SOFR Risk 30% of USD Market

Shanny Basar
Portware Integrates Markit TCA

SOFR risk now accounts for 30% of the US dollar rates markets according to Clarus Financial Technology, which the derivatives analytics provider was due to the regulatory “SOFR First” initiative.

Regulators set Monday 26 July as “SOFR First” for interbank markets.

The Commodity Futures Trading Commission’s Market Risk Advisory Committee said SOFR First represents a prioritization of trading in SOFR, the Secured Overnight Financing Rate, rather than US dollar Libor. Regulators want market participants to decrease reliance on Libor by the end of this year, when many Libor rates will be discontinued.

After the financial crisis there were a series of scandals regarding banks manipulating their submissions for setting benchmarks across asset classes, which led to a lack of confidence and threatened participation in the related markets. As a result, regulators have increased their supervision of benchmarks and want to move to risk-free reference rates based on transactions, so they are harder to manipulate and more representative of the market. The US Alternative Reference Rates Committee (ARRC) selected SOFR to replace US dollar Libor, although other new reference rates have also been launched

Chris Barnes at Clarus wrote in a blog that SOFR First appears to have been successful.

“If we ballpark markets as 50% client activity and 50% interdealer activity, this data suggests that 50% of interdealer activity is now versus SOFR. That is impressive !”, said Barnes.

Clarus is reasonably confident that SOFR risk now accounts for 30% of the US dollar rates market, compared to 7% in July before the SOFR First initiative was announced.

Barnes expects August 2021 will be a record month for total SOFR risk traded based on LCH SwapClear weekly data. The volumes will be confirmed next week when clearing houses public their August statistics for RFRF activity.

Colm Murtagh, Head of U.S. Institutional Rates at Tradeweb, also said in a blog that SOFR trading on Tradeweb as a percentage of new risk reached a weekly record for 2021 in August.

In addition, the spread between the average composite bid-offer in SOFR compared to Libor tightened across tenors on Tradeweb.

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