The volume of SOFR and Sonia derivatives reaches a record
Trading in futures and options on a risk-free rate basis has reached record volumes, with regulators warning of the approaching deadline at the end of this year, when a number of Libor rates will cease to exist.
CME Group said its SOFR futures reached a record high of more than one million open interest contracts on September 15. SOFR open interest futures reached 1,004,882 contracts marking its seventh consecutive record open interest day.
#SOFR The open term interest exceeds 1 million contracts.
– CME Group (@CMEGroup) September 16, 2021
After the financial crisis, there were a series of scandals involving banks manipulating their bids to establish benchmarks for all asset classes, which led to a lack of confidence and threatened participation in the affected markets. As a result, regulators have stepped up their oversight of benchmarks and want to move to transaction-based risk-free benchmarks, making them harder to manipulate and more representative of the market.
The US Alternative Reference Rates Committee (ARRC) has chosen SOFR to replace US dollar Libor, although other new benchmark rates have also been introduced.
If companies use a rate other than SOFR, they have to do extra work to show they are making a reasonable decision, and they will be questioned about that decision, says Michael Held. @NewYorkFed #isdabenchmarks @ISDAConferences
– ISDA (@ISDA) September 15, 2021
On June 8, a sub-committee of the United States Commodity Futures Trading Commission recommended a “SOFR First” initiative in which inter-professional brokers replaced the trading of Libor linear swaps with SOFR linear swaps from July 26 of This year.
Agha Mirza, global head of OTC rates and products at CME Group, said in a statement that the group has been pleased with the adoption of CME SOFR futures since their introduction almost three and a half years ago.
“This milestone is a reflection of the strong growth we’ve seen across the SOFR ecosystem since CME implemented SOFR-based fallback solutions on March 29 of this year,” added Mirza. “In August, SOFR forward volume increased 195% year on year to 125,000 contracts per day and our OTC SOFR swap volume reached $ 65 billion in notional cleared volume.”
SOFR open interest, which includes open interest on SOFR futures and options as well as all Eurodollar futures and options beyond June 2023, increased to 20.2 million contracts since the adoption of SOFR-based backup solutions. This represents over a third, 38%, of the total short-term interest rate futures and options outstanding at CME Group.
Derivatives of Sonia
The UK chose Sonia as the risk-free rate to replace Libor.
On September 16, Sonia options reached a record volume of 620,826 contracts at ICE and just over a fifth, 21.8%, of sterling futures and options are now at Sonia at ICE.
Record volumes yesterday in SONIA options of 530,850 contracts and in SONIA futures and options of 648,695.
The open interest of SONIA futures and options has reached over 1.8 million.
21.8% of sterling futures and options are now in SONIA.
– ICE CREAM (@ICE_Markets) September 16, 2021
Steven Hamilton, Global Head of Financial Derivatives at ICE, said in an email: “The rapid increase in Sonia contract trading reflects increased activity in the risk-free rate market before the Sterling Libor stopped at the end. from 2021. We have worked closely with our clients to provide them with the tools they need to manage sterling interest rate risk and the Sterling Libor transition.
Progress of the Libor transition
The increase in risk-free rate derivatives trading activity was cited as a response to optimism by Scott O’Malia, Managing Director of ISDA, at a Benchmark Strategies Forum on September 15.
“Alternative rate derivative trading activity has grown steadily in recent months, and we expect this to continue as we move closer to the end of 2021 deadline,” did he declare.
However, he also warned that there are only 108 days left, just over three months, until 30 Libor parameters cease to exist or become unrepresentative and there is still work to be done to do so. place old Libor contracts at alternative rates before the deadline. .
The UK’s Financial Conduct Authority said in March this year that Libor parameters would cease to be provided by an administrator or would no longer be representative immediately after December 31, 2021 for all parameters in pounds sterling, euros, Swiss francs and Japanese yen, and week and two-month US dollar settings. All other US dollar settings will end immediately after June 30, 2023.
O’Malia continued that following the introduction of the SOFR First initiative, trading activity in SOFR reached 12.5% of total US dollar interest rate derivatives cleared DV01 in August. against 7.4% the previous month according to the analysis of ISDA and Clarus Financial Technology, the derivatives analysis provider.
ISDA-@clarusft Risk-free rate (#RFR) The adoption indicator hit a record 17.5% in August, down from 14.1% the month before. Want to learn more about the highlights for August 2021? Read the full report here: https://t.co/PazT5rHclU pic.twitter.com/wcJOjMxtDf
– ISDA (@ISDA) September 14, 2021
He expects that several upcoming steps should spur progress.
The UK’s UK Pound Sterling Risk-Free Benchmark Working Group has set a target by the end of this month for companies to complete the active conversion of all old Libor sterling contracts expiring after the end of 2021, when viable.
In December, major central counterparties will convert all existing cleared swaps linked to the Euro, Pound Sterling, Swiss Franc and Yen Libor into overnight RFR index swaps which O’Malia says will eliminate d ‘all at once a large amount of legacy Libor exposures.
Phase II, also called #RFR First, this will be our next step. On September 21, the inter-professional market will enter into negotiation agreements of #LIBOR To #SOFR in currency swaps, which include those referring to the US dollar, British pound, Swiss franc and Japanese yen, says @CFTCbehnam
– ISDA (@ISDA) September 15, 2021
“For the remaining uncompensated derivatives, robust pullbacks will automatically take effect in the vast majority of cases if companies do not complete their transition efforts on time,” he added. “So far, more than 14,500 entities in nearly 90 jurisdictions have adhered to ISDA’s IBOR fallback protocol, which incorporates fallbacks into existing non-cleared derivatives.”
O’Malia concluded that there had been good progress on legislative solutions for difficult legacy exposures.
The UK’s Financial Conduct Authority has completed a consultation on its policy framework for developing synthetic Libor for certain metrics, and is expected to consult shortly on the details of who will be able to use synthetic Libor for six pounds sterling and yen Libor. tenors.
In the United States, the House Financial Services Committee passed a bill on July 29 to resolve difficult US dollar Libor positions, following the passage of a similar law in New York State. in April.
By the end of this year, every company must have stopped using LIBOR for all new exposures and safely landed on robust alternatives – not a recommendation but an explicit prudential guidance, says Michel Held. @NewYorkFed #isdabenchmarks
– ISDA (@ISDA) September 15, 2021
“Five of the most popular US Dollar Libor settings will continue to be published until mid-2023, giving companies a little more leeway to process US Dollar Libor transactions,” O’Malia said. “However, a number of regulators around the world, including the Federal Reserve, have said they will restrict the further use of US dollar Libor from the end of 2021, except under limited circumstances.”
O’Malia said there was no room for complacency over the next 108 days. He said: “We need to use the remaining time wisely to make sure everyone is ready for a future without Libor.”