SOFR Conventions for Floating-Rate Notes and Interest Rate Swaps

Summary

The discussion addresses how floating-rate products changed after the transition from LIBOR to SOFR, focusing on floating-rate notes and interest rate swaps. For floating-rate notes, it describes using compounded SOFR fixings from the coupon period with a lagged observation window. An observation shift can align the rate observations with the dates needed to schedule and settle coupon payments.

For swaps, the response describes a market convention using annual payment frequencies on both legs and an Act/360 day-count basis, with no lookback and a two-business-day payment lag. These details explain operational conventions rather than provide a complete pricing framework. The document does not explain how to calibrate discount or forwarding curves, price CMS swaps, caps, or floors, or handle variations across contracts and markets. It points to transition recommendations as a reference source, so practitioners would need product-specific documentation and market data to price actual trades.

Key ideas

• SOFR floating-rate note coupons can use compounded fixings observed over a lagged period.
• An observation shift helps align rate observations with coupon scheduling and settlement.
• The described SOFR swap convention uses annual payments, Act/360 day counts, and a two-business-day payment lag.
• The response covers conventions rather than quantitative valuation models or all SOFR-linked products.

Tags

# What are the quantitative models for modelling the SOFR rate, the IR products when Libor rates end


# What are the quantitative models for modelling the SOFR rate, the IR products when Libor rates end












Many year ago, I worked on the pricing of IR products (Floating rate swap, CMS swap, Cap, Floor,...)

Libor rates are now replaced by SOFR rate. I would like to know

- What are the new IR products (Floating rate swap, CMS swap, Cap, Floor,...) after the replacement of Libor rates by SOFR rate? And how are these new IR products priced?

I would be grateful if you could give me some good references (papers, books,...).

## Answer by Attack68 (score 3, accepted)

https://quant.stackexchange.com/a/75615

The reference you want is https://www.newyorkfed.org/arrc The conversion to SOFR from LIBOR was well worked and well publicised, concerning the transition issues and what were the ultimate recommendations.

For FRNs, a variety of possibilities existed. The recommendations were a lookback period of 'x' days with observation shift. This means that coupon periods on FRNs rely on the published, compounded SOFR fixings within a period, but lagged by 'x' days so that cashflows can be scheduled and settled.

In the IRS space the market now trades SOFR IRS on an Annual/Annual Act360/Act360 structure with no lookback but with a payment lag of 2 business days to ensure operational cashflow settlement.

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.