Term SOFR is a forward-looking interest rate benchmark published each U.S. Government Securities Business Day by CME Group in four tenors: one month, three months, six months, and twelve months. It replaced USD LIBOR as the standard reference rate in American business lending after the final LIBOR settings ceased publication on June 30, 2023. Because the rate is set at the start of each interest period rather than calculated after the fact, a borrower on a Term SOFR loan knows the benchmark portion of their interest rate at the beginning of every payment cycle, much as they did under LIBOR.
Why a Forward-Looking Rate Exists
The underlying Secured Overnight Financing Rate measures the cost of borrowing cash overnight against U.S. Treasury collateral. It draws from a large pool of daily repo market transactions cleared through the Fixed Income Clearing Corporation, filtered to exclude trades driven by demand for specific securities.1Federal Reserve Bank of New York. Secured Overnight Financing Rate Data That overnight rate is deep and difficult to manipulate, which is why regulators built the post-LIBOR system on top of it. But an overnight rate creates a practical problem: on a commercial loan, nobody wants to learn the period’s interest bill only after the period ends.
Term SOFR closes that gap. CME Group derives the rate from the pricing of one-month and three-month SOFR futures, extracting the market’s implied rate over each future window.2CME Group. CME Term SOFR Reference Rates Benchmark Methodology The result behaves operationally like LIBOR: rate known upfront, cash flows forecastable, treasury systems undisturbed. The Alternative Reference Rates Committee, convened by the Federal Reserve Board, formally endorsed the CME rate in July 2021.3Federal Reserve Bank of New York. Summary and Update of the ARRC Term SOFR Scope of Use Best Practice Recommendations
CME publishes each day’s values at 5:00 a.m. Central Time.4CME Group. CME Term SOFR Reference Rates Benchmarks A Government Securities Business Day means any day other than a Saturday, Sunday, or a day on which the Securities Industry and Financial Markets Association recommends its members’ fixed-income departments close for the full day, so federal holidays generally have no publication.5Federal Reserve Bank of New York. Forward Looking Term SOFR and SOFR Averages (Applied in Advance)
The Four Tenors
Term SOFR is published in one-month, three-month, six-month, and twelve-month tenors.6eCFR. 12 CFR 253.2 – Definitions The tenor is simply the length of the interest period during which the benchmark rate stays fixed. A borrower on three-month Term SOFR locks in the benchmark portion of their rate for the full 90-day window at the outset.
Shorter tenors reset more often, so the rate tracks market movements more closely. That helps when rates fall and hurts when they rise. Longer tenors trade rate sensitivity for predictability. In practice, three-month Term SOFR dominates syndicated and bilateral business lending because it balances rate exposure with operational simplicity.
How Term SOFR Compares With the Other SOFR Variants
A borrower reading a credit agreement may see references to more than one SOFR variant, because Term SOFR is not the only permitted way to reference the rate. The ARRC recognizes several forms, and the differences shape how and when a borrower learns their interest bill.5Federal Reserve Bank of New York. Forward Looking Term SOFR and SOFR Averages (Applied in Advance)
- Term SOFR is forward-looking and set at the beginning of each interest period. This is the dominant choice in business lending.
- SOFR Averages applied in advance are a backward-looking average of past overnight fixings, but applied at the start of the next period. Known upfront, but reflects what already happened.
- Daily Simple SOFR in arrears applies each day’s overnight rate to that day’s accrual. The total isn’t known until the period ends.
- Daily Compounded SOFR in arrears is similar but adds compounding, marginally more accurate but harder to administer.
The ARRC recommends that Term SOFR use stay concentrated in business loans, related end-user hedges, and securitizations backed by Term SOFR assets. It does not support Term SOFR for the broader derivatives market, interdealer transactions, new floating-rate notes, adjustable-rate consumer mortgages, or securitizations that don’t hold Term SOFR assets.3Federal Reserve Bank of New York. Summary and Update of the ARRC Term SOFR Scope of Use Best Practice Recommendations The concern is circular: if too many products reference Term SOFR, they could distort the futures market that produces it.
Term SOFR in a Credit Agreement
A typical Term SOFR loan states the interest rate as the applicable tenor plus a margin, for example “three-month Term SOFR plus 2.00%.” The rate resets at each interest period based on the value published shortly before the period begins.
Rate-Setting and Day Count
The ARRC recommends using the Term SOFR rate published two U.S. Government Securities Business Days before the first day of each interest period, and holding that rate for the whole period.5Federal Reserve Bank of New York. Forward Looking Term SOFR and SOFR Averages (Applied in Advance) That two-day lookback mirrors the old LIBOR convention, which is why most loan systems absorbed the transition without major changes.
Interest is calculated on an Actual/360 basis, the standard convention in U.S. money markets.5Federal Reserve Bank of New York. Forward Looking Term SOFR and SOFR Averages (Applied in Advance) Daily interest is the annual rate divided by 360 and multiplied by the actual number of calendar days in the period. Since a year has 365 days, this convention generates slightly more interest over a full year than a 365-day denominator would. Payment dates typically follow the Modified Following Business Day convention: 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 back to the prior business day.
