Release Number 8394-21

CFTC’s Interest Rate Benchmark Reform Subcommittee Recommends July 26 for Transitioning Interdealer Swap Market Trading Conventions from LIBOR to SOFR

June 08, 2021

— The CFTC’s Market Risk Advisory Committee’s (MRAC) Interest Rate Benchmark Reform Subcommittee voted to recommend a market best practice for switching interdealer trading conventions from LIBOR to the Secured Overnight Financing Rate (SOFR) for U.S. Dollar (USD) linear interest rate swaps. This MRAC Subcommittee initiative, referred to as “SOFR First,” is the third recommendation this Subcommittee has referred to the MRAC for consideration in connection with the transition of USD derivatives and related contracts away from LIBOR. Acting Chairman Rostin Behnam is the sponsor of MRAC

SOFR First, a best practice modeled after the U.K.’s SONIA First, represents a prioritization of interdealer trading in SOFR rather than LIBOR. Specifically, the Subcommittee recommends that on July 26, 2021 and thereafter, interdealer brokers replace trading of LIBOR linear swaps with trading of SOFR linear swaps. This step will cause trading activity amongst swap dealers on these platforms, which account for a substantially large share of trading in the interest rate swap markets, to switch from LIBOR to SOFR. The SOFR First best practice recommends keeping interdealer brokers’ screens for LIBOR linear swaps available for informational purposes, but not trading activity, until October 22, 2021. After this date, these screens should be turned off altogether. Given most tenors of USD LIBOR will continue to be published until June 30, 2023, the Subcommittee views it as appropriate that the rate remain accessible in the interdealer market as a basis to SOFR for risk management purposes as highlighted in the U.S. banking regulators’ supervisory guidance. SOFR First recommendations are focused on the interdealer market only, and therefore do not impact availability of LIBOR linear swaps in dealer-to-client transactions.

“I commend the Interest Rate Benchmark Reform Subcommittee on the development of SOFR First and its forward-thinking approach to increasing overall SOFR derivatives trading in order to facilitate a smooth transition of exposures from LIBOR to SOFR. SOFR First’s milestone date of July 26, 2021 is consistent with, and is designed to complement, U.S. banking regulators supervisory guidance that banks should cease entering into new contracts that use USD LIBOR as a reference rate at the end of 2021. Many thanks to the Subcommittee for their hard work on this important contribution to the benchmark reform effort,” said Acting Chairman Behnam. 

The Subcommittee’s recommendations will be submitted to the MRAC for consideration. The views, analyses, and conclusions expressed regarding SOFR First reflect the work of the MRAC Interest Rate Benchmark Reform Subcommittee, and do not necessarily reflect the views of the MRAC, the Commission or its staff, or the U.S. government.

See SOFR First Frequently Asked Questions here and under Related Links.