SOFR, SONIA and Other Alternative Reference Rates

Regulators are urging the financial industry to strengthen existing benchmarks for interbank offered rates (IBORs) and to establish and voluntarily adopt alternative reference rates (ARRs) in interest rate applications.

Regulators are also encouraging market participants to include appropriate triggers and references to ARRs as standard ICE LIBOR fallback contract language across asset classes.

Central banks and endorsed committees have identified ARRs for certain currencies that rely on ICE LIBOR benchmarks. These include “near-risk free” reference rates (RFRs) like SOFR (Secured Overnight Financing Rate) for USD and SONIA (Sterling Overnight Index Average) for GBP, which are based on significant transaction volumes compared to the underlying market used in the ICE LIBOR calculation.

Market participants are working to establish forward-looking term reference rates for certain currencies, which will become feasible once sufficient transactions develop in derivatives based on the respective ARRs. CME Group believes that a fully transactions-based reference rate consistent with the IOSCO Principles for Financial Benchmarks benefit the marketplace.

We are working closely with our customers during this transition, and we will continue to offer capital-efficient choices to manage risk via Eurodollar, 30-Day Federal Fund, SOFR, and SONIA futures, as well as SOFR- and SONIA-based cleared over-the-counter (OTC) swaps.

CME Group acknowledges the importance of industry alignment on the critical issues of IBOR fallbacks and transition. We aim to keep all market participants informed, as we continue to engage with industry groups, regulators and market participants regarding the triggers and operational processes for fallback to ARRs.

CME Group is fully supportive of efforts by the official sector, ARRC, ISDA and their industry-wide working groups, to improve and strengthen IBOR fallbacks. We intend to align with ISDA to include revised fallback language in our rules at a time which is concurrent with amendments or New Definitions being adopted across the OTC derivative marketplace, while reserving the right to make necessary adjustments based on consultations with our clients.

In May 2019, ISDA commenced further consultations relating to IBORs, including USD ICE LIBOR. CME Group continues to work closely with ARRC, ISDA and our clients in relation to these issues, and we will communicate our plans regarding these currencies at the appropriate times in relation to ISDA’s work to achieve consensus across the industry.

The Sterling Overnight Index Average (SONIA) is a transaction-based index that has been administered by the Bank of England (BOE) since April 2016. It has been endorsed by the Sterling Risk-Free Reference Rate Working Group (Working Group) as the preferred risk-free reference rate for Sterling Overnight Indexed Swaps (OIS).

In January 2018, the Working Group added banks, dealers, investment managers, non-financial corporates, infrastructure providers, trade associations and professional services firms. In April 2018, the BOE introduced a series of reforms of the SONIA benchmark.

CME Group is engaged in several financial industry efforts to examine ICE LIBOR’s long-established role as the world’s most important interest rate benchmark, including participation in the ARRC.

Read "What's Next for ICE LIBOR and Eurodollar Futures?"

As a prominent ICE LIBOR-reference liquidity pool, CME Eurodollar futures and options remain as strong and reliable as ever. 

Market practitioners continue to use CME Eurodollar futures and options as key risk management tools – in expanding numbers.

Notional shown for illustrative purposes only

The daily effective federal funds rate (EFFR) is one of the world's most influential IR benchmarks, given its role as the target used by the Federal Open Market Committee (FOMC) to guide US monetary policy. EFFR represents the interest rate on overnight federal funds, i.e, USD-denominated, domestic, unsecured, overnight borrowings by depository institutions from other depository institutions and certain other entities, primarily government-sponsored enterprises. The federal funds rate is administered by FRBNY and is based on overnight federal funds transactions reported by banks to the Federal Reserve System in the FR 2420 Report of Selected Money Market Rates. It generally changes when the FOMC announces a change in the desired target level for EFFR for management of US monetary policy.