A Chicago-based futures and options trading firm is recommended as the administrator for the Federal Reserve’s alternative to the London Interbank Offered Rate (LIBOR), which is scheduled to be discontinued at year’s end.
The Fed’s Alternative Reference Rates Committee (ARRC) said it selected CME Group of Chicago as the administrator that it plans to recommend for a forward-looking Secured Overnight Financing Rate (SOFR) term rate, once market indicators for the term rate are met. SOFR is being developed as an alternative to LIBOR, which will become defunct at the end of the year (and which will become defunct for existing contracts June 30, 2023).
According to a May 6 release by ARRC, that set of market indicators is designed to measure progress in establishing deep and liquid SOFR derivatives and cash markets. Designating an administrator for the term rate is a step toward recommending the forward-looking SOFR term rate.
Along those lines, the group said the selection of CME Group builds on previous actions (including issuance of term rate principles and term rate market indicators) “which together provide clear guidance that would allow the ARRC to recommend a SOFR-based term rate relatively soon.”
According to the ARRC, market indicators to be considered in recommending a term rate are:
- Continued growth in overnight SOFR-linked derivatives volumes.
- Visible progress to deepen SOFR derivatives liquidity, consistent with ARRC best practices:
- Offering electronic market-making and execution in SOFR swaps and swap spreads;
- Changing the market convention for quoting USD derivative contracts from LIBOR to SOFR;
- Making markets in SOFR-linked interest rate volatility products (including swaptions, caps, and floors).
- Visible growth in offerings of cash products, including loans, linked to averages of SOFR, either in advance or in arrears.
The ARRC, in a release, said it identified CME Group’s submission as the strongest proposal offered in response to its request for proposal (RFP). The group said it evaluated proposals based on four specific criteria: technical criteria, firm criteria, public policy criteria, and calculation methodology criteria.