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 LIBOR fallback contract language across asset classes.

Central banks and endorsed committees have identified ARRs for certain currencies that rely on 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 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 3.5M SOFR futures traded in the first year.

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 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 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

ISDA published final results of its non-USD IBOR derivatives fallbacks consultation in December 2018, and issued its USD derivatives fallback consultation in May 2019

ISDA also published an additional consultation on pre-cessation issues for LIBOR and certain other IBORs in May 2019.

Fallbacks for Cash Market Products

The ARRC published recommended LIBOR fallback language for floating rate notes and syndicated loans on April 25, 2019, and published recommendations for bilateral business loans and securitizations on May 31, 2019.

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 LIBOR benchmark reform and its implications for the markets.

Alternative Reference Rates Committee

The ARRC is planning the transition from USD 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.

CME SOFR Futures and Cleared OTC SOFR 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

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 LIBOR.

What is SONIA

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

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 LIBOR?

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

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


No end date

There is no set end date for LIBOR publication.


Adoption

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


Broad Implications

LIBOR has broader implications beyond CME Eurodollar futures.


Improved fallbacks

If 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 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.

H1 2019 ADV and OI for ED Futures and Options in USD Notional Equivalent

  Average Daily Volume Open Interest
Futures

$3.1T

$12.7T

Options

$2T

$65T

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.

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 LIBOR: Side by Side

SOFR

  • Secured
  • Overnight
  • $700B+ 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

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

EXPECTED LAUNCH: October 2019 | ADMIN: ECB | Unsecured

TONAR: Tokyo Overnight Average Rate

LAUNCH: Live | ADMIN: Bank of Japan | Unsecured

SARON: Swiss Average Rate Overnight

LAUNCH: Live | ADMIN: SIX Swiss Exchange | Secured