ARRC Welcomes CME’s SOFR First for Options

Basel Committee Consults on Interest-Rate Risk

The Alternative Reference Rates Committee (ARRC) applauds CME Group’s announcement regarding the launch of SOFR First for Options, an initiative aimed at accelerating the growth of Secured Overnight Financing Rate (SOFR) options trading. This significant initiative is consistent with supervisory guidance and the ARRC’s recommendation to cease entering into new LIBOR contracts immediately, as well as the Commodity Futures Trading Commission Market Risk Advisory Committee’s SOFR First recommendation.

In particular, SOFR First for Options will help propel successful transition of the exchange-traded options market, one of the last key remaining markets that still needs to shift away from U.S. dollar (USD) LIBOR ahead of its cessation in mid-2023.

Specifically, CME Group announced today that under its SOFR First for Options initiative set for June and July of this year, it will be taking additional steps to build on the impressive growth already seen in SOFR futures to help significantly increase SOFR options trading based on a deep and liquid marketplace. These steps include providing a market-wide fee waiver for SOFR options in June and July, accompanied by introducing additional market making incentives during this period to help enhance liquidity in all venues.

CME Group will also sunset the listing of long-dated quarterly Mid Curve and Eurodollar options which, upon expiration, will be replaced by SOFR options.

“Moving exchange-traded options to robust reference rates like SOFR is essential to accomplishing a successful transition away from U.S. dollar LIBOR,” said John C. Williams, President of the Federal Reserve Bank of New York and Co-Chair of the Financial Stability Board’s Official Sector Steering Group. “This initiative will play an important role in accelerating growth in SOFR options trading, so that we can use the final 12 months until LIBOR ends to focus on addressing legacy contracts.”

“The transition of exchange-traded options to SOFR is another important milestone and step forward in the shift away from U.S. dollar LIBOR,” said Rostin Behnam, Chairman of the U.S. Commodity Futures Trading Commission. “Increasing SOFR options trading will further develop overall SOFR derivatives liquidity and bolster the transition effort as we focus our collective efforts on the last 12 months of LIBOR.”

“CME Group’s SOFR First initiative is a critical tool for increasing SOFR options liquidity now,” said Tom Wipf, ARRC Chairman and Vice Chairman of Institutional Securities at Morgan Stanley. “This strategy builds upon the notable progress we have already seen in SOFR futures, so move now to make sure that you are prepared.”

Source: ARRC

Sean Tully, CME Group Senior Managing Director, Rates and OTC Products, said in an email:

“Building on the success of previous SOFR First initiatives, we are pleased to work with the marketplace to make it as attractive as possible for all market participants to adopt SOFR options for new, short-term, U.S. dollar interest rate risks best managed using options. Since the start of LIBOR transition, CME Group has worked tirelessly with our customers, regulators, the ARRC and the entire U.S. dollar interest rate community to build the products and infrastructure needed to ensure long-term, seamless continuity of the estimated $220 trillion in derivatives, cash and loan market products tied to USD LIBOR today. We look forward to working with our clients and the industry to propel SOFR options liquidity even further forward.”

Related articles

  1. Derivatives clearing obligation is being adapted as part of the interest rate benchmark reform.

  2. Buy Side Responds to Esma on Clearing Swaps

    Reasonable steps should be taken to make derivatives referencing €STR available to customers.

  3. Basel Committee Consults on Interest-Rate Risk

    LCH SwapAgent said trade highlights its coordination of the transition to risk free rates for non-cleared OTC ...

  4. Nasdaq has ambitions to launch futures on carbon removals as the market grows.

  5. Anticipated Ethereum Merge has increased demand to hedge risk on a regulated venue.