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As part of the final phase of the SOFR First Initiative, the CFTC Market Risk Advisory Committee ("MRAC") recommended that market participants (i) "transact in SOFR exchange-traded derivatives as soon as possible" and (ii) adopt the best practice of replacing LIBOR with SOFR for new contracts after year-end 2021.
The SOFR First Initiative, a four-phase plan adopted in July 2021 (see previous coverage), provides a series of best practice recommendations for a smooth transition away from USD LIBOR to SOFR. Market participants "noted improved liquidity and trading conditions for impacted SOFR-based interest rate derivatives" following the implementation of the previous three phases.
The fourth and final stage of the initiative offered guidelines for the transition of certain exchange-traded derivatives, and provided clarity with respect to:
- Eurodollar futures and options;
- SOFR futures and their growing volume;
- the possible decrease in liquidity for LIBOR contracts after year-end 2021; and
- the creation of products to assist in the risk transfer from Eurodollar futures to SOFR futures in advance of USD LIBOR's cessation on June 30, 2023.
The MRAC subcommittee said that because there is no identifiable "interdealer" market for exchange-traded LIBOR instruments, there is no specific pre-2021 date to transition. Instead, the subcommittee encouraged all market participants to adopt the best practice of replacing LIBOR with SOFR after end of 2021.
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