Please contact CME Group Data Sales to discuss and arrange appropriate licensing.
7. How can CME Term SOFR be used?
CME Term SOFR Reference Rates are available to license directly from CME Group under three specific Use License Categories:
Category 1 – Use in Cash Market Financial Products.
Use of CME Term SOFR Reference Rates as a primary reference in any business loan activity for the calculation of the interest amount, default rate and close out calculations or for purposes of transitioning legacy Cash Market Financial Products from LIBOR.
Typical Category 1 permitted use in Cash Market Financial Products include:
Business Loans: Bilateral and syndicated lending, which reference Term SOFR, are permitted under Category 1. All lending participants to a loan syndication will require a Category 1 Use License.
Intercompany Lending: Use of CME Term SOFR in an intercompany loan is permitted under Category 1, as the corporate will take on the role of a lender.
Securitizations Tied to Term SOFR Assets: Term SOFR is permitted for use in securitizations where the underlying business loans or other Cash Market Financial Product assets reference CME Term SOFR
Transition of Legacy Cash Market Financial Products: CME Term SOFR is permitted for use in the transition of a legacy Cash Market Financial Product from LIBOR.
Category 2 – Use in OTC Derivative Products:
OTC Derivative Products: Derivative products (e.g. structured products, swaps, security-based swaps, forwards, warrants, options and other similar derivative instruments) are permitted to hedge end user exposure from one or more Cash Market Financial Products that references CME Term SOFR.
Swapping Fixed Rate Debt: Swapping of fixed rate debt to Term SOFR is permitted if the swap is intended to hedge existing Term SOFR exposure.
Basis Swaps: Term SOFR versus SOFR OIS Basis Swaps are permitted.
Inter-dealer Trading: Interdealer (dealer to dealer) trading of derivative products should be aligned with the ARCC guidance on scope of use of Term SOFR.
Typical Category 2 permitted use in OTC Derivative Products include:
- A Borrower Hedging Term SOFR Exposure: A borrower may hedge its Term SOFR exposure using OTC Derivative Products. The OTC Derivative hedge does not need to be with the lender.
- A Lender Hedging Term SOFR Exposure: A lender may hedge their Term SOFR exposure using OTC Derivative Products with an internal or external derivatives desk.
- A lending desk providing a derivatives hedge to the borrower can use a third party to offset this derivatives exposure if the lending desk does not participate in the inter-dealer derivatives market.
- An Investor Hedging Term SOFR Exposure: An investor that purchases a loan or securitization linked to Term SOFR may hedge their Term SOFR exposure using OTC Derivative Products.
- A Syndication Participant: A syndication participant is permitted to enter back to back Term SOFR OTC Derivative transactions solely for credit risk mitigation (any inter-bank distribution of Term SOFR market risk is not permitted).
Category 3 – Use in the Provision of a Service:
Use of CME Term SOFR Reference Rates in products and/or services provided to external clients, for example pre and post trade services that include treasury and risk management activities, transaction administration services and valuation services.
The service providers must hold a license directly with CME Group for Category 3 Use of CME Term SOFR. Whilst a client of such a service does not require a License with CME Group to access the service, they may require a License with CME Group depending on their use.
Where a Category 1 or Category 2 Licensee provides a client valuations, interest rates, pricing information or similar calculations related to the Category 1 or Category 2 Products executed with the client, this activity does not require a Category 3 license. For the avoidance of doubt, a Category 3 license is only required where such a service is provided by a service provider that is not a direct party to the transactions being managed by the service.
The licensing Terms and Conditions and Benchmark Information Fees can be found on the following CME Group Information License Agreement webpage.
We encourage market participants to engage with CME Group Data Sales to help with any licensing needs.
8. Why is use of CME Term SOFR restricted?
Our policy is to limit the use of CME Term SOFR Reference Rates to avoid overly detracting from volumes in the underlying SOFR-linked derivatives, that are relied upon to construct CME Term SOFR rates.
Whilst independent, our policy aligns with ARRC guidance on recommended scope of use of Term SOFR. In their guidance, the ARRC recommends that market participants use overnight SOFR and SOFR averages in floating rate notes, consumer products including adjustable rate mortgages and student loans, and most securitizations.
9. What are the reporting obligations for CME Term SOFR?
CME Group standard reporting requirements vary according to how you access and use the information. This is covered in more detail in our Reporting and Audit Guide, link here.
