The SOFR lookback convention is the timing rule that lets a lender tell you what you owe before the payment is due. For each day in your interest period, the rate applied is the SOFR rate published a fixed number of business days earlier, most commonly five for syndicated business loans. That shift closes the gap created by SOFR’s design: unlike LIBOR, SOFR is published after the trading day it measures, so without a lookback the final rate for an interest period wouldn’t be available until after the period ends.
Why SOFR Needs a Lookback at All
SOFR measures the cost of overnight borrowing in the U.S. Treasury repo market, using completed transactions rather than bank quotes.1Federal Reserve Bank of New York. Secured Overnight Financing Rate Data That transaction-based design is what makes the rate hard to manipulate, but it also means the rate for any given day isn’t known until the next morning.
The Federal Reserve Bank of New York publishes SOFR at approximately 8:00 a.m. Eastern Time each business day, reflecting the prior business day’s repo activity.1Federal Reserve Bank of New York. Secured Overnight Financing Rate Data If an interest period ends on a Tuesday, the final rate for that period doesn’t appear until Wednesday. A lender can’t invoice before the payment date, and a borrower can’t plan cash, unless the calculation reaches back for rates that are already public. That is what the lookback does.
How the Standard Lookback Works
The convention the Alternative Reference Rates Committee recommends for syndicated business loans is a lookback without observation shift, typically set at five business days.2Federal Reserve Bank of New York. SOFR In Arrears Conventions for Syndicated Business Loans The mechanic is straightforward. For each day in the interest period, you use the SOFR rate from five business days earlier. The rate applied to Monday, July 13 would be the SOFR rate from the prior Monday, July 6.
The important feature is what stays anchored and what moves. The rate itself comes from the past. The day-count weight for that rate, meaning how many calendar days it covers, stays tied to the current interest period. If the current day is a Friday, that day’s rate covers three calendar days because the loan sits outstanding over Saturday and Sunday. The rate is from five business days ago; the weight reflects the real time the money is out.
That anchoring is why the ARRC prefers this version for loans. If a borrower prepays mid-period, the day counts still line up with the days the loan was actually outstanding, so accrued interest comes out clean.2Federal Reserve Bank of New York. SOFR In Arrears Conventions for Syndicated Business Loans
When the Observation Shift Variant Shows Up
There’s a second version of the lookback called an observation shift. It also pulls rates from earlier business days, but it moves the day-count weighting into the shifted window as well. Each rate is weighted by the number of calendar days until the next business day inside the observation period, not the interest period.3Federal Reserve Bank of New York. An Updated User’s Guide to SOFR The whole observation window slides back as a block.
The two methods often produce the same answer, but they diverge around holidays. When a holiday falls in the observation window but not the interest period, or vice versa, the day counts between corresponding dates no longer match, and the totals drift apart.3Federal Reserve Bank of New York. An Updated User’s Guide to SOFR
The observation shift is more common in derivatives and securitized products, where matching the convention used on SOFR swaps reduces basis risk if the loan is hedged. For plain commercial lending, the prepayment-mismatch problem is why the ARRC steered the syndicated market away from it.
How the Lookback Interacts With Simple vs. Compounded SOFR
Your credit agreement will specify one of two accrual methods, and the lookback runs on top of whichever one applies.
Daily Simple SOFR adds each day’s rate linearly. The daily charge is principal times that day’s SOFR rate divided by 360, the standard U.S. money market day-count convention, with no compounding.4Federal Reserve Bank of New York. Basis Between Compound and Simple SOFR It replicates easily in a spreadsheet, which is a large part of why it’s common in syndicated loans.
Compounded SOFR in Arrears adds each day’s accrued interest to the balance before calculating the next day’s charge.4Federal Reserve Bank of New York. Basis Between Compound and Simple SOFR You end up paying interest on previously accrued interest, which produces a slightly higher total over the same period. The compounding is small on a short month but meaningful on large balances or longer accrual windows. This method is standard in derivatives and bonds.
Either way, the lookback governs which historical SOFR rate feeds into the daily calculation. The compounding question is about what the formula does with that rate once it’s pulled.
