Release Number 8449-21

CFTC’s Interest Rate Benchmark Reform Subcommittee Selects November 8 for SOFR First for Non-Linear Derivatives

October 15, 2021

The Interest Rate Benchmark Reform Subcommittee, a subcommittee of the Commodity Futures Trading Commission’s Market Risk Advisory Committee (MRAC), voted to select November 8th as the date for switching interdealer trading conventions from LIBOR to the Secured Overnight Financing Rate (SOFR) for U.S. Dollar (USD) non-linear derivatives under the MRAC’s SOFR First initiative. Acting Chairman Rostin Behnam is the sponsor of MRAC.

SOFR First, a market best practice adopted by the MRAC at its July 13, 2021 meeting, is a four-phase initiative that represents a prioritization of interdealer trading in SOFR rather than LIBOR. The first two phases of SOFR First for the transitioning of linear swaps and cross currency swaps occurred on July 26, 2021 and September 21, 2021. 

SOFR First for non-linear derivatives is the third phase of the initiative and is recommended to occur on November 8, 2021. Specifically, starting November 8, 2021, interdealer brokers are encouraged to change USD non-linear derivative trading conventions to SOFR, and 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. For SOFR First purposes, USD non-linear derivatives include swaptions, caps and floors. Other products like exotic options, Bermudan options and constant maturity swaps are not included, and may continue trading in the interdealer market after November 8, 2021. 

SOFR First for non-linear derivatives is focused on the interdealer market only, and therefore does not impact the availability of USD LIBOR non-linear derivatives in dealer-to-client transactions. While dealers may still execute USD LIBOR non-linear derivatives with clients after November 8, 2021, the U.S. banking regulators’ guidance states that dealers should cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. 

The fourth and last phase of SOFR First will involve exchange-traded derivatives with timing to be determined.

See SOFR First for Non-Linear Derivatives Frequently Asked Questions here.

SOFR First is the work of the MRAC and does not necessarily reflect the views of the Commodity Futures Trading Commission.