Sunday, 26 June 2022

USD STIR Futures: SOFR progress ... but still too much LIBOR

We are six months into the "now new USD-LIBOR risk traded" period as announced by regulators. We had a look at the situation through the eyes of the STIR futures market at CME.

USD-LIBOR futures have been the most liquid STIR futures for many years. The new SOFR futures and the "SOFR First" initiatives should have shifted the volume.

In Figure 1, the daily volume at CME is displayed. One can see that SOFR-3M futures have now a higher volume than LIBOR-3M futures. But this is a recent phenomenon that appeared only in May and the advantage of SOFR is small. Over last (short) week, the SOFR volume as only 20% higher than the LIBOR volume.

Figure 1: Daily STIR Futures volume at CME.

On the open interest side, LIBOR is still largely above SOFR with an excess OI of 75%. More details are displayed in Figure 2. Moreover LIBOR OI as only decreased slightly since the start of the year, from 11.2 m contracts to 9.6 m (-16%). A large part of the decreased came when existing contracts came to expiry. Since the beginning of the year, the total LIBOR futures volume has been 265.8 m contracts. The decrease in OI correspond to 0.7% of the traded volume. We are extremely far away from a situation were the new LIBOR trades are risk reducing!

Figure 2: Open Interest in STIR Futures.

Another feature of the futures market is the expiry date of the contracts traded. LIBOR with cease in June 2023. One could claim that trading LIBOR contracts with expiry before that date make sense from a risk management perspective and is in line with the spirit of the SOFR first requirement in the sense that those trade do not add to the transition effort which is not needed before June 2023. But the expiry profile of the futures traded does not look like that at all. If we take the traded volume for quarterly contracts on Friday 24 June, we get a expiry profile displayed in Figure 3.

Figure 3: Daily volume on 24 June 2022 for the different quarterly expiries.

The SOFR-3M futures are dominating overall, but for the maturities beyond June 2023, LIBOR is dominating. The higher LIBOR volume is even more important on a relative basis for longer expiries. If we take contracts with maturity beyond 5 years (June 2027 and beyond), the LIBOR volume is 27 times higher than the SOFR volume. Is there some market participants betting on the transition not taking place in the next 5 years?

This leads to a question we have asked for some time, without finding an answer. Or more exactly finding plenty of answers, but all bad (and scary) answers. The question is

Why do financial institution still trade LIBOR futures/swaps?

In the different seminars on SOFR that we are presenting, we use the following slide to put the question in perspective.

Figure 4: Why do financial institution still trade LIBOR futures/swaps?

  • Investment universe. SOFR products not approved by the investment committee.
  • Validation Model. validation had no time to do a full validation of the new products.
  • Systems. The system (risk/accounting) cannot cope with the SOFR products / the composition in-arrears.

Those reasons are valid reason from a very short term practical perspective, but certainly not valid 5 years after the "Future of LIBOR" speech by FCA, 4 years after the creation of SOFR and 1 year after one knows about the actual cessation date. It can take time to change systems, guidelines and validate changes. But by trading LIBOR products, you are only lying to yourself and hiding your weakness to yourself, not solving any of them. At the very least I would expect participants to trade the real think (SOFR swaps and futures), without frankensteins-like fallback, and book/report them in the best way they can. That could simply be to create swaps/futures linked to SOFR term rate (same system complexity as LIBOR) and adjust the booking as soon as possible. At least you will represent the bulk of your risk correctly and link it to SOFR!

Don't hesitate to contact us for advisory work related to the transition, the associated model developments, validation, or implementation.

Wednesday, 15 June 2022

ESTR: Volume and term rate

This week, SOFR as usual (small progress) but important news on the ESTR side. EMMI (the administrator of EURIBOR and the disappeared EONIA) has started to publish a ESTR Term rate (in beta version).

The Term rates are unfortunately not part of the fallback in the derivative ISDA definition but the Euro Risk Free Rates Working Group has recommended a forward-looking term rate as a fallback for EURIBOR for certain asset classes.

This new step in the direction of a term rate is accompanied by an important surge in the ESTR-OIS volume as can be seen in Figure 1. The weekly volume was around USD 6.8 trillions. By comparison SOFR volume was around USD 3.2 trillions, less than 50%.

Figure 1: Weekly ESTR volume at LCH.

