On October 23, the New York Fed announced two modifications to the Secured Overnight Financing Rate (SOFR) calculation methodology, which serves as a broad measure of the cost of financing Treasury securities on an overnight basis. Both modifications involved the treatment of transactions within the delivery-versus-payment (DVP) segment of the repossession market, whereby investors and collateral providers exchange money and securities bilaterally and without the use of a clearing bank. These changes, which are aimed to make SOFR more accurate and reliable, will start on November 25.

On the first of the changes, transactions between affiliated entities will be excluded from the DVP segment, which is the largest of the three market segments incorporated into the calculation of SOFR. The New York Fed typically excluded transactions between affiliated entities when relevant and when data about affiliated transactions was available, which is now possible since the DVP segment switched on January 24, 2022, to higher resolution data sourced directly by the Treasury’s Office of Financial Research. Affiliated-party transactions will be excluded on a “best efforts” basis when neither of the affiliated entities appear to be acting in a fiduciary capacity.

Second, to reduce the impact of “specials” transactions, 20 percent of the lowest-rate transaction volume will also be removed from the DVP segment. “Specials” are trades where cash providers are willing to accept a lesser return to obtain a particular security, executing trades at rates below those for general collateral repos. The New York Fed is making the change to mitigate the influence of “specials” on the entire segment, eliminate related day-to-day variability, balance the risk of including specials with removing activity that is occurring at rates similar to general collateral repossessions, and ensure that SOFR remains a robust benchmark.