June 8, 2021

CFTC Subcommittee's Recommendation Paves Way for Term SOFR

The CFTC's Interest Rate Benchmark Reform Subcommittee recommended "that on July 26, 2021 and thereafter, interdealer brokers replace trading of LIBOR linear swaps with trading of SOFR linear swaps." Further, the Subcommittee recommended to the Market Risk Advisory Committee (or "MRAC") that interdealer brokers keep LIBOR linear swap screens available for informational purposes only until October 22, 2021, after which the screens should be turned off altogether.

The Subcommittee's recommendations came as a part of the SOFR First Transition Initiative, a market best practice that prioritizes trading in SOFR (Secured Overnight Financing Rate) rather than LIBOR.

The change in convention is expected to increase the volume of transactions quoted in SOFR, which the Alternative Reference Rates Committee said is necessary for the implementation of a term rate for SOFR. "As a result," according to Randal K. Quarles, Vice Chair for Supervision at the Federal Reserve Board and Chair of the Financial Stability Board, "term SOFR will be available upon implementation of the change."

The CFTC also released the SOFR First-Related FAQs, which clarify that:

  • USD linear swaps include outright swaps, swap spreads and curve trades;

  • the initiative affects the interdealer market only, meaning that dealers may still execute USD LIBOR linear swaps with clients after July 26, 2021, and after October 22, 2021 for risk management purposes;

  • the Subcommittee expects the continued publication of USD LIBOR ICE Swap Rates, even though they may more heavily rely on pricing quotes from dealer-to-client trading venues; and

  • the Subcommittee will next consider nonlinear derivatives, exchange-traded derivatives and cross-currency swaps.

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