THE ALTERNATIVE REFERENCE RATE STORY

SOFR, SONIA and Other Alternative Reference Rates

Alternative Reference Rate Initiatives

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.

To explore the background and rates, click the links below

U.S. Alternative Reference Rate Developments

The Alternative Reference Rates Committee (ARRC) is a group of market participants and official-sector entities convened by the U.S. Federal Reserve Board to help ensure successful adoption of its recommended alternative, SOFR and improved IBOR fallbacks. The ARRC’s Paced Transition Plan has encouraged adoption of SOFR in cash and derivatives markets and contributed to the development of the derivatives market, as set out in the timeline below.

Following the SOFR benchmark’s first publication in April 2018, CME Group launched SOFR futures in May 2018. CME Group also added OTC clearing capabilities for SOFR-based interest rate swaps in October 2018. These initiatives are progressing very well, with 10.2M SOFR futures traded and 44.5B in SOFR swaps cleared as of December 31, 2019.

CME Group continues to work with clients and regulators to ensure that each step of the Paced Transition Plan is widely supported by market participants. For example, we are collaborating with market participants on how to accelerate SOFR’s use in price alignment and discounting in OTC USD derivatives in place of the Fed Funds rate.

Improved, ARR-based ICE LIBOR Fallbacks

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.

Fallbacks for Derivatives

Fallbacks for Cash Market Products

SOFR

SOFR is a broad measure of the cost of borrowing USD cash overnight, collateralized by U.S. Treasury securities.

Though the market is still building, SOFR has a growing notional amount of floating rate instruments tied to it.

Key Benefits


Transaction-based


Calculated from overnight US Treasury repurchase (repo) activity 


Underpinned by around $975B of daily transactions

"SOFR is a good representation of general funding conditions in the overnight Treasury repo market. As such, it will reflect an economic cost of lending and borrowing relevant to the wide array of market participants active in the market..."

- ARRC

Resources

Setting the Stage for SOFR

J.P. Morgan has compiled an in-depth review of ICE LIBOR benchmark reform and its implications for the markets.

ARR Committee

The ARRC is planning the transition from USD ICE LIBOR to SOFR. Visit the ARRC homepage for more information.

What is SOFR

CME Group offers an educational course introducing SOFR as a reference rate as well as some information about CME SOFR futures.

A User’s Guide to SOFR

The Federal Reserve Bank of New York (FRBNY) provides an introduction on how to use SOFR in cash products, including background for SOFR and much more.

October 2020 Discounting

CME Group’s proposal for transitioning price alignment and discounting for OTC cleared swaps from EFFR to SOFR.

SOFR Strip Rates

CME SOFR Strip Rates provide an indicative view into forward-looking expectations for overnight Treasury repo rates as reflected by SOFR.

CME SOFR futures, options and cleared swaps

CME Three-Month SOFR (SR3) futures and One-Month SOFR (SR1) futures launched on May 7, 2018. Their volume and OI growth has placed them among the most successful new products in CME Group’s 171-year history.

In October 2018, CME Group added clearing of OTC SOFR-based swaps.
Explore Cleared OTC SOFR Swaps

In January 2020, CME Group added SOFR options, giving clients a holistic solution for managing SOFR price risk across futures, options, and cleared swaps.
Explore SOFR options

€STR and SOFR Discounting Transitions for Cleared Swaps

As the €STR and SOFR discounting transitions approach, watch three quick educational videos to answer common questions and discuss how CME Group can help you smoothly navigate these events.
Learn more

SONIA

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.

Key Benefits


Transaction-based


Wholesale based (beyond Interbank)


Underpinned by £40-50B daily transactions

Resources

Key Features and Policies: SONIA Outline

The BOE provides an overview of SONIA benchmark determination, publication and governance.

SONIA as the RFR and Approaches to Adoption

The BOE provides a detailed look into adoption approaches for SONIA and why SONIA was chosen as the preferred RFR for GBP ICE LIBOR.

What is SONIA

Watch an educational course about the SONIA rate as well as an introduction to SONIA futures at CME Group. 

SONIA newsletter

Sign up for SONIA newsletter.

CME SONIA Futures

CME MPC SONIA futures and Quarterly IMM SONIA futures launched on October 1, 2018, and have rapidly gained traction in the marketplace.

What’s Next for ICE LIBOR?

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?"

Watch Webinar: LIBOR Fallbacks for Eurodollars


No end date

There is no set end date for ICE LIBOR publication.


Adoption

U.S. dollar fixed income market participants may adopt the new interest rate benchmark.


Broad Implications

ICE LIBOR has broader implications beyond CME Eurodollar futures.


Improved fallbacks

If ICE LIBOR were discontinued, there are several layers of fallback provisions for all remaining obligations.

Continued Growth in CME Eurodollar Futures and Options

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.

2019 ADV and OI for ED Futures and Options in USD Notional Equivalent

  Average Daily Volume Average Daily Open Interest
Futures

$2.7 Trillion

$12.6 Trillion

Options $1.7 Trillion

$56.1 Trillion

Notional shown for illustrative purposes only

 

CME Eurodollar Futures and Options

Eurodollar futures and options are the preferred tool for professional traders who want to express a view on future interest rate moves.

Effective Federal Funds Rate

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.

Fedwatch tool

BoE tool

CME Fed Fund Futures and Options

30-Day Fed Fund futures and options are one of the most widely used tools for hedging short-term interest rate risk.

SOFR, SONIA and ICE LIBOR: Side by Side

SOFR

  • Secured
  • Overnight
  • $975B underlying daily volume
  • Administered by FRBNY
  • Based on transaction data from multiple segments of the Treasury GC repo market: tri-party (collected from Bank of New York Mellon and FICC GCF Repo service) and bilateral (collected from FICC Delivery-versus-Payment repo service)

SONIA

  • Unsecured
  • Overnight
  • £40-50B underlying daily volume
  • Administered by BOE
  • Based on transaction data reported daily by banks to BOE in Form SMMD

ICE LIBOR

  • Unsecured
  • Overnight, 1-week, 1-, 2-, 3-, 6-, and 12-month maturities for each of CHF, EUR, GBP, JPY, and USD
  • $500M underlying daily volume*
  • Administered by ICE Benchmark Administration Ltd
  • Based on submissions from a panel of contributor banks (16 for each of USD and GBP)

Data sourced from JPMorgan, CME Group

Other Alternative Reference Rates

€STR: Euro Short-Term Rate

ADMIN: ECB | Unsecured

TONAR: Tokyo Overnight Average Rate

ADMIN: Bank of Japan | Unsecured

SARON: Swiss Average Rate Overnight

ADMIN: SIX Swiss Exchange | Secured

TIEE: Interbank Equilibrium Interest Rate

ADMIN: Bank of Mexico | Secured