The following website gives the specifications of the CME Term SOFR reference rates: CME Term SOFR.
Point 1 in the link above specifies that the tenors that are currently supported are 1m, 3m, 6m, and 12m. Point 2 specifies that CME SOFR futures of various maturities are used to imply the SOFR Term rates (the maturities differ, but the underlying accrual period is always either 1m or 3m). Point 7 specifies that the Alternative Reference Rate Committee (ARRC) supports the introduction of SOFR Term rates.
My question is this: why do you think that the CME uses SOFR futures, rather than SOFR OIS swaps, to imply the SOFR Term rate?
January 2022 data show that EuroDollar futures (i.e. USD Libor futures) were still 3-times more liquid in terms of volume than the SOFR equivalent. On the other hand, SOFR OIS swaps have by now far exceeded LIBOR swaps in terms of liquidity. Why not just use the OIS SOFR swaps?
Why is the market obsessed with trying to come up with some "fancy" SOFR term rate (such as the CME SOFR term rate, which mixes various SOFR futures and uses an opaque formula based on VWAP): I totally understand that the market wants a forward looking credit sensitive rate (for example to index lending to): but why not just take points on the SOFR OIS yield curve as the forward-looking SOFR term rate?
My only possible explanation is that the SOFR OIS curve is based purely on a compounded rate, whilst the market might fancy some type of an arithmetic average rate: when you undertake overnight financing, you do it on a non-compounded basis (you borrow a fixed amount, pay prevailing interest rate, and then might chose to borrow the same fixed amount again and pay the new prevailing overnight rate: therefore arithmetic average might be better for hedging, rather than a compounded average).
The SOFR futures link above specifies that the CME 1m SOFR futures use an arithmetic average daily SOFR during the delivery month to compute the settlement rate, whilst the CME 3m SOFR futures use the compounded daily SOFR during the delivery quarter to compute the settlement rate.
To my knowledge, the SOFR OIS swaps use the compounded average for the SOFR floating leg (so presumably the same formula as the 3m CME futures).
So the 1m SOFR futures might be better for a forward-looking SOFR Term rate based on an arithmetic average.
Is it the arithmetic vs. the compounded rate argument, or is there a different reason for not using the SOFR OIS swap curve to imply a SOFR Term rate?