Tuesday, 26 October 2021

SOFR and ESTR: a real boom?

Over the last months, our analysis in relation to ESTR and SOFR has been something like "small improvements".

This week the summary could be: a real boom!

The situation is very different in USD-SOFR and in EUR-ESTR, even if the result are similar.


Let's start with the EUR-ESTR. EONIA has been the main overnight benchmark up to recently even if EONIA is derived from ESTR as ESTR+8.5 bps since October 2019. In two years, the real underlying had not been able to overtake the old and broken incumbent. EONIA will stopped to be published as of 1 January 2022.

On 15 October, the CCPs have cancelled the existing EONIA swaps and replaced them by ESTR swaps. No more EONIA swaps at CCPs but many ESTR swaps. This is clearly visible in the graph below (LCH volumes).

Note that at almost the same time (on 21 October), the EU published a text of law mandating the replacement of EONIA by ESTR + 8.5 bps. When it was announced that EONIA data collection would be stopped (somewhere in 2018) and replaced by ESTR + spread, Marc said that he believed that the synthetic EONIA would last for very long. He was quickly proven wrong with the announcement that EONIA publication would be stopped on 1 January 2022.

Now he is proven right again by the law! Three years were no enough to deal with this transition. This is in line with another (even older) prediction: Change of benchmark overnight index is a difficult task. Another prediction was that EONIA would stay for a very long time in bank systems as a fixing and as a curve. Note that the EONIA replacement by ESTR+8.5bps is only for contracts for which the EU law applies.


For SOFR, there was no specific news, but a real progress in term of volume nevertheless.

A significant increase in absolute volume both at LCH and in the ISDA figures (US regulatory figures). The relative volume is still below the 15% of the total LIBOR + SOFR. The USD market is still far away from SOFR first!