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How Treasury Repo Transactions Contribute to SOFR

Article Quant Q&A · Author: codeedoc
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Summary

The note explains the transactions underlying the Secured Overnight Financing Rate, a benchmark derived from overnight Treasury repo activity. A repo is economically a collateralized loan structured as an initial securities sale followed by an agreed repurchase. Its rate is annualized, so the difference between sale and repurchase prices over a single day should not be read directly as the quoted annual rate without accounting for the period and conventions.

It also distinguishes general collateral from a repo requiring a particular security: with general collateral, the cash lender accepts an eligible security category such as Treasuries. In tri-party repo, an intermediary handles tasks such as collateral management and settlement; in bilateral repo, the two counterparties arrange these directly. The answer gives conceptual definitions but no detailed calculation, transaction-level example, or discussion of how the different repo segments are weighted in SOFR.

Key ideas

  • A Treasury repo is a collateralized borrowing arrangement carried out through sale and later repurchase of securities.
  • Repo rates are annualized, so a one-day price difference is not itself the quoted rate.
  • General collateral repo permits a choice among eligible securities rather than requiring one specific issue.
  • Tri-party arrangements use an intermediary for collateral and settlement processes.
  • Bilateral repo counterparties handle collateral and cash transfers between themselves.

Tags

Fixed incomeMarket microstructure
Full text
# what are the underlying transactions for SOFR?


# what are the underlying transactions for SOFR?












Recently I am reading about SOFR (Secured Overnight Financing Rate), which is projected to replace LIBOR to be the reference for risk-free rate in the market. But I still don't understand or imagine what an underlying transaction that makes up the SOFR would look like? If we look at the resources below:

Based on Wikipedia: SOFR is based on the Treasury repurchase market (repo), Treasuries loaned or borrowed overnight.

And Based on CME's deck on SOFR (link: https://www.cmegroup.com/education/files/what-is-sofr.pdf, page 2): SOFR is based firmly on transaction data drawn from multiple and diverse sources:

- Tri-party Treasury general collateral (GC) repo transactions cleared and settled by Bank of New York Mellon (BNYM)

- Tri-party Treasury GC repo transactions made through the FICC GCF repo market, for which FICC acts as central counterparty.

- Bilateral Treasury repo transactions cleared through the FICC Delivery-versus-Payment (DVP) service.

I don't have much experience in this area. But here is how I made out of the above resources:

Let's say I am holding a treasury bond/note/bill, I sell it to a party B at the price \$1 and I buy it back from B at the price of \$1.1 the next day. Does it mean that the rate 10% here along with many other rates from similar transactions eventually make up the so-called "SOFR" rate? Am I describing the "Treasury repurchase market" correctly using this example?

And it would be great if anyone could provide a more concrete example of what "Tri-party Treasury general collateral repo transactions" and "Bilateral Treasury repo transactions" mean.

Thanks a lot in advance!

## Answer by Magic is in the chain (score 2, accepted)

https://quant.stackexchange.com/a/46121

Repo is essentially collateralised lending/borrowing, but it is executed via sale and repurchase. The repo rate works the same way as the deposit rate, so would be annualised. General collateral means that the seller has a choice regarding which particular security to provide,e.g., any US treasury as opposed to a specific issue. Triparty means that the collateral management and cash settlement etc are handled by a third party as opposed to bilateral repo in which they two parties will deal with the collateral and cash transfer between themselves.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.