Reporting obligations for accessing CME Term SOFR
Display Devices - Reporting obligations for entitlement to access CME Term SOFR in Display Devices will begin in January 2023.
Where CME Term SOFR is entitled for access for viewing on a screen provided by a licensed information distributor then,
- the distributor alone will report directly to CME Group the total quantity of display devices entitled to access the information by your firm;
- that total quantity of devices, in aggregate, is reported on a location basis each month,
- for each location the report captures, Firm Name, Firm Address and total quantity of devices entitled to access to the CME Term SOFR information;
- no personal or user level detail is required to be reported.
Where CME Term SOFR is entitled to access for viewing on a screen, and the entitlement to access for the display devices is managed by the license holder (licensee) then,
- the licensee will be required to report directly to CME Group the total quantity of display devices entitled to access to the information by your firm;
- the total quantity of devices, in aggregate, is reported on a location basis each month,
- for each location, the report captures Firm Name, Firm Address and total quantity of devices entitled to access the CME Term SOFR information;
- no personal or user level information is required to be reported.
Where CME Term SOFR is used for Non-Display Benchmark Use, Licensees will have no reporting obligation for such use.
Reporting obligations for Use License Categories 1 and 2
CME Benchmark Administration, Ltd. is subject to UK Benchmark Regulation (UK BMR) that requires CBA to report to the regulator the outstanding notional of financial products that reference CME Term SOFR. This helps the regulator determine the use of and systemic importance of the benchmark.
CME therefore requires licensees to report the total outstanding notional of their financial products that reference CME Term SOFR. This can be reported as a single aggregated notional across Category 1 and Category 2 products combined, or as a separate notional for each category. The request, a point in time assessment, will come in January of each year and will be due in February. This requirement will be deferred for 2022 and will commence in 2023.
Reporting obligations for Use License Category 3
For use Category 3, there are currently no reporting obligations.
10. How to submit a report for display devices?
CME provides a reporting template in Excel format. It can be downloaded from the CME Data Services Portal which can be accessed here.
A sample reporting template can also be found here.
Completed templates should be submitted using the same portal. Your firm will be provided a unique access point to this portal to enable you to submit these reports each month. Here is a screenshot of where you will be asked to submit your report:
11. What information does CME Group collect when onboarding a licensee?
To administer the license agreement, including notifications, communication and billing, CME Group requires the following information concerning your firm; firm name, firm address, an email address to which you would like all communications to be sent and a phone number for us to contact you in respect of the agreement. Such information is confidential and used only by CME Group in the carrying out of its obligations under the agreement.
REGULATORY STATUS AND TRADE ASSOCIATION GUIDANCE
12. Are CME Term SOFR Reference Rates available for use under Benchmark Regulation (BMR)?
CME Term SOFR Reference Rates are a family of benchmarks registered under BMR and available for use by EU/UK supervised entities.
Under the Brexit transition arrangement, all UK BMR regulated benchmarks are eligible for use in the EU as Third Country transitional benchmarks, without EU registration. A Benchmark Regulatory Statement is available on the CBA webpages.
13. What happens when the Third Country transition period ends in December 2023?
At the end of the transition period, use of a benchmark in the EU will require a benchmark to be registered in the EU. There is an option for the EU to extend the transition period by a further two years until the end of 2025.
CME Group is committed to ensuring that CME Term SOFR continues to be available for use as a benchmark in the EU post-transition.
14. Are CME Term SOFR Reference Rates IOSCO compliant?
CME Term SOFR Reference Rates have been designed to meet industry best practices and the IOSCO Principles for Financial Benchmarks. A statement of IOSCO compliance is available on the CBA webpages here.
15. Are CME Term SOFR Reference Rates supported by the Alternative Reference Rate Committee (ARRC)?
The ARRC formally announced its endorsement of 1-month, 3-month and 6-month CME Term SOFR Reference Rates on July 29, 2021, and the 12-month Reference Rate on May 19, 2022.
Use of the CME Term SOFR Reference Rates are supported by the ARRC for certain specific uses, as reflected in the ARRC Scope of Use Recommendations
CME Term SOFR Rates
CME Term SOFR Reference Rates provide an indication of the forward-looking measurement of overnight SOFR, based on market expectations implied from derivatives markets.