Agency panel recommends interdealer trading switch to SOFR; move seen as catalyst for interest rate swap markets

Switching interdealer trading conventions from the current LIBOR to a new alternative rate developed (and promoted) by the Federal Reserve Bank of New York was recommended Tuesday by the federal agency overseeing the commodities markets.

In a release, the Commodity Futures Trading Commission (CFTC) said its interest rate benchmark reform subcommittee voted to endorse the Secured Overnight Financing Rate (SOFR) for U.S. dollar (USD) linear interest rate swaps as an alternative to LIBOR (London Interbank Offered Rate), set to be abandoned for use in new contracts at the end of this year.

SOFR was developed by the New York Federal Reserve Bank’s Alternative Reference Rate Committee (ARRC) to replace LIBOR.

Specifically, the CFTC said its subcommittee recommended that beginning July 26, 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 CFTC asserted.

However, the subcommittee also recommended keeping interdealer brokers’ screens for LIBOR linear swaps available for informational purposes, but not trading activity, until Oct. 22 – when the screens should be turned off altogether, the panel said.

“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,” the CFTC said. The agency added that the recommendations affect the interdealer market only, and therefore do not affect the availability of LIBOR linear swaps in dealer-to-client transactions.

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