Guide

‘SOFR First’ Concludes with Publication of User Guide

The user guide outlines best practices for converting an exchange-traded derivatives business into a SOFR business in the near term.

The CFTC (Commodity Futures Trading Commission) Subcommittee on Interest Rate Index Reform of the MRAC (Market Risk Advisory Committee) has released a user guide for the transition of newly implemented exchange-traded derivatives from LIBOR to SOFR.

The user guide is part of the first SOFR initiative, which was approved by MRAC in July. SOFR First is a four-stage initiative representing priority trading in SOFR rather than dollar LIBOR for specific market segments and products.

This initiative is designed to help market participants reduce dependence on US dollar LIBOR in light of US Banking Supervision guidelines that such activity should cease as soon as practicable and in any event by December 31, 2021.

The first three phases of SOFR First focused on dealer markets for certain US dollar interest rate derivative products with transition dates occurring on July 26, 2021 for linear swaps; September 21, 2021 for exchanges between currencies (and additional exchanges between currencies on December 31, 2021); and November 8, 2021 for nonlinear derivatives.

The release of the user guide for the transition of the newly implemented exchange-traded derivatives from LIBOR to SOFR completes the fourth and final phase of the first SOFR initiative.

The user guide outlines best practices that market participants should consider when converting an exchange-traded derivatives business to a SOFR business in the near term.

It encourages all market participants to ensure the operational ability to transact in SOFR exchange-traded derivatives as soon as possible, and states that it will be a best practice for all market participants to replace the use of LIBOR with SOFR in new contracts, including exchange trading. Derivatives after the end of 2021.

Since there is no specific “intra-traded” market for ETEs, the Subcommittee was unable to set a specific date before the end of 2021 when dealers should move their ETC derivatives business from LIBOR to SOFR.

Instead, it encourages all market participants to adopt best practices to replace the use of LIBOR with SOFR in new contracts after the end of 2021.

The first user guide for the SOFR Exchange Traded Derivatives System has been published here (download).

In a statement, the Alternative Reference Rates Committee (ARRC) welcomed the user guide, and also published a year-end progress report on the transition from US dollar LIBOR to SOFR.

The report highlights the acceleration of progress towards SOFR across asset classes, with changes to the first SOFR agreement playing a major role in changing behavior and business activity in the derivatives markets.

The report includes the results of a survey of ARRC member firms, in which respondents indicated that the transition is proceeding “smoothly” in general and in derivatives, consumer loans, and floating rate markets in particular.



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