October 2, 2019
By: Thomas Volet
This article focuses on the mechanics of Compounded SOFR as set forth in the formula and examples in the NY Federal Reserve's A User's Guide to SOFR and in recent proposals by the NY Fed. The formula (which has been used for two decades in the overnight index swap market) presents a hybrid interest regime that provides for accruals lying between traditional simple interest and traditional compounding.
However, as demonstrated in the article, the formula’s suspension of compounding on nonbusiness days entails the potential occurrence of anomalous differences in overall interest accruals for transactions that should have identical results.
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