SOFR First for More Cross-Currency Derivatives

The Interest Rate Benchmark Reform Subcommittee, a subcommittee of the Commodity Futures Trading Commission’s Market Risk Advisory Committee (MRAC), announced that it has selected December 13 to switch interdealer trading conventions from LIBOR to the Secured Overnight Financing Rate (SOFR) for the U.S. dollar (USD) leg of newly-executed cross-currency derivatives under the MRAC’s SOFR First initiative. Acting Chairman Rostin Behnam is the sponsor of MRAC.

SOFR First, a market best-practice that the MRAC adopted at its July 13, 2021 meeting, is a four-phase initiative that represents a prioritization of interdealer trading in SOFR rather than LIBOR. [See CFTC Press Release No. 8409-21] As adopted, the second phase of SOFR First, involving the transitioning of cross-currency derivatives, was comprised of two parts. Part I recommended cross-currency swaps referencing USD, Swiss Franc (CHF), Japanese Yen (JPY), and British Pound (GBP) utilize risk-free reference rates (RFRs) in each currency instead of LIBOR as of September 21, 2021 (RFR First). Part II is intended to address the transition of other currencies at a later date.

SOFR First for additional cross-currency derivatives is Part II of SOFR First’s second phase and is recommended to occur on December 13, 2021. This recommendation is intended to capture the USD leg of all other cross-currency derivative transactions, regardless of the accompanying non-USD currency leg. Specifically, starting on December 13, 2021, interdealer brokers are encouraged to change the USD leg of newly-executed cross-currency derivatives from USD LIBOR to SOFR. For SOFR First purposes, cross-currency derivatives include cross-currency basis swaps where one leg of the transaction is quoted in USD. Typically, the USD leg incorporates USD LIBOR in such transactions (except where the transaction is covered by RFR First, which occurred on September 21, 2021).

The first and third phases of SOFR First for the transitioning of linear swaps and non-linear derivatives occurred on July 26, 2021, and November 8, 2021, respectively. [See CFTC Press Release Nos. 8394-21 and 8449-21] The fourth and last phase of SOFR First is forthcoming and will involve exchange-traded derivatives.

See SOFR First for Additional Cross-Currency Derivatives Frequently Asked Questions here and under Related Links.

SOFR First is the work of the MRAC and does not necessarily reflect the views of the Commodity Futures Trading Commission.

Source: CFTC