As described in several SOFR related blogs and seminars (e.g. here), the share of the ESTR short term trades (in gray in Figure 1) is quite high. The ESTR liquidity is concentrated where it is important to have a robust ESTR Term rate. This is by opposition to USD-SOFR where only a small part of the volume is short term and the recommended SOFR Term rate is based on futures which require an arbitrary interpolation schemes and un-hedgeable time weights.

Also in relative terms, ESTR is taking more importance. As displayed in Figure 2, the ESTR share has reached 60% last week, to be compared with SOFR share at 37%.

Figure 2: Weekly share by product type at LCH.

Tuesday, 7 June 2022

LIBOR to SOFR transition: 3 June figures

The week before last saw a large increase in SOFR volumes at LCH. Last week, the SOFR share stayed high, at 38.4% but in a market with lower total volume (See Figure 1 and 2).

Figure 1: Weekly share by product types at LCH


Figure 2: Weekly SOFR volume at LCH and as reported by ISDA (US regulatory figures based).

The SOFR-OIS outstanding amount continues to increase steadily to reach close to USD 35 trn (see Figure 3); the amount is now largely above the EFFR amount. But the LIBOR-IRS outstanding amount is not really decreasing. At USD 82 trn, it is higher that January figures and more than twice the size of SOFR-OIS. Even if LIBOR weekly volume have decreased, the still large transacted amounts are certainly not all risk reducing. 

Figure 3: Outstanding amounts at LCH.

Tuesday, 31 May 2022

SOFR: significant increase in OTC volume

Last week has seen a significant increase in SOFR OTC volume. At LCH, the volume has been close to 3.7 trn, well above the 3.2 trn from beginning of March. The LIBOR volume has been only slightly below the year average, at 2.7 trn. The EFFR share continues to decline also. The weekly shares are displayed in Figure 1.

Figure 1: Weekly share by product types at LCH

The absolute numbers for the volume at LCH and as reported by ISDA are in Figure 2. The ISDA figures do not show such a large increase. [Note that at the time this post was first published, the ISDA figures for the week ending 27 May were not yet available; comment and graph updated accordingly].

Figure 2: Weekly SOFR volume at LCH and as reported by ISDA (US regulatory figures based).

Monday, 23 May 2022

LIBOR: Large OTC volume! SOFR: Large ETD volume!

Big increase in LIBOR OTC swaps volume this week!

Figure 1: Weekly share by product types at LCH

But on the futures side, we had, for the first time, a couple of "SOFR First" days last week from a volume perspective. The volume of SOFR-3M futures has been above the volume of LIBOR-3M futures from Wednesday to Friday (see Figure 2). The SOFR First is only in terms of volume, not in terms of open interest. In OI terms, SOFR-3M futures represent 50% of LIBOR-3M. Actually the 50% treshold was reached on Tuesday 24 May and now stands at 50.02%!

Figure 2: Daily STIR futures volume at CME.

The open interest for LIBOR-3M futures is decreasing very slowly. Since 31 December, the OI has decrease only by 7.2%. Note also that the total volume (SOFR+LIBOR) is significantly lower than previous peaks. It is not clear if this is structural or conjectural. But with uncertainty about monetary policy path, one could have expected a larger volume.

New published paper: Swap Rate fallback: unreasonable effectiveness of approximations and alternatives

A couple of months ago, we announced that the research paper written by Marc and titled

Swap Rate: cash settled swaptions in the fallback

had been accepted for publication in Risk. The article will appear in the June edition.

Since, that research has been deepened and we are pleased to announce that the follow-up article has been already accepted for publication in Wilmott Magazine. The article is titled

Swap Rate fallback: unreasonable effectiveness of approximations and alternatives.


Cash-settled swaptions with collateral discounting are impacted by the Swap Rate fallback mechanisms decided by working groups/ISDA. The legacy vanilla swaptions are becoming exotic products, as the mechanism is based on a non-linear transformation of the OIS swap rate, and generate convexity adjustments. It turns out that those two effects almost cancel each other and lead to almost vanilla products. We analyse those cancelling effects and the risk management impacts. Based on those insights, we propose an adjusted fallback mechanism that reduces further the exotic features and simplify further the risk management of the legacy book.

The article should be published in the September issue. 

As a teaser, the graph below describes by which factor the "exoticness" of the fallback is reduced by our proposed alternative mechanism for different market movements. All the technical details are available in the paper.

