With USD LIBOR scheduled to cease to be provided or representative from end-June 2023, to ensure a seamless transition from CME Eurodollar futures and options to CME Three-Month SOFR futures and options, CME Group has worked closely with market participants to develop and implement both robust SOFR-based fallbacks for Eurodollar contracts as well as efficient trading mechanisms for shifting positions to SOFR prior to June 2023.
- What happens to open Eurodollar futures positions upon the cessation of USD LIBOR from end-June 2023?
- What happens to open Eurodollar options positions upon the cessation of USD LIBOR from end- June 2023?
- How can I proactively move Eurodollar futures positions to SOFR ahead of June 2023?
- How can I proactively move Eurodollar options positions to SOFR options ahead of June 2023?
- How can I track activity in SOFR contracts relative to Eurodollars?
- What additional resources are available?
1. What happens to open Eurodollar futures positions upon the cessation of USD LIBOR from end-June 2023?
Trading in Eurodollar futures will be terminated and all open positions will be converted on a 1:1 basis into same month CME Three-Month SOFR futures (SR3) contracts with a price adjustment of 26.161bp (the fixed ISDA Fallback Spread Adjustment for 3M USD LIBOR) to the latest Eurodollar (ED) futures daily settlement price.
Conversion formula: SR3 futures assignment price = ED futures settlement price + 26.161 bps.
2. What happens to open Eurodollar options positions upon the cessation of USD LIBOR from end-June 2023?
Trading in Eurodollar options will be terminated and all open positions will be converted on a 1:1 basis into same month/expiry CME options on SR3 futures with a 25 bp higher price strike. Prices will be adjusted to account for the difference in movement of 25 bp in strike vs 26.161bp ISDA Fallback Spread Adjustment.
Specifically, positions will be converted into corresponding CME options on SR3 futures via a simultaneous two-step conversion process by CME:
- Eurodollar options inventories will be mapped to a corresponding non-standard options on SR3 futures strike calculated by adding the ISDA Fallback Spread Adjustment to the original Eurodollar option strike. The resultant strike prices would very likely not align with the standard exercise price arrays (which feature integer multiples of 12.5 basis points).
- Positions assigned in conversion therefore will be allocated to the nearest optimal standard strike(s) and like contract months in CME options on SR3 futures according to standard options valuation methodologies determined by CME. [The methodology will be discussed with clients and made transparent before its application on the relevant date of termination of trading.]
3. How can I proactively move Eurodollar futures positions to SOFR ahead of June 2023?
While CME’s conversion process will operate to convert any open positions at end-June 2023, CME Group also offers two efficient trading mechanisms for shifting Eurodollar futures positions to Three-Month SOFR (SR3) futures to support market participants that wish to move ED futures positions into equivalent SR3 futures positions at any time ahead of June 2023.
- Reduced-tick SR3-ED spreads
- Tradable in 0.1 bp increments around the ISDA Fallback Spread for 3M USD LIBOR
- Simultaneously executes a buy (sell) in SR3 vs. a sell (buy) in Eurodollars at a spread equal to 26.16 + the traded price
- Available for same contract month Inter-commodity spreads (ICS), Sep 2023 and beyond
- Listed on CME Globex under the ticker SED and SEAA<Comdty> on Bloomberg
- Available as packs and bundles under the product code SEP
- Executable as a block trade provided the sum of the legs of the spread meets the smaller of the threshold requirements for the underlying products
- Traditional SR3-ED ICS
- Quoted in 0.25 bp increments for the nearest term SOFR vs. ED, and 0.50 bp for all others listed in this spread
- Listed as SOFR vs. ED on Globex (SR3Z2-EDZ2) and SFRED on Bloomberg
- Executable as a block trade provided the sum of the legs of the spread meets the larger of the threshold requirements for the underlying products
- One of the deepest pools of SOFR-based liquidity with ADV exceeding 250K contracts
4. How can I proactively move Eurodollar options positions to SOFR options ahead of June 2023?
All Eurodollar options have an equivalent 3-Month SOFR option listed. Inter-commodity spreads between ED and SR3 options are available to help facilitate market-led switching prior to June 2023.
Lower block threshold for SOFR vs. ED options spreads:
- SOFR vs. ED ICS can be executed as block trades provided that each leg of the spread meets the smaller of the two threshold requirements.
- For example, a SOFR vs. ED ICS may be executed via block provided that the size of each leg is at least 2,500 contracts, the block minimum for 3-Month SOFR options during RTH (1,250 during ETH, 625 during ATH).
- Allows options premiums to be traded at 1/20 of a tick
- Available in Open Outcry and on Globex (Strategy code “LS”)
- Permissible only in strategies that meet all of the following conditions
- Two-legged spread buying one leg, selling one leg
- Like contracts: GE/SR3, GE0/S0, GE2/S2, etc.
- Same contract month: H3/H3; Z2/Z2
- Call/Call or Put/Put
- SOFR strike exactly 25 bps above the ED strike
- Permissible: +1 Mar 23 ED 98.00 Call vs -1 Mar 23 SR3 Call 98.25
- Permissible: +1 Mar 23 E0 98.00 Call vs -1 Mar 23 S0 Call 98.25
- Not permissible: +1 Mar 23 ED 98.00 Call vs -1 Ma 23 SR3 Call 98.50 (strikes must be 25 basis points apart)
- Not permissible: +1 Mar 23 ED 98.00 Call vs -1 Mar 24 SR3 Call 98.25 (contract months must be the same)
5. How can I track activity in SOFR contracts relative to Eurodollars?
The SOFR/Eurodollar Market Update offers a daily recap of trading activity in SOFR contracts relative to Eurodollars.
To get this report delivered to your inbox each morning, sign up via the subscription center under "Interest Rate Reports".
6. What additional resources are available?
SOFR options resources:
SOFR futures offer the deepest centralized pool of liquidity, price discovery, and risk management on the Secured Overnight Financing Rate (SOFR).
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.