Business Days and Holidays That Change the Math
A SOFR lookback is only as accurate as the business day calendar behind it. Loan agreements typically reference the U.S. Government Securities Business Day calendar, which tracks when the Treasury repo market is open. The Securities Industry and Financial Markets Association defines that calendar: a day counts unless it’s a Saturday, Sunday, or a day SIFMA recommends its members close their fixed income departments for government securities trading.5International Swaps and Derivatives Association. Guidance Regarding the Publication of SOFR on Good Friday, April 3, 2026
The SIFMA schedule includes the standard federal holidays plus some that catch borrowers off guard, like Columbus Day and Veterans Day, when many businesses are open but the Treasury market is closed.6SIFMA. Holiday Schedule Good Friday is another to watch. SIFMA recommends an early close at noon rather than a full closure, and SOFR is still published that day, though treatment can vary by agreement. When a holiday falls inside the five-day lookback count, the calculation skips it and reaches to the next available business day, which can shift the effective weight of a rate.
Most agreements adopt a Modified Following business day convention for payment dates. A payment scheduled on a non-business day moves to the next business day, unless that would push it into the following calendar month, in which case it moves to the preceding business day.2Federal Reserve Bank of New York. SOFR In Arrears Conventions for Syndicated Business Loans If that convention is applied wrong, the interest period boundaries shift, and every rate’s weight shifts with them. Pulling the wrong holiday schedule is the most common manual-check error.
Verifying the Interest Charge Yourself
Checking a lender’s math on a Daily Simple SOFR facility with a five-day lookback and no observation shift is a spreadsheet job. For each day in the interest period, multiply the outstanding principal by the applicable SOFR rate pulled from five business days earlier, then divide by 360.3Federal Reserve Bank of New York. An Updated User’s Guide to SOFR Add the contractual margin to the SOFR rate before multiplying. If your agreement includes a floor, use whichever is greater: the looked-back SOFR rate or the floor.
Historical SOFR rates are published on the Federal Reserve Bank of New York’s website.1Federal Reserve Bank of New York. Secured Overnight Financing Rate Data Build one row per calendar day in the interest period. For each row, identify the corresponding observation date (five business days back, skipping SIFMA holidays), pull the SOFR rate for that date, apply the floor and margin, multiply by principal and the number of calendar days that rate covers, and divide by 360. Sum the column.
One wrinkle trips people up repeatedly. The SOFR rate published on a given date reflects transactions from the prior business day. The rate published on Tuesday morning represents Monday’s repo market activity. When your agreement refers to “the SOFR rate for June 25,” it means the rate published on June 25, not the rate for transactions on June 25.3Federal Reserve Bank of New York. An Updated User’s Guide to SOFR Reading that wrong shifts every rate in the calculation by one day.
What to Check in Your Credit Agreement
The ARRC’s conventions are recommendations, not rules. The committee says plainly that market participants must decide for themselves whether and how to adopt them.7Federal Reserve Bank of New York. ARRC Recommended Best Practices for Completing the Transition From LIBOR Your loan agreement is the only document that actually governs your calculation. Reading the conventions tells you what’s typical. Reading your agreement tells you what applies.
A few items worth confirming:
- Lookback length. Five business days is standard for syndicated loans, but bilateral facilities sometimes use shorter windows.
- Observation shift. Confirm whether your agreement uses a lookback with or without an observation shift, because the day-count weighting differs and produces different totals around holidays.
- Floor. Many SOFR loans include a rate floor, often zero. If SOFR drops below the floor, you pay interest based on the floor rate plus margin.
- Business day calendar. Verify the agreement references the U.S. Government Securities Business Day calendar and confirm which holidays apply.
- Payment date convention. Modified Following is standard, but your agreement controls.
If you manage multiple SOFR facilities, map the lookback windows and payment dates for each one, particularly around the late November and late December holiday clusters where SIFMA closures can compress observation periods and shift rate weights unexpectedly.
If Your Loan Uses Term SOFR, There’s No Lookback
Not every SOFR loan uses a lookback. CME Group publishes forward-looking Term SOFR rates for one-month, three-month, six-month, and twelve-month tenors, calculated from SOFR futures trading data.8CME Group. CME Term SOFR Those rates work like the old LIBOR structure. You know the rate at the start of the interest period, so there’s no lookback window, no daily accrual tracking, and no end-of-period invoicing gap. If your facility prices off Term SOFR, the mechanics above don’t apply to you. If it prices off Daily Simple SOFR or Compounded SOFR in Arrears, they do.