Figure 1: Reduction in "exoticness" achieved by the alternative fallback proposal.

The summary of the results related to the alternative fallback method and the research paper have been communicated to the ARRC.

Added 7 June 2022: A preprint version is available on SRRN at:

Don't hesitate to contact us if you are interested by the alternative to the ISDA fallback for swap rates. Cash settled swaption fallback can be a lot simpler than the current approach. Why not simplify your transition risk at no cost?

Tuesday, 17 May 2022

LIBOR-SOFR transition - still many unknowns

We start this week with a LCH consultation regarding the Conversion of Outstanding Cleared USD LIBOR Contracts. No big surprise in the content of the consultation itself. It is roughly the same a proposal for USD in June 2023 than the one for GBP in December 2021.

But this consultation is also the occasion to remember the uncertainty surrounding cleared LIBOR trades, the OTC versions at LCH and CME but also the ETD futures versions at CME. Each trade involving a LIBOR fixing beyond June 2023 need a precise fallback. The cleared trades don't have a precise fallback yet. The existence of the consultation, almost 5 years after the "Future of LIBOR" speech, is a reminder that the transition is still unplanned. The figures below illustrate that LIBOR still attracts more volume than SOFR. But a lot of those LIBOR-linked trade are for an unknown term sheet. 

The cleared swaps term sheet can be modified unilaterally by the CCPs using unknown mechanisms. The LIBOR futures will be transformed into SOFR futures at an unknown date and with unknown mechanisms. Yes, those mechanisms have been roughly described and there is an expectation that there will be little modification of them. But remember, for the ISDA definition, there was a consultation and then after the results were announced, the actual meaning of the different fallback mechanism was decided by Bloomberg! For cleared GBP swap at LCH, it was announced that the ISDA mechanism would be copied, only to decide later that a different mechanism would be used.

As model validators, we don't understand how the trading of Eurodollar futures or cleared LIBOR swaps can be validated from a quant perspective when the exact term sheet is still unknown.

Coming back to our weekly statistics, we see that at LCH, from a volume perspective, SOFR is still third. Five months into 2022, we certainly have not achieved "SOFR First" in a stable way.

Figure 1: Weekly share by product types at LCH

Last week, the SOFR relative volume was around 29.0%. It has been lower than both the LIBOR and the EFFR volumes for several weeks now. On an absolute basis, the volume has not been increasing either. Last week volumes at LCH and as reported by ISDA are lower than the one reported in February as displayed in Figure 2.

Figure 2: Weekly SOFR volume at LCH and as reported by ISDA (US regulatory figures based).

The futures do not paint a very different picture. The volume of LIBOR-3M futures is still above the volume of SOFR-3M futures each and every day, as displayed in Figure 3.

Figure 3: Daily futures volume at CME.

The activity in LIBOR futures is certainly not all risk reducing as regulators would like. Since the beginning of the year almost 222 million LIBOR futures contract have been traded. Over the same period, the open interest in the same futures has decreased by a pale 660,000 contracts. A maximum of 0.3% of the trades are risk reducing. We say "maximum" as a certain amount of trades expired on a monthly basis — we don't have the expiry figures so cannot adjust the above figure.

Tuesday, 10 May 2022

SOFR still third and other RFR's volume decreasing

For the second week in a row, SOFR is coming third in the benchmark race at LCH. Its share is down to 27.4%.

Figure 1: Weekly share by product types at LCH

On an absolute basis, the SOFR figures are not great either. The weekly traded notional was around 2.3 trn, which is a level similar to January. The volume has peaked at 3.2 trn at the beginning of April. The SOFR volume decrease is also visible in the ISDA/US regulatory figures.

Figure 2: Weekly SOFR volume at LCH and as reported by ISDA (US regulatory figures based).

If we look at the currencies for which LIBOR has been discontinued (GBP, JPY and CHF), we see a common behavior for the outstanding amounts at LCH: they are all decreasing since the start of the year (hyphened lines). We don't have a direct explanation. It can be a combination of: better use of compression for overnight, market participants less comfortable with OIS than with IRS, transfer to other CCPs (JSCC for JPY, EUREX for CHF), or something else. But certainly it is worth keeping an eye on it as it seems common to the three currencies.

Figure 3: End of week outstanding notionals at LCH for GBP (SONIA), JPY (TONA) and CHF (SARON).

