CME SOFRWatch Tool Methodology – CME Group

The SOFRWatch tool has a couple sources of data: benchmark rate and FOMC data is acquired via the Fed, while SOFR futures reference period dates are supplied through CME Group internal systems.

The first thing the tool does is establish a fixed spread between the latest O/N SOFR and the lower end of the Fed’s policy rate range. This value is saved for use in all subsequent calculations.

The tool presents users with all scheduled and expected FOMC meeting dates alongside the pre-populated most probable policy action the FOMC might take at each meeting, as informed by the CME FedWatch Tool. The user is given the option to override the projected change with their own expectations of policy change at each of these upcoming meetings by typing in the size and direction of the change (-25 for a 25bp cut and +25 for a 25bp hike, for example). Although the FOMC typically moves in multiples of 25bp, the tool permits inputs of any size, such as +60 for a 60bp hike, for example.

Finally, given the user’s FOMC expectations, the established spread between O/N SOFR and the Fed’s target rate range, and the past O/N SOFR fixings, the tool can imply where SOFR futures prices might settle.

For each date in the future, the tool looks at the lower end of the Fed’s target rate range and applies any user-inputted cuts or hikes that would have taken place by that date, as well as the established fixed spread between the Fed’s rates and O/N SOFR. The resulting figure is saved as the implied O/N SOFR fixing for that date.

For example, if the current FOMC policy range is 5.00% – 5.25%, the fixed spread between the lower-end of that range and O/N SOFR was established by the tool to be 6bp, and the user has inputted his expectations for a 25bp hike in the upcoming FOMC meeting, then the tool would imply an O/N SOFR fixing for the dates after the upcoming FOMC decision equal to: 5.00% + 0.06% + 0.25% = 5.31%. This would be the implied O/N SOFR rate for all days until the subsequent user-defined change in FOMC policy.

Repeating this for all relevant dates into the future (i.e., all dates which would impact a currently listed SOFR futures contract), the tool creates a continuously compounded SOFR value for each day, compounding the daily O/N SOFR fixings from the first relevant contract date until the last implied future O/N SOFR fixing calculated. This allows the tool to price any Three-Month (SR3) SOFR futures contract by simply dividing the continuously compounded SOFR value for the last day in the contract’s reference period by the value for the first day in the period.

Effectively, this process derives the implied three-month compounded SOFR rate which is used to calculate the final settlement price for CME Group Three-Month SOFR futures contracts (SR3).

Similarly, the tool also calculates the average O/N SOFR rate for each month which CME Group has One-Month SOFR futures contracts (SR1) listed and uses said figures to output the implied final settlement prices for these SR1 contracts, given the same user-defined expectations of FOMC decisions.

In the case of either a SR1 or SR3 contract whose reference period has already begun, the tool utilizes a mix of actual and implied O/N SOFR fixings to calculate a potential final settlement price.