On July 13, 2021, the CFTC’s Market Risk Advisory Committee (“MRAC”) formally adopted a market best practice for switching interdealer trading conventions from LIBOR to the Secured Overnight Financing Rate (“SOFR”) for U.S. dollar linear interest rate swaps, cross currency swaps, non-linear derivatives and exchange traded derivatives. This initiative (referred to as “SOFR First”) was initially recommended by the MRAC’s Interest Rate Benchmark Reform Subcommittee (“Subcommittee”) on June 8, 2021 for U.S. dollar linear interest rate swaps. It is a best practice modeled after the U.K.’s “SONIA First” and represents a prioritization of interdealer trading in SOFR rather than LIBOR.

SOFR First has four phases with phase one, involving U.S. dollar linear swaps, recommended to occur on July 26, 2021. Specifically, on July 26, 2021 and thereafter, interdealer brokers would replace trading of LIBOR linear swaps with trading of SOFR linear swaps. The SOFR First market best practice recommends keeping interdealer brokers’ screens for LIBOR linear swaps available for informational purposes, but not trading activity, until Oct. 22, 2021. After this date, these screens should be turned off altogether.

The remaining SOFR First phases involve cross currency swaps, non-linear derivatives and exchange traded derivatives. The MRAC’s adopted recommendations include SOFR First trading convention switches for these additional LIBOR products prior to the end of 2021. The switch from LIBOR to SOFR for cross currency swaps is expected to occur on Sept. 21, 2021. The Subcommittee has not confirmed the dates non-linear derivatives and exchange traded derivatives are expected to switch from LIBOR to SOFR.

The Alternative Reference Rates Committee (“ARRC”), in a separate announcement, commended the MRAC for its actions. Previously, the ARRC outlined a set of indicators it would consider in formally recommending the CME Group Inc. (“CME”) forward-looking SOFR term rates. Completion of the Subcommittee’s proposed change in interdealer trading conventions, scheduled for July 26, 2021 as adopted by the MRAC, would satisfy one such market indicator, allowing the ARRC to formally recommend the CME SOFR term rates very shortly thereafter.

Key Publications

CFTC Market Risk Advisory Committee Adopts SOFR First Recommendation at Public Meeting

ARRC Commends the CFTC Market Risk Advisory Committee’s Formal Adoption of a Recommendation on Transitioning Interdealer Derivatives Market Trading Conventions to SOFR