Wednesday, 4 May 2022

SOFR: one step forward, one step backward.

Just one graph this week.

We are back to "SOFR Third" at LCH!

Figure 1: Weekly share by product types at LCH

Thursday, 28 April 2022

SOFR First - Step 1.5!

One month ago we published a blog titled "SOFR First - Step 1!". This was the fist week where at LCH there was more SOFR swaps traded than LIBOR swaps. We also indicated that for STIR futures at CME, LIBOR was still well above SOFR in volume terms.

This week we can indicate that "Step 1.5" in SOFR first has been reached. The daily volume of SOFR-3M futures is still less than the LIBOR-3M one, but for the first time, there was one day (Tuesday 19 April) where the combined volume of SOFR-3M and SOFR-1M surpassed on the LIBOR-3M one. You may have received some marketing email from CME indicated this milestone — even if the mail was not clear on the fact that this was achieved only by combining SOFR-3M and SOFR-1M. If you take the contract individually, LIBOR-3M has still more volume than SOFR-3M every single day. On the 1M side, EFFR-1M has still more volume than SOFR-1M every single day. This is why we call this step by the name of "1.5". The true "Step 2" will be when SOFR-3M volume is above LIBOR-3M volume and maybe "Step 3" when SOFR-1M volume is above EFFR-1M volume.

Returning to the LCH OTC cleared side, since that first "SOFR First - step 1" week, the SOFR, EFFR and LIBOR shares have battled for the leadership. The weekly shares are provided in Figure 1. SOFR hase been the main benchmark for a couple of weeks, but still far away from registering 50% of the OTC swap volume.

Figure 1: Weekly share of product types at LCH

The volume has been flat on an absolute basis over the last 8 weeks. The increase in market share is more due to the decrease in LIBOR and EFFR than the increase in SOFR.

Figure 2: SOFR volume evolution and share among tenors.

The oustanding amount has been steadly increasing for SOFR and has now reached the EFFR level. The LIBOR outstanding amount is almost unchanged since the beginning of the year, confirming that the activity on LIBOR is not all risk reducing.

Outstanding volume

Figure 3: LIBOR, EFFR and SOFR outstanding volumes at LCH.

The daily volume in STIR futures at CME is displayed in Figure 4. The "Step 1.5" is not directly visible on the graph, but by adding the SOFR-1M to the SOFR-3M volume on 19 April, the totla is larger than the LIBOR-3M volume. Up to know, this was a one-off. We will indicate the real "Step 2" in our blogs as soon as we see it hapenning.

Futures daily volume

Figure 4: Daily futures volume at CME.

On the open interest side, the situation is a continuation of the developments since the begining of the year. An very small decrease in LIBOR open interest — indicating once more if needed that the vast majority of the LIBOR trades are not risk reducing — and a significant increase in the SOFR open interest and a smalller one in EFFR open interest. The OI in SOFR-3M futures has not reach 50% of the LIBOR-3M futures yet. The increase in SOFR and EFFR is probably linked in part to the change in monetary policy and not only to the benchmark transition. The total STIR futures OI has significantly increased since the start of the year.

Figure 5: Futures Open Interest at CME

Wednesday, 13 April 2022

SOFR progress: 2022-04-08

Graphs without comment this week.

Figure 1: Weekly share by product types at LCH

Figure 2: SOFR volume evolution and share among tenors.

Saturday, 9 April 2022

New working paper: Options on overnight futures

We are pleased to announce a new working paper titled

Options on overnight futures

is available in our muRisQ Advisory Model Development series of research papers. The paper is available on SSRN preprint repository at


With the transitions to overnight benchmarks as the main benchmarks in some currencies, futures based on overnight rates are becoming more common. The most traded futures on overnight rates settle agains compounded rates. The pricing of those futures requires some convexity adjustments with an Asian flavour due to the composition. Together with the greater liquidity of those futures came the market for options on futures. The options are traded with the usual futures daily margin mechanisms and can be standard options or mid-curve options; the options themselves are European or American. The pricing of those options, require different adjustments for the margin and composition features. In this note we propose the pricing of those options in the Gaussian HJM framework.

Wednesday, 6 April 2022

SOFR in 2022 Q1: slow progress

2022 was suppose to be the year where USD-LIBOR was only used for risk reduction. The end of Q1 has come and that has not happen. 

