CME Group plans to convert eurodollar futures and options open interest into corresponding secured overnight financing rate (SOFR) contracts on April 14, 2023, under the company’s previously adopted fallbacks plan.
SOFR is a short-duration benchmark rate in which U.S.-based financial institutions pay each other for overnight loans. It succeeded Libor at the beginning of 2022.
Unlike Libor, which relied on estimated borrowing rates set by the trading desks, SOFR is based on actual transactions in the repurchase market and borrowers post reassuring collateral, such as US Treasuries.
Eurodollar futures and options contracts that expire before June 30, 2023 are excluded from this proposal and will continue to trade until their expiry.
“Our proposed conversion date will help our clients complete their operational work as early as possible in the transition process, while closely aligning with the recently published industry timelines for over-the-counter interest rate swaps,” said Agha Mirza, global head of rates and OTC products at CME Group.
He added, “SOFR futures and options are now the leading liquidity pool, as open interest has reached approximately 19 million contracts and volume has significantly outpaced Eurodollars. Based on this growth, today’s announcement provides a practical timeline by which clients can bring remaining Eurodollar contracts into the SOFR market.”
Ahead of the final conversion under fallbacks, liquid standard and reduced-tick Inter-Commodity Spread (ICS) instruments are available to facilitate the voluntary conversion of Eurodollar open interest via the SED Spread for futures and the LS Spread for options.
In addition, CME plans to add SOFR options to its portfolio margining solution for cleared products in December 2022, subject to regulatory approval.
Portfolio margining enables clients to reduce margin requirements by offsetting their exposure on cleared swaps versus interest rate futures and options.
Figures from CME show that SOFR is becoming the dominant reference rate. In July, an average volume of $2.55 trillion of futures and options contracts tied to SOFR changed hands daily compared to just $151.55 billion last year.