Grygo is the chief content officer for FTF & FTF News.
Just in case you were wondering, the CFTC is doing its part for interdealer brokers transitioning from the ill-fated Libor reference rate to the Secured Overnight Financing Rate (SOFR) for U.S. Dollar (USD) non-linear derivatives, which are instruments whose rewards are not set in stone like swaps, futures, and forwards.
In fact, the regulator has specified that the USD non-linear derivatives in scope for the transition are: swaptions, caps and floors. and exotic options. “Bermudan options and constant maturity swaps are not included and may continue trading in the interdealer market after November 8, 2021,” the CFTC says.
Overall, though, the CFTC’s Interest Rate Benchmark Reform Subcommittee of the Market Risk Advisory Committee (MRAC) recently “voted to select November 8 as the date for switching interdealer trading conventions from LIBOR to under the MRAC’s SOFR First initiative,” according to a statement from the regulator.
To remind you, the SOFR First effort is a set of “market best practices adopted by the MRAC at its July 13, 2021, meeting,” and there are four phases that focus on interdealer trading in SOFR rather than LIBOR, according to the CFTC. “The first two phases of SOFR First for the transitioning of linear swaps and cross currency swaps occurred on July 26, 2021, and September 21, 2021.”
So, the third phase of SOFR First targets non-linear derivatives.
“Specifically, starting November 8, 2021, interdealer brokers are encouraged to change USD non-linear derivative trading conventions to SOFR, and dealers are encouraged to specify physical settlement for SOFR-based swaptions until a benchmark for SOFR swap rates is published in a tradeable form and ISDA publishes updated settlement provisions for the USD SOFR ICE Swap Rate,” according to CFTC.
The SOFR First for non-linear derivatives phase “is focused on the interdealer market only, and therefore does not impact the availability of USD LIBOR non-linear derivatives in dealer-to-client transactions,” according to the CFTC.
“While dealers may still execute USD LIBOR non-linear derivatives with clients after November 8, 2021, the U.S. banking regulators’ guidance states that dealers should cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021,” officials add.
The final phase of SOFR First will be for “exchange-traded derivatives with timing to be determined,” the CFTC says.
More details about SOFR First can be found here: https://bit.ly/3DWg653
And the regulator has set up another resource — Frequently Asked Questions about SOFR First for Non-Linear Derivatives — here: https://bit.ly/3G34b7u
The regulator has also issued an unusual disclaimer: “SOFR First is the work of the MRAC and does not necessarily reflect the views of the Commodity Futures Trading Commission.”
FTF News hopes that all firms find their way to SOFR even if it is nonlinear.
Need a Reprint?