There has been progress on the LIBOR transition and on SOFR developments but they can only be qualified as "slow" and not all LIBOR transition goes in SOFR direction.

Let's start with the SOFR progress part. This is clearly visible in Figure 1 which displays the SOFR volume at LCH and as reported by ISDA (in Swap Info).

Figure 1: SOFR volume evolution and share among tenors.

The SOFR progress is clearly visible with the volume roughly tripling over the last 6 months.

On the LIBOR side, there has been a clear decrease in volume but far away of the one we would have expected from a"prohibition of new use" as decided by the FCA. Since the beginning of the year, the LIBOR volume represent roughly 31% of the USD 165 trn traded in USD derivatives at LCH. The weekly benchmarks shares are displayed in Figure 2. 

Figure 2: Weekly share of product types at LCH

One obvious feature of the market share, is that is the USD derivative market is not based on a pure LIBOR-SOFR transition, but there is a third major participant: EFFR. Even without the support of the regulators and without the automatic conversion of some LIBOR trades, EFFR represent around one third of the market. The EFFR trades are concentrated on the short end of the curve.

As explained in previous blogs, this is a problem for SOFR as the term SOFR rates (CME and IBA version) are currently not based on "level 1 waterfall" — quoted OIS in the interbank market. It makes the pricing and hedging of those terms rates and the associated basis, which in theory should be 0, relatively difficult.

On the STIR futures side, the situation is not very different. SOFR is progressing and LIBOR is decreasing, but we are still very far way from a transition. EFFR is also playing a non-negligible role. The daily volumes over the last 6 months is displayed in Figure 3.

Figure 3: Daily volumes for STIR futures at CME.

We look at the STIR futures in two blocks: the 3 months futures and the 1 month futures. The 3 months are the most liquid and composed of three types: LIBOR, SOFR and BSBY. The daily share of SOFR has been between 12.4% and 42.5%, it has never been the most traded futures on any single day. The share of BSBY is anecdotic, between 0 and 1%. LIBOR is still by far the dominant futures with more than 70% of the average daily volume. The 1 month is composed of only two types: SOFR and EFFR. The daily share of SOFR is between 8.3% and 29.7%. Fed Funds futures are still largely dominating SOFR with with around 85% of the average daily volume.

Wednesday, 30 March 2022

Oops! Back to SOFR third!

Last week we reported the first "SOFR First" week, at least in term of volume at LCH. This week we are already back to "SOFR Third" as displayed in Figure 1. The SOFR share fell significantly to 19.8% from 36.0% while EFFR increased to 46.4% and LIBOR to 27.3%. In DV01 terms the shares may be different as a lot of the EFFR trades are shorter term.

Figure 1: Weekly share of product types at LCH

The large changes in share are due to a slight decrease in SOFR trading but significant increase in EFFR and LIBOR trading as displayed in Figure 2. The ISDA/US regulatory figures also display a decrease in SOFR share.

Figure 2: SOFR volume evolution and share among tenors.

In absolute terms for the outstanding amounts, SOFR is also third as displayed in Figure 3. The only slightly positive note for SOFR is the continuous increase in outstanding amounts at LCH while LIBOR outstanding amounts have been decreasing for the last 4 weeks.

Figure 3: LIBOR, EFFR and SOFR outstanding volumes at LCH.

Tuesday, 22 March 2022

"SOFR First" - Step 1!

Finally, 5 years after the "The future of LIBOR" speech, 1 year after the death date announcement, more than 6 months after regulators "SOFR First" announcement, we have reach the first step in "SOFR First". "SOFR First" is for the first time a reality in LCH cleared weekly volumes. The SOFR first is still very partial as it does not appear in ISDA/US regulatory or in CME futures figures.

On LCH side, SOFR is first with 36.0%, EFFR second with 35.0% and LIBOR third with 24.6%. SOFR has a relative majority, slightly above one third of the volume but still far from an absolute majority. On the US regulatory figure, outright SOFR is 42.4% of a total that does not include EFFR (not reported in ISDA figures). The change of volume share is mainly due to the decrease in LIBOR and EFFR volume; the SOFR volume is practically unchanged over the last 5 weeks.

