Wednesday 10 November 2021

Volume in overnight-indexed derivatives


With the disappearance of EONIA (at least in the cleared world), ESTR continues in line with previous weeks.


SOFR also continues to progress. But still below 15% of the IR derivatives (as reported by ISDA Swap Info) and far away from SOFR first.

On Monday (2021-11-08), IBA launched the USD SOFR ICE Swap Rate.


CHF-LIBOR is disappearing in roughly 6 weeks. SARON, its only competitor, continues to progress slowly. We would not say it is a complete victory yet.

USD futures

On the Exchange Trade (Futures) side, LIBOR is still the USD leader, by a wide margin.

If we zoom in on the alternatives, we see a host of other contract types. Beyond SOFR, there is EFFR, BSBY and AMERIBOR. The good old Fed Fund futures (1 month, arithmetic average) is still the most traded contract after LIBOR on some days. The volumes for BSBY and AMERIBOR are significantly smaller by not completely negligible. They also help to assess the value transfer embedded in the LIBOR fallback.

LIBOR contract beyond July 2023 will be converted in SOFR-3M futures in June 2023. Still more liquidity in the LIBOR futures than in SOR futures even after July 2023. Why? Two hypothesis: one not good for the state to the financial industry and one not good for the state of the transition.

Hypothesis 1: Financial institution not ready for SOFR futures. This can be due to valuation and risk (SOFR futures have a different convexity adjustment and a different apy-off) or operational (settlement is at the end of the period, based on compounded rate) issues. Trader would use LIBOR futures because their institution cannot cope with SOFR futures, even if they know that they are not really trading LIBOR futures. They hope than in the next 18 months their institution will be ready, but clearly they are not ready yet.

Hypothesis 2: Trader have a very good understanding of the issue but believe that there is still a chance that USD-LIBOR will not stop at end of June 2023. The LIBOR futures are trading at the ISDA/Bloomberg spread to SOFR futures. They can be seen as a free option on the non-cessation. If everything goes as planned by regulators/IBA, no loss; if cessation is postponed, a big profit (if the position is in the right direction). But that would be a one sided bet, who is taking the opposite direction? People certain of the transition? People not aware of uncertainty in the transition? People not aware of the transition?

I don't know which of the two is true or if a third hypothesis should be incorporated.

SOFR is certainly taking some volume from USD-LIBOR. But BSBY is also coming to life. A little bit of volume on the futures side (7,500 ADV or so) and commitment by the two main USD Swap clearing houses (CME and LCH) to start clearing BSBY IRS by year end. The USD Game of Benchmark is on, now more than ever.