The Interest Rate Benchmark Reform Subcommittee ("Subcommittee") of the CFTC Market Risk Advisory Committee ("MRAC") recommended that interdealer brokers switch trading conventions from LIBOR to SOFR for USD ("USD") non-linear derivatives beginning on November 8, 2021.
The recommendation represents the third phase of the SOFR First initiative. The recommendation applies to swaptions, caps and floors, but excludes "exotic" options such as Bermudan options and constant maturity swaps, which may continue trading in the interdealer market after November 8, 2021.
The Subcommittee emphasized that "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" (emphasis in original). The related FAQ clarifies, among other things, that once the USD SOFR ICE Swap Rate is available in a tradeable form, the Subcommittee will encourage brokers and dealers to select the most appropriate documentation for SOFR-based swaption transactions.
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