Term SOFR vs overnight SOFR

Overnight SOFR is one day's rate, published the morning after the trades it measures; compounded over an interest period, it is only known at the end. The New York Fed's SOFR Averages and SOFR Index are that same rate compounded over past windows. Term SOFR is different in kind: a forward-looking 1-, 3-, 6- or 12-month rate that CME Group derives from SOFR futures, known at the start of the period and licensed by CME to anyone who uses it to set, price or distribute rates; a borrower merely paying it needs no license. The ARRC recommended it for a deliberately narrow set of uses, chiefly business loans.

The three families side by side

Overnight SOFR and why compounding it looks backward

SOFR measures the cost of borrowing cash overnight against Treasury collateral. Each print covers one business day, and the New York Fed publishes it the next morning. A loan or note that pays "SOFR" for a three-month period has to turn dozens of daily rates into one (the third quarter of 2026 had 64 SOFR prints), and the standard way is to compound them. Because the last daily rate in the period is not published until the period is over, compounded SOFR in arrears is only known at the end.

The ARRC's 2021 user's guide to SOFR is blunt about the plain version: paying on the first day of the next period, with each day's SOFR accruing for that day, "is often not operationally practical." Market conventions buy back a few days of notice. A payment delay pays two days after the period ends, as SOFR swaps do. A lookback uses the rate from several business days earlier: 2–3 business days has been typical for floating-rate notes, and the ARRC's business-loan conventions contemplate 5. A lockout freezes the final few days. None of them tells the borrower the rate at the start. The mechanics are worked through in compounding-in-arrears conventions, and the compounded SOFR calculator runs any of them on real data.

SOFR Averages and the SOFR Index: the same rate, packaged

Since March 2, 2020 the New York Fed has published 30-, 90- and 180-day SOFR Averages and a SOFR Index every business day. They add no new market information: each is overnight SOFR compounded on business days, with simple interest over weekends and holidays, on actual/360.

The Index makes compounding in arrears easy. Divide the Index on the last day of a period by the Index on the first day, subtract one and annualize, and you have the compounded rate between any two dates. That still gives the answer at the end of the period, because the closing Index value is not available until then. The SOFR Index calculator does the division.

The Averages offer a second route. A contract can set its rate at the start of a period equal to, say, the 30-day Average SOFR published that day. The rate is then known in advance, but it describes the previous 30 days, not the coming ones. The ARRC's user's guide notes the averages "are more likely to be used in advance." Regulation ZZ, the Federal Reserve Board rule under the LIBOR Act, uses 30-day Average SOFR as the replacement for 1-, 3-, 6- and 12-month LIBOR in most legacy contracts of FHFA-regulated entities that lacked a workable fallback. The trade-offs between the two are covered in SOFR Averages vs the SOFR Index.

Worked example: one month across a Fed move

The federal funds target range rose 25 bp to 3.75%–4.00% from September 17, 2026, according to the New York Fed's EFFR data. That gives a clean test of how backward-looking and in-arrears rates behave. Take a $10,000,000 loan with a 30-day interest period from September 8 to October 8, 2026, ignoring margin, on actual/360.

Daily SOFR ran between 3.62% and 3.64% from September 8 to September 16, then 3.85% to 3.90% from September 17 through October 7. Compounding those 22 published values over the 30 days gives 3.80800%, matching to five decimal places both the Index ratio (1.26194573 ÷ 1.25795382) and the 30-day Average the New York Fed published on October 8. The average set in advance missed the move entirely: it was 15.983 bp lower, worth $1,331.92 of interest on this loan for one month. In a calm stretch the two land close together: for July 8 to August 7, 2026, with no change in the target range, the 30-day Average set in advance (3.63576%) and the in-arrears rate (3.62347%, the Average published August 7) were 1.229 bp apart. The difference is timing, not bias; when rates fall, the advance average overstates the period instead.

A forward-looking term rate set on September 8 would have reflected whatever the SOFR futures market expected for the coming month on that date. Whether that was closer to 3.81% or to 3.65% is exactly the kind of figure this site cannot show without a CME license.

CME Term SOFR: a forward-looking rate built from futures

CME Group announced on April 21, 2021 that it was publishing CME Term SOFR Reference Rates for 1-, 3- and 6-month tenors. A 12-month tenor followed, endorsed by the ARRC on May 19, 2022. The administrator is CME Group Benchmark Administration Limited, with Chicago Mercantile Exchange Inc. as calculation agent.

The inputs are not repo trades. CME takes transaction data from thirteen consecutive 1-month SOFR futures and five consecutive quarterly 3-month SOFR futures, computes volume-weighted average prices over several intraday observation intervals, and feeds them into a projection model. The output is a rate for each tenor that reflects where the futures market expects SOFR to be, not where it has been.

