A Federal Reserve-developed alternative to a now-defunct (and soon to be eliminated) interest rate standard has become the dominant benchmark in the market, according to the group that developed the alternative.
The Alternative Reference Rates Committee (ARRC) said in a release Friday that its Secured Overnight Financing Rate (SOFR) has become the “dominant” benchmark rate. SOFR was developed by the ARRC (with the Federal Reserve) to replace the London Interbank Offered Rate (LIBOR), which was discontinued last year. As of June 30, LIBOR can no longer be used by existing contracts (that is, those that were in force when LIBOR was discontinued).
The ARRC asserted that there is “continued momentum” in the transition from LIBOR to SOFR, with SOFR predominant across cash and derivatives markets.
The group said SOFR swaps have consistently accounted for more than 85% of daily volumes on average of interest rate risk traded in the outright linear swaps market since June 2022, while LIBOR swaps have accounted for less than about 10% of the overall volume over the same period.
The ARRC also said that average daily SOFR futures volumes steadily increased throughout last year and the beginning of this year. “Average daily SOFR futures volumes remain well above average daily Eurodollar futures volumes,” the ARRC said. “Conversely, average daily Eurodollar volumes have diminished considerably throughout 2022 and the beginning of 2023.”
The group also said it continues to recommend that market participants remediate contracts referencing the U.S. dollar LIBOR intercontinental exchange (ICE) Swap Rate, including via adhering to the International Swaps and Derivatives Association (ISDA) fallbacks, “particularly as neither the LIBOR Act nor the FCA’s ‘synthetic powers’ extend to the ICE Swap Rate,” the group said, referring to the United Kingdom’s Financial Conduct Authority.