A subcommittee within the Commodity Futures Trading Commission (CFTC) voted to recommend switching interdealer trading conventions from LIBOR to the Secured Overnight Financing Rate (SOFR) for interest rate swaps.
The recommendation was made by CFTC’s Market Risk Advisory Committee’s (MRAC) Interest Rate Benchmark Reform Subcommittee. This initiative, referred to as “SOFR First,” is the third recommendation this subcommittee has referred to the MRAC for consideration in connection with the transition of US Dollar derivatives and related contracts away from LIBOR. SOFR First is a best practice modeled after the U.K.’s SONIA First. It represents a prioritization of interdealer trading in SOFR rather than LIBOR.
“I commend the Interest Rate Benchmark Reform Subcommittee on the development of SOFR First and its forward-thinking approach to increasing overall SOFR derivatives trading in order to facilitate a smooth transition of exposures from LIBOR to SOFR. SOFR First’s milestone date of July 26, 2021, is consistent with, and is designed to complement, U.S. banking regulators’ supervisory guidance that banks should cease entering into new contracts that use USD LIBOR as a reference rate at the end of 2021. Many thanks to the Subcommittee for their hard work on this important contribution to the benchmark reform effort,” Acting MRAC Chair Rostin Behnam said.
Specifically, the subcommittee recommends that starting July 26, interdealer brokers replace trading of LIBOR linear swaps with trading of SOFR linear swaps. This step will cause trading activity amongst swap dealers on these platforms, which account for a substantially large share of trading in the interest rate swap markets, to switch from LIBOR to SOFR.
The subcommittee’s recommendations will not be reviewed by MRAC for consideration.