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!