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Term SONIA vs Compounded SONIA
Compounded SONIA
Term SONIA
We do not publish official Term SONIA rates, but our forward curves help estimate equivalent 1M, 3M, and 6M SONIA projections based on market expectations. 🔗 View Term SONIA from LSEG
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FAQs
What is Term SOFR?
Term SOFR is a forward-looking, daily set of interest rate estimates. Published by the CME Group for tenors of 1, 3, 6, and 12 months, it represents the market's expectation of what the average SOFR rate will be over that future period. Term SOFR is used by over 2,870 firms globally and is the benchmark for an estimated $7.95 trillion in loans, making it the preferred choice for USD loans quoted in 1, 3, 6 and 12 month tenors.
How is Term SOFR calculated?
It is calculated using data from SOFR futures contracts. The CME Group uses the transaction prices from these derivatives markets—supported by an average of $2.3 trillion in daily notional trading volume—to model and project the term rates. The underlying SOFR rate itself is based on transaction volumes that regularly are over $1 trillion daily, making it one of the most robust benchmarks available.
Who administers and publishes Term SOFR?
CME Group Benchmark Administration Limited administers the rates, which are then published by the Chicago Mercantile Exchange (CME).
When is Term SOFR published?
CME Term SOFR reference rates are published daily at 5:00 a.m. Central Time (CT).
Is Term SOFR an officially endorsed rate?
Yes, it was formally recommended by the Alternative Reference Rates Committee (ARRC), which was convened by the Federal Reserve to find a replacement for LIBOR.
Term SOFR vs. Compounded SOFR, What is the difference?
Although both are based on the Secured Overnight Financing Rate (SOFR), Term SOFR and Compounded SOFR are calculated in very different ways and are used for different purposes.
How Term SOFR is Calculated
Forward-looking: Term SOFR is published daily by the CME Group for 1-, 3-, 6-, and 12-month maturities.
It is derived from pricing in SOFR futures and swaps markets, which reflect where the market expects overnight SOFR to average over the chosen tenor.
The key feature is timing: the rate is fixed at the start of the interest period, so borrowers know their payments in advance.
Use cases: Popular in commercial loans, trade finance, and syndicated facilities, where operational simplicity and cash-flow certainty are priorities.
How Compounded SOFR is Calculated
Backward-looking: Compounded SOFR is built by compounding each day’s overnight SOFR fixing over the accrual period (such as one or three months).
Because it uses realised overnight rates, the final figure is only known at the end of the period.
Use cases: Considered more robust by regulators, it has become the standard for derivatives, floating-rate bonds, and securitisations.
Why the Distinction Matters?
Term SOFR provides predictability, similar to how LIBOR once worked.
Compounded SOFR reflects the actual cost of borrowing in overnight markets and underpins most derivatives activity.
For market participants, it’s critical to be clear which version is meant when someone says “3M SOFR”, since the cash-flow and risk management implications can be quite different.
Forecast vs. Reality: Term vs Compounded SOFR
One way to highlight the difference is to compare how Term SOFR (the forecast) lines up with realised Compounded SOFR (the truth).
Over the last 5 years, the results are as follows:
On average, 3M Term SOFR has been within half a basis point of realised Compounded SOFR. Forecast errors have been limited, typically in the –20 to +20 bps range.
The biggest gaps happen around Fed surprises

Daily Simple SOFR vs. Term SOFR
Another convention often used in loans is Daily Simple SOFR. It was introduced to give borrowers and lenders an easy way of calculating interest based on overnight SOFR fixings.
What is Daily Simple SOFR?
Calculation: it is the simple (non compounded) average of daily SOFR rates over the accrual period. Adjustments are made for holidays and weekend by carrying forward the most recent fixing
Timing: Like Compounded SOFR, it is backward looking: the final interest rate is only known at the end of the period
Use cases: because it avoids the complexity of daily compounding, Daily Simple SOFR is easier to implement in loan systems. It has been widely adopted in corporate loans and situations where simplicity matters more than precision
How it Differs from Term SOFR
Forward vs Backward: Term SOFR is fixed at the start of the period, where Daily Simple SOFR is determined after the end of the period
Market Input: Term SOFR relies on SOFR futures and swaps, while Daily Simple SOFR comes straight from overnight repo transactions
What types of financial products use Term SOFR?
Term SOFR is widely used across various financial instruments. It has been widely adopted to replace USD LIBOR for new business loans, credit facilities, and as a fallback rate for legacy LIBOR loans. In addition to loans, it is the reference rate for approximately $3 trillion in over-the-counter (OTC) derivative hedges, which are crucial for managing interest rate risk. Term SOFR's locked-in rate for 1-, 3-, or 6-month tenors facilitates budgeting, cash-flow forecasting, and simpler documentation.
How does Term SOFR compare to LIBOR?
Term SOFR is functionally similar to LIBOR in that it is a forward-looking term rate, which makes it easy for operational adoption. However, unlike LIBOR, which was based on bank estimates and susceptible to manipulation, Term SOFR is derived from a deep and robust market of actual transactions, making it more transparent and reliable. This is a critical distinction: the daily transaction volumes underlying the SOFR ecosystem regularly exceed $1 trillion, a stark contrast to the less than $1 billion in transactions that typically supported the most active tenor of USD LIBOR. A key difference is that Term SOFR does not include the bank credit risk premium that was inherent in LIBOR.
What is adjusted term SOFR?
Adjusted Term SOFR is a benchmark interest rate created by adding a credit spread adjustment to the standard forward-looking Term SOFR rate. This spread is designed to make the rate function as a more comparable replacement for credit-sensitive benchmarks like LIBOR, which had inherent bank credit risk that the risk-free SOFR does not.
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