Figure 1: Weekly share of product types at LCH

Last week also saw the launch of the ICE Term SOFR Reference Rates. There was already a SOFR Term rate, administered by CME, but to our opinion that benchamrk is less convenient. The CME benchmarks are based on futures prices and obtained through some arbitrary intepolation mechanism and some weighted average over the day while the ICE benchmarks are based on actual market prices for the given tenors at a given point in time.

This lead to Figure 2, where the volume of SOFR swaps and its split by tenor is displayed. We can see the trend already mentionned in previous blogs (e.g. here) which is that with respect to other overnights benchmarks, the share of short term swaps is relatively low. The volume in the USD OIS short term market is mainly in EFFR-OIS. The liquidity is not there yet to use level 1 inputs in the benchmark waterfall. Level 1 inputs are "eligible, executable prices and volumes for relevant and eligible overnight interest rate swaps referencing the relevant RFR, provided by regulated, electronic trading venues". For the moment only Level 2 inputs, i.e. "eligible dealer-to- client prices and volumes".

Figure 2: SOFR volume evolution and share among tenors.

The outstanding volume continue to decrease slighlty for LIBOR and increase for SOFR.

Figure 3: LIBOR, EFFR and SOFR outstanding volumes at LCH.

On the futures side, we are still far away from SOFR First. LIBOR is still the dominant force, both in terms of daily volume (Figure 4) and open interest (Figure 5). Over last week the market share at CME was LIBOR-3M at 53.7% (2.4 m ADV), SOFR-3M at 32.7% (1.5m ADV), EFFR-1M at 11.4%, SOFR-1M at 2.2% and BSBY at 0.1%. There has not been a single day where SOFR-3M volume was above LIBOR-3M volume. On the futures side, we are still waiting the "SOFR First" first day. On the one month contracts, EFFR is well above SOFR-1M, a market feature parallel to the swap market where short term EFFR-OIS dominated SOFR-OIS.

Figure 4: Daily futures volume at CME.

The open interst is almost unchanged for LIBOR since the start of the year, with only a small dip on 15 March with the expiry of the March contracts. The SOFR-3M open interests continue to increase and also dipped at mid-month (on 17 March, due to a different expiry mechanism).

Figure 5: Futures Open Interest at CME

New published paper: Swap Rate: cash settled swaptions in the fallback

We are pleased to announce that the research paper written by Marc and titled

Swap Rate: cash settled swaptions in the fallback

has been accepted for publication in Risk. The publication date will be announced later.

The preprint version of the paper is part of the muRisQ Advisory Model Development series of research papers. The paper results have been presented in different seminars and conferences, including the The 4th Interest Rate Reform Conference on 20 October 2021.


With the planned cessation of LIBOR, the LIBOR-based Swap Rates will also cease. For legacy transactions linked to it, a fallback is required. Some approximated fallback mechanisms have been proposed by working groups. The approximations involve some non-linear function of overnight-based swap rates. Due to the non-linearity, cash settled vanilla swaptions are becoming exotic products. Moreover, keeping the annuity unchanged while changing the rate to overnight-based swap generates technical issues in the pricing leading to convexity adjustments. The article proposes different pricing methodologies for those now exotic swaptions, including several price approximation to reduce the implementation numerical complexity.

Tuesday, 15 March 2022

USD Benchmark transition: LIBOR-SOFR criss-cross continues

LIBOR fight not over: LIBOR retakes the lead in front of SOFR at LCH.

Two weeks ago, SOFR overtook LIBOR in volume terms at LCH for the first time. Last week, LIBOR took back the lead by a wide margin — 38.2% for LIBOR versus 27.7% for SOFR. Similar trend is visible in the ISDA/US regulatory figures where LIBOR is almost the double of SOFR in volume terms (1,874 bn v 952 bn).

Figure 1: Weekly share of product types at LCH

Figure 2: SOFR volume evolution and share among tenors.

In terms of outstanding amounts, the LIBOR instruments are almost unchanged. No real LIBOR risk reduction visible at this stage.

On the futures side, LIBOR remains firmly in the lead, even if that lead has been eroded.

Figure 3: Volume in some STIR ETD futures at CME since October 2021 (in thousands of contracts).

Tuesday, 8 March 2022

LIBOR peak?

Last week, the LIBOR share at LCH has continued its decrease and is now just above 15%. On the week, the SOFR share has also decrease to 23.5% (from 28.3%). The weekly winner is certainly EFFR with a 56.0% share. See Figure 1 for the history.