If Term SOFR has not been published by 5:00 p.m. Eastern Time on a lookback day, the ARRC recommends using the most recently published rate, provided it is no more than three Government Securities Business Days old.5Federal Reserve Bank of New York. Forward Looking Term SOFR and SOFR Averages (Applied in Advance)
Credit Spread Adjustments on Legacy Loans
Loans that originated under LIBOR and converted to SOFR often carry a fixed credit spread adjustment on top of the SOFR rate. LIBOR reflected some bank credit risk; SOFR does not. Applying SOFR directly to a legacy LIBOR loan without adjustment would have handed the borrower a windfall. Regulators standardized the adjustments at 0.11448% for one-month contracts, 0.26161% for three-month, and 0.42826% for six-month.7Federal Register. Additional Guidance on the Transition From Interbank Offer Rates to Other Reference Rates
A loan originated today with Term SOFR as its benchmark from the outset has no credit spread adjustment. The lender simply prices its credit risk into the margin.
Interest Rate Floors
Many credit agreements include a floor that keeps the benchmark from going below a set level, often zero. On a newly originated SOFR loan, the ARRC recommends applying the floor to SOFR itself. On a legacy loan that converted from LIBOR, the floor applies to SOFR plus the credit spread adjustment.8Federal Reserve Bank of New York. SOFR In Arrears Conventions for Syndicated Business Loans A converted loan with a 0% LIBOR floor and a 25-basis-point spread adjustment, for instance, ends up with a SOFR floor of negative 25 basis points, so the spread adjustment can still do its work.
Fallback Provisions
Credit agreements also set out what happens if Term SOFR itself becomes permanently unavailable. Fallback clauses usually step through Daily Simple SOFR or SOFR compounded in arrears, with the administrative agent or lender empowered to select the replacement. Because Term SOFR depends on healthy futures volume, these clauses aren’t purely theoretical, and a borrower should know which alternative their agreement names.
Licensing
Referencing Term SOFR in a loan requires a use license from CME Group, held by the lender. The borrower does not need a separate license, and CME charges no fee for cash market products, which includes bilateral loans, syndicated lending, and intercompany lending.9CME Group. CME Term SOFR Reference Rates – Frequently Asked QuestionsCME Group Benchmark Fee List In a syndicate, each lender must hold its own license.
The LIBOR Act and Legacy Contracts
The statutory backbone for the transition is the Adjustable Interest Rate (LIBOR) Act, enacted in March 2022 as part of the Consolidated Appropriations Act. The law creates a uniform nationwide process for replacing LIBOR in existing contracts that lack workable fallback language, and it is designed to prevent the litigation that would otherwise follow the benchmark’s disappearance.10Office of the Law Revision Counsel. 12 USC 5801 – Findings and Purpose
For any LIBOR contract that either has no fallback provisions or has fallbacks that don’t identify a specific replacement rate or a person authorized to choose one, the “Board-selected benchmark replacement” automatically takes effect on the LIBOR replacement date. A “determining person” named in a contract, such as a calculation agent, may also opt into the Board-selected replacement even if other fallbacks exist.11Office of the Law Revision Counsel. 12 USC 5803 – LIBOR Contracts
The Act does not dictate the benchmark for new contracts. A lender writing a new loan today can choose Term SOFR, overnight SOFR, a fixed rate, or another benchmark entirely, and no federal supervisor may take enforcement action solely because SOFR wasn’t chosen.
Tax Treatment When a Loan Converted From LIBOR
Changing a loan’s reference rate could, in principle, be treated as a taxable exchange if the change is significant enough to create a materially different obligation. The IRS addressed this squarely. Under Treasury regulations, a “covered modification” that replaces LIBOR with a “qualified rate” like SOFR is not treated as a taxable exchange.12eCFR. 26 CFR 1.1001-6 – Transition From Certain Interbank Offered Rates
To fit the safe harbor, the modification must replace LIBOR with a qualified rate as the operative rate, add a qualified rate as a fallback, or replace a LIBOR-based fallback with a qualified rate. Qualified rates include SOFR, any rate a central bank has endorsed as a LIBOR replacement, and any rate the ARRC recommends while the Federal Reserve Bank of New York sits as an ex officio member. Technical changes that ride along with the rate swap, such as adjusting interest-period definitions or payment timing, count as permissible associated modifications.12eCFR. 26 CFR 1.1001-6 – Transition From Certain Interbank Offered Rates
The safe harbor doesn’t cover everything. If a lender used the transition to renegotiate unrelated economics, grant concessions for financial difficulty, or extract consent payments, those changes fall outside the protected zone and are tested under the normal rules for significant debt modifications.12eCFR. 26 CFR 1.1001-6 – Transition From Certain Interbank Offered Rates Revenue Procedure 2020-44 provides an earlier and slightly narrower safe harbor for modifications that incorporated ARRC- or ISDA-recommended fallback language.13Internal Revenue Service. Revenue Procedure 2020-44
Where To Find the Daily Rate
CME Group publishes current and historical Term SOFR values on its benchmark administration page. The New York Federal Reserve publishes the underlying overnight SOFR and the SOFR averages on its own reference rates page, but not Term SOFR itself, because CME Group holds that administrative role.4CME Group. CME Term SOFR Reference Rates Benchmarks Most financial data terminals and loan servicing platforms carry the rate under a CME data feed.