July 2021 Rates Recap

The SOFR derivatives market is much larger than you think

At just over three years old, the SOFR futures market has developed rapidly into a sizeable ecosystem with over 550 participants, YTD ADV of 114K contracts (+154% YoY), and open interest of over 841K contracts (+87% YoY).

​​​​​​SOFR-linked derivatives exposure is actually significantly larger than these numbers suggest...

  • On March 29, 2021, CME Group officially amended the Eurodollar futures and options rulebook to include SOFR-based fallbacks.
  • Whereby, upon the cessation of 3-month USD ICE LIBOR in June 2023, position holders in Eurodollars will be assigned contracts in 3-Month SOFR (SR3) based on this formula: 
    SR3 futures assignment price = ED futures price + 26.161 bps
    .
  • With this change, Eurodollar exposure post-June 2023 became closely tied to SOFR exposure.
  • Eurodollar activity tied to futures expiries from Sep 2023 and beyond is significant and growing, measuring 913K ADV in H1 2021. This augments SOFR futures ADV in H1 of 114K, resulting in over 1 million ADV in futures contracts linked explicitly or via fallback to SOFR.

Exhibit 1: More than one in every three contracts of Eurodollar futures and options activity is tied to futures expiring after June 2023. For example, Mid-Curve options with a Sep 2023 or later futures expiry account for 39% of Eurodollar options ADV.

Source: CME Group

Exhibit 2: Eurodollar futures open interest held in Sep 2023 and beyond has grown 123% YTD to over 4.5M contracts. Together with SOFR futures open interest of 841K, there is now over 5M contracts of futures open interest tied explicitly or via fallbacks to SOFR.

Source: CME Group

Exhibit 3: SOFR-ED basis spreads U3 and beyond trade in a tight range around the 26.161 bps ISDA spread.

Introducing Micro Treasury Yield futures

Launching August 16*, Micro Treasury Yield futures will be cash-settled to BrokerTec UST benchmarks, offering direct exposure to the most recently auctioned Treasury securities at four key tenor points on the curve​​​​​.

  • ​​​​​​Traded in yield
  • Simple, cash-settled design
  • Available on 2s, 5s, 10s, 30s
  • All four contracts sized at $10 dollar per basis point of yield (0.01%), creating seamless curve spreading opportunities

FOMC volatility showcases demand for 3-Year Treasury futures

A year ago, 3-Year Treasury futures were relaunched with a reduced tick size (1/8), a new matching algo (FIFO), and a broader delivery basket (includes old 7-yrs) to meet client demand for more curve granularity.

  • Despite a year of constrained volatility, historically low yields, and sticky price movements at the short-end of the curve, the 3Y saw strong adoption with over 160 participants, total volume of 1.7M contracts, and open interest of 15.7K contracts.
  • What's more, June gave us a glimpse of the contract's true potential. As short-end volatility ticked higher following the June 16 FOMC meeting, 3Y futures volume jumped to 20K contracts/day in the three days that followed, with a record number of participants in the market.

 


BSBY futures coming soon

Available to trade in Q3*, futures on the Bloomberg Short-Term Bank Yield Index (BSBY) will offer:

  • A price discovery mechanism for building forward curves and hedging OTC swap risk.
  • ​An efficient tool for hedging loan exposure, projecting future BSBY resets/cash flows, and reducing income statement volatility.
  • New inter-commodity spreads vs. SOFR, Eurodollars, and Fed Funds for managing basis risk, RV trading, and hedging credit spreads.
  • Efficiencies with cleared BSBY swaps, coming in Q4 to CME Group.

Dynamic circuit breakers coming to STIR futures July 27*

Please see the SER below for more details.


Data as of June 30, 2021, unless otherwise specified
*Subject to regulatory review