Licensing

Overnight SOFR, the Averages and the Index are free to use under the New York Fed's Terms of Use, which require an attribution notice. Term SOFR is a commercial benchmark. CME states that using it "as a data input or reference in valuation, pricing, transactional or benchmarking activities and in the provision of a service requires a Use License," and that "a Distribution License … is required for any party that distributes CME Term SOFR Reference Rates to third parties." Its use-license categories cover cash market products, OTC derivatives hedging Term SOFR cash exposure, and provision of a service.

The ARRC's recommended scope for Term SOFR

The ARRC formally recommended CME's term rates on July 29, 2021, the final step of its Paced Transition Plan, three days after interdealer trading switched to "SOFR First." From the outset it limited where the rate should be used, and its April 2023 update restated the reason: Term SOFR is "based on derivatives products, primarily SOFR futures markets, not directly on the overnight Treasury repo market." Its use, the ARRC said, "needs to remain limited, particularly in derivatives markets." The recommended uses are:

• Legacy LIBOR fallbacks. "As a fallback rate for legacy LIBOR cash products."
• New business loans. "For new use in business loans, and also certain securitizations that hold underlying Term SOFR assets."
• End-user hedges only. "For use in derivatives only if issued to end-users to hedge cash products that reference the Term SOFR rate."

Everything else, including floating-rate notes, consumer products such as adjustable-rate mortgages and student loans, and most securitizations, the ARRC steered to overnight SOFR and the SOFR Averages, which it "continues to recommend … for all products."

The dealer rules are strict. A dealer is not an end user, should not hedge its Term SOFR exposure with another Term SOFR derivative, and should "strictly avoid trading any Term SOFR derivatives with other dealers," including through interdealer brokers. The one refinement in April 2023 allowed dealers to enter Term SOFR–SOFR basis swaps with any non-dealer. The ARRC called these "permanent recommendations for the market," and it was itself terminated in November 2023 after fulfilling its mandate. The recommendations are voluntary, and the ARRC said whether CME licenses in line with them "will be determined solely by the CME itself."

Why business loans adopted Term SOFR

A USD LIBOR loan fixed its rate at the start of each interest period, so the borrower knew the interest due on the payment date. Term SOFR keeps that intact; compounded SOFR in arrears does not. Loans also differ from notes in ways that make in-arrears structures harder to run: the ARRC chose a lookback without observation shift for loans because loan principal can be repaid at any time and loans trade between lenders without clean coupons, which makes the note-style in-arrears structures awkward. Those same features are why advance rate-setting matters more to loans than to notes.

Policy pointed the same way. The ARRC put new business loans inside Term SOFR's recommended scope, and when Congress and the Federal Reserve Board settled contracts with no workable fallback, Regulation ZZ replaced 1-, 3-, 6- and 12-month LIBOR in most non-consumer cash contracts with the matching CME Term SOFR tenor plus a fixed spread (0.11448% for 1-month, 0.26161% for 3-month). The FCA's synthetic USD LIBOR, published until September 30, 2024, was itself CME Term SOFR plus the ISDA spread. How those spreads were fixed is in the credit spread adjustment, and the LIBOR fallback calculator applies them with compounded SOFR.

Hedging fits the scope too. A borrower with a Term SOFR loan is an end user and can swap it to fixed with a dealer using a Term SOFR swap. The dealer on the other side may not offset that position with another dealer in Term SOFR derivatives; since April 2023 it may enter Term SOFR–SOFR basis swaps with non-dealers.

Choosing between them

If the rate must be known at the start and the product is a business loan, or a securitization or end-user hedge tied to one, Term SOFR is within the ARRC's scope, under a license held by the lender. If advance knowledge matters but Term SOFR is out of scope, a SOFR Average set in advance gives a known rate at the cost of a lag, as the September 2026 example shows. Otherwise, compounded SOFR in arrears, from daily rates or the SOFR Index, is the reference whose inputs anyone can check on the SOFR Averages and Index page.

Related tools and guides

• SOFR Averages vs SOFR IndexWhen to use a published average and when to compute from the index.
• Compounding in arrears conventionsLookback, observation shift, lockout and payment delay explained with worked numbers.
• Floating-rate loans on SOFRMargins, floors, reset dates and how a SOFR loan's interest is actually computed.
• The LIBOR to SOFR transitionHow U.S. dollar LIBOR ended and what replaced it, with the key dates.
• Credit spread adjustmentWhy legacy LIBOR contracts add a spread to SOFR, and how the ISDA values were fixed.
• SOFR Averages & IndexThe 30-, 90- and 180-day SOFR Averages and the SOFR Index, with history and how to use them.
• Compounded SOFR calculatorCompound daily SOFR in arrears with lookback, observation shift or lockout conventions.
• SOFR Index calculatorCompounded SOFR between any two dates from the New York Fed's published SOFR Index.