11 Feb Size of the SOFR Market
This is the second article of a three-part series on the transition from LIBOR to the Secured Overnight Financing Rate (SOFR). The first article examined the size of the LIBOR-linked markets. This article takes a look at the size of the SOFR market.
The SOFR Rate
The SOFR rate is an overnight rate of three baskets of repo transactions. It’s an overnight collateralized rate. SOFR is the current rate the ARRC, The Fed and the FHA have agreed to use to replace LIBOR
SOFR is the volume-weighted median of transaction-level rates
- Tri-Party repo data collected from the Bank of New York Mellon
- GCF Repo transaction data is collected from Depository Trust Clearing Corporation (DTCC)
- DVP repo Bilateral Treasury repo transactions clear through FICC’s DVP service.
- Hard to borrow or securities trading “special” aren’t part of the sample.
The New York Federal Reserve provides the SOFR Rate and the component Repo data. The New York Fed’s interactive pages let the user chart the monthly median Volume of Tri-Party, General Collateral & SOFR.
The Size of the SOFR Market
The SOFR rate is an overnight rate of three baskets of repo transactions. It’s an overnight collateralized rate. SOFR is the current rate the ARRC, The Fed and the FHA have agreed to use to replace LIBOR
The SOFR rate is calculated as a transaction-level volume-weighted median of each bucket of repo transactions from three types of overnight repo:
- Tri-Party repo data collected from the Bank of New York Mellon as well as
- GCF Repo (BGCR) transaction data and
- Bilateral Treasury repo transactions cleared through FICC’s DVP service, which is obtained from DTCC Solutions LLC, an affiliate of the Depository Trust Clearing Corporation. The securities trading “special” is eliminated from this sample.
The overnight Treasury repo markets included in SOFR are very liquid, averaging more than $700 billion in daily trading volume and an outstanding amount of $833 billion.
Repo is an overnight rate. While repo is liquid overnight, we need to price swaps out to 30+ years. So let’s see if a forward rate market for SOFR has developed. The CME has futures contracts, let’s see how liquid they are today.
TABLE 1 shows the outstanding repo for each bucket. This gives us a sense of the overall liquidity in the repo market. Which in turn gives us the size of the SOFR market
Cash Issuance of SOFR-Link Bonds and Notes
Chart 1 shows SOFR-Linked issuance over the past year, through October 2019, separated by type of issuer. Government Sponsored Entities have been the largest issuers of SOFR-linked debt with ~80% of the SOFR-linked market. As of mid-December, there’s a total of $280 billion outstanding with 300 issues trading. Cash issuance is another measure of the size of the SOFR market.
Chart 2 shows SOFR linked issuance both monthly and cumulatively, as of mid-December cumulative issuance of $282 billion with monthly issuance as high as $55 billion in August. Issuance dropped off in October & November.
Chart 3 shows SOFR issuance by tenor. November 2019 saw low issuance overall, but the largest issuance maturing in 5 years+ 
SOFR Futures Volume & Open Interest
SOFR Futures are seeing good growth in volume and open interest. In one year, as of November, 2019 open interest has grown to over 500,000 contracts with a 20-day average volume of 48,000 contracts.
TABLE 2 shows the SOFR Futures Volume and Open Interest over the past 18 months. The size of the SOFR market is growing.
Table 3 shows the strip of futures from January 2020 to January 2021
Summary & Conclusions
The repo markets used to calculate SOFR are liquid and as the transition from LIBOR to SOFR becomes final, the rate will be used as a benchmark more as of December 2021 approaches.
SOFR Issuance, for a new product in its first year, saw good support in the issuance market. Futures and Swaps have also seen good market support.
LIBOR swaps and LIBOR-linked debt outstanding are still significantly larger than the SOFR replacement.
In part three of this series, we’ll look at the relationships between different rates to measure the likelihood of SOFR successfully replacing LIBOR in our capital markets.