A look at CME Term 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.
For those transitioning from LIBOR license agreements to CME Term SOFR license agreements, it’s important to understand the license types, key terms, and agreements that are required.
License types
An Access License grants the right to receive the CME Term SOFR Reference Rates, primarily through a Display License or a Non-Display License.
A Display License is required to view CME Term SOFR on a terminal, screen, or display device – either directly with CME Group or through an authorized vendor or distributor, like Bloomberg or Refinitiv. For example, a risk manager could view CME Term SOFR on their Bloomberg terminal.
A Non-Display License is required to use CME Term SOFR in a machine, application, algorithm, software, or other solution whereby the data is not viewable. A Non-Display License is only available directly through CME Group, even if you receive CME Term SOFR from an authorized vendor or distributor. For instance, a lender could use CME Term SOFR in an application to calculate risk.
It is important to note, that while an Access License grants you or your institution the right to receive CME Term SOFR data, a Use License is required should your organization intend to use CME Term SOFR as an input or reference in valuation, pricing, transactional, or benchmarking activities.
There are two types of Use Licenses available today: Category One and Category Two. A Category One Use License grants the rights to use CME Term SOFR in cash market financial products. A Category Two Use License grants the rights to use CME Term SOFR in certain OTC derivative products.
A Category One Use License is required for an institution that utilizes CME Term SOFR Reference Rates in any of the following activities:
- as a reference in a cash market financial product such as a loan, mortgage, bond, note, or money market instrument.
- as a primary or fallback reference in cash market financial products, including in connection with interest amount, default rate, and close-out calculations.
- in valuation and pricing activities ‒ including but not limited to ‒ collateral calculations, interest rate calculations, the creation of pricing, discount, and forward curves.
- in communications and disclosures to third parties in connection with performance measurement, benchmarking, strategy outcome measurements, and money market and other return calculations;
- for purposes of converting or transitioning cash market financial products referencing, directly or indirectly, an IBOR to another rate as a conversion factor or price adjustment.
It is important to note that all parties on the lending side of a loan transaction require a Category One Use License.
License examples
A bank that uses CME Term SOFR as an input or reference to a loan will require a Category One Use License in addition to an Access License.
Another example is a participant in a syndicated loan utilizing CME Term SOFR as an input or reference in the loan transaction, which will require a Category One Use License in addition to an Access License.
An end user or borrower in a loan transaction does not require a Category One Use License by merely being the counterparty to a loan transaction. However, if the end user or borrower uses CME Term SOFR Reference Rates in any of the activities outlined as requiring a Category One Use License ‒ including in valuation, benchmarking, and pricing activities such as collateral calculations, interest rate calculations, calculation of performance measurements, or return calculations, among others ‒ a Category One Use License in addition to an Access License is required.
A Category Two Use License is required for any application of CME Term SOFR as a reference in an OTC derivative product ‒ such as a swap, forward, warrant, or structured product ‒ that is tied or linked to a licensee and end user hedging against exposure from one or more cash market financial products that reference the same CME Term SOFR rate. Again, a Use License is only available directly through CME Group.
Finally, a Distribution License is required for any data distributor that wishes to distribute CME Term SOFR Reference Rates data to a third party. A Distribution License is only available directly through CME Group.
Information License Agreement (ILA)
Clients licensing directly with CME Group require the signing of an Information License Agreement, a commercial agreement between CME Group and a licensee with standard terms and conditions that apply equally to all clients. This agreement is currently utilized for most CME Group data products and services. The Information License Agreement is signed at the parent entity level. All affiliates, that is those entities under common control either directly or indirectly, with at least 50% ownership by the parent, retain the same rights as the parent company.
Current clients will need to augment their existing agreements by signing a Schedule 7 and Appendix A. New clients will need to complete an Information License Agreement, Schedule 7, and Appendix A.
Licensees that maintain Use Licenses will be required to annually report the aggregate notional value with respect to the licensee’s direct and indirect use of CME Term SOFR as a reference in financial instruments such as Category One Use in cash market financial products and Category Two Use in OTC derivative products. This allows CME Group to meet its requirements under Benchmark Regulation.
There are a variety of factors that determine the fee structure and license type for CME Term SOFR. It is important to note, that while a license is required to utilize CME Term SOFR in cash market financial products, such usage will not incur fees through 2026.
Members of our Data Sales team are available to work with you, so that we can better understand the licenses that work best for you and your needs.
Additional resources including the benchmark methodology, license details, and FAQ are available on cmegroup.com/termsofr.