Transition from LIBOR to SOFR in exchange-traded options market aim of latest initiative

The announcement of an initiative to increase secured overnight financing rate (SOFR) options trading based on a “deep and liquid marketplace” by a derivatives exchange was applauded Thursday by the Federal Reserve group that established the SOFR rate as an alternative to the now-defunct London Interbank Offered Rate (LIBOR).

According to the Alternative Reference Rates Committee (ARRC), a Federal Reserve-sponsored group that charged with developing and implementing an alternative to LIBOR, the initiative – known as the SOFR First for Options – “will help propel successful transition of the exchange-traded options market, one of the last key remaining markets that still needs to shift away from U.S. dollar (USD) LIBOR ahead of its cessation in mid-2023.”

The initiative was sponsored by CME Group of Chicago, which calls itself the world’s largest financial derivatives exchange; it trades in asset classes that include agricultural products, currencies, energy, interest rates, metals, stock indexes and cryptocurrencies futures. The CME Group action was also announced Thursday.

According to the ARRC, the initiative will begin operation next month and in July. The group said other steps to be taken include providing a market-wide fee waiver for SOFR options in June and July, “accompanied by introducing additional market making incentives during this period to help enhance liquidity in all venues.”

CME Group will also sunset the listing of long-dated quarterly Mid Curve and Eurodollar options which, upon expiration, will be replaced by SOFR options, the ARRC said.

In a statement, John C. Williams, president of the Federal Reserve Bank of New York and co-chair of the Financial Stability Board’s Official Sector Steering Group said moving exchange-traded options to reference rates such as SOFR is essential to moving away from U.S. dollar LIBOR). “This initiative will play an important role in accelerating growth in SOFR options trading, so that we can use the final 12 months until LIBOR ends to focus on addressing legacy contracts,” he said.

LIBOR is only in effect for existing contracts until June 30, 2023; new contracts were no longer written using LIBOR after the first of this year.

ARRC Welcomes CME Group’s SOFR First for Options Announcement