SOFR Futures Celebrate Two-Year Anniversary

Two-year-olds are remarkably energetic, as any parent can confirm. It’s a stage of life where everything seems possible and fresh achievements come thick and fast. The development milestones are certainly piling up quickly for CME Group’s two SOFR futures products, which celebrate their second birthday in early May.

The two contracts – One-Month SOFR futures and Three-Month SOFR futures – are based on the new US interest rate benchmark, the Secured Overnight Financing Rate (SOFR), which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.

Not-so-terrible twos

The two SOFR futures are among the fastest-growing new products in the exchange’s 172-year history. Daily volumes averaged around 56,000 contracts in early 2020, although SOFR futures have set records for volume above 150,000 contracts.

By the time of their second birthday, the products had also reached open interest of around 612,000 lots – around 10 times the average of open interest in the contracts’ first year of life. At the same time, the contracts’ appeal is also broadening. Some 425 participants traded SOFR futures in their second year of listing, of which 161 became large open interest holders.

Super siblings

CME Group’s SOFR futures are part of a broader SOFR ecosystem: Open interest on Three-Month SOFR options continues to grow and market participants are already positioning for year-end 2020, while strong client demand also led CME Group to launch One-Month SOFR options in early May.

Active spread trading has emerged between 30-Day Federal Funds futures and One-Month SOFR futures and between Three-Month Eurodollar futures and Three-Month SOFR futures. Around a third of SOFR volumes currently comes via these spread trades, which benefit from the margin offsets between SOFR futures and the broader Rates complex and the operational efficiencies provided by inter-commodity spreads on CME Globex and via block trading.

SOFR futures’ closest relation – cleared SOFR swaps – are also experiencing significant momentum in recent months. To date, 34 participants have cleared $156 billion in notional value of SOFR swaps at CME Group, with notional outstanding growing to over $86 billion.

This significant growth in SOFR derivatives is perhaps not so surprising, given the growing pace of issuance of SOFR-linked floating rate securities, which has continued to expand, despite the economic challenges inflicted by the COVID-19 virus.Over $225 billion of SOFR-linked securities were issued in March and April 2020, bringing total issuance to $600 billion.

SOFR, so far

The first few years of anyone’s life is a critical time for development and growth. A strong start and a supportive environment are crucial to the chances of success in later life.

Futures products require the same care and attention. Fortunately, SOFR futures have benefited from strong market support and their links to CME Group’s established short-term Interest Rate complex.

As a result, the two SOFR futures products have hit their second milestone in great health and are growing up quicker than anyone would have predicted. And with increased volumes of securities linked to SOFR, the need continues to grow for users of the benchmark to manage their risk.

It will be fascinating to observe the further development of SOFR futures as they continue to mature. Looking forward from their second birthday, all the indications are very positive.

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