United States: MRAC Subcommittee Recommends LIBOR Switch To SOFR For “Non-Linear” Derivatives
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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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