Figure 1: Weekly share of product types at LCH

SOFR share is for the second week above LIBOR and one can expect this trend to continue.

On the absolute volume side, SOFR has reach its higher level ever at USD 3,144 bn, just above the record from 3 weeks ago. See Figure 2 for more details.

Figure 2: SOFR volume evolution and share among tenors.

The ISDA reported figures (reported under US regulation) also showed a large relative increase of SOFR with respect to LIBOR (unfortunately, the spreadsheet was not updated on ISDDA Swap Info website). But they do not show the EFFR figures in the same data set. It is difficult to see if the international trend related to EFFR visible at LCH is also true domestically in the US.

What is also interesting is to follow the outstanding amounts. They allow us to see if the LIBOR activity is risk reducing or not. We know that SOFR outstanding amounts are increasing as this is a relatively new benchmark and the BAU level has not been reach yet. What about LIBOR? Do we see a significant decrease? The answer is partly in Figure 3. LIBOR still dominates largely (above USD 80 trn v around USD 25 trn for SOFR). Moreover, even if the outstanding amount has slighlty decrease last week, there is no clear downward trend (even an increase since end of January). But with last week decrease, we may have reached "LIBOR peak"! The coming weeks will tell us if this is the case. On the outstanding amount side, EFFR is also above SOFR.

Figure 3: Outstanding amounts at LCH.

Wednesday, 2 March 2022

USD STIR Futures - first 2 months of 2022

ETD STIR Summary: SOFR progresses, but LIBOR still dominates.

In our weekly review of USD interest rate OTC volume, we reported that for the first time last week, the volume of SOFR products was over the volume of LIBOR products — even if still below the volume of EFFR products. On the ETD STIR side, SOFR continues to progress but has certainly not yet reach the LIBOR level. The SOFR 3M futures were last week at 28.1% of the total STIR futures for 59.8% for LIBOR - and 10.3% for EFFR 1M, 1.8% for SOFR 1M and 0.1% for BSBY. The daily volumes for the past couple of months are reported in Figure 1.

Figure 1:Volume in some STIR ETD futures since October 2021 (in thousands of contracts).

The steady progress of the SOFR daily volume is clearly visible since the start of 2021. LIBOR is supposed to be used only for risk reduction. Is this what is happening in the futures market? The answer can be seen in Figure 2 displaying the open interest for the different contract types. Since the start of the 2022, the LIBOR Futures OI is virtually unchanged, even if a couple of serial contracts have expired since. The volume does not correspond to risk reduction.

Figure 2: Open Interest in STIR ETD options since the start of 2022 (in millions of contracts).

We also provide some figure related to the options on futures. As reported in a recent blog, the options on SOFR futures have started to trade, but for options, the lag is even more important than for futures. The daily volume up to 1 March is provided in Figure 3.

Figure 3: Volume in some STIR ETD options since the start of 2022 (in thousands of contracts).

Even if there is some progress, the SOFR volume is still barely visible on the graph. The total volume of SOFR options is below the volume of the LIBOR 2-year mid-curve options, which are the third level of LIBOR options. As explained in previous blogs, those 2-year mid-curve options will be converted to SOFR mid-curve options. Potential explanantion for this choice by the market were discuss in the blog SOFR ETD options: Finally some activity.

Figure 4: Open Interest in STIR ETD options since the start of 2022 (in millions of contracts).

At the level of open interests, the SOFR progress is visible, but it is drarf by the LIBOR progress. Since the start of 2022, the open interest in LIBOR options has increased by 9 millions contracts while the SOFR options side has increased by 0.9 million contracts. The increased interest in the options is most probably related to the uncertainty about the monetary policy. Monetary policy watchers appear to express their volatility views through the LIBOR options instead than through the SOFR options. This is somehow similar to the linear products where monetary policy watcher appear reluctant to express their view through SOFR and do it through EFFR (see here).

Tuesday, 1 March 2022

USD: Is LIBOR transition starting?

Almost five year after the notorious The Future of LIBOR speech, is the "lack of there of" part actually starting in the USD market?

The evolution away from LIBOR had to go through three phases (not necessarily disjoint): preparation, actual transition and disposal.

  1. Preparation: decide what we don't want - LIBOR in this case -, what we want (SOFR), when we want to do it, what are the new products required (futures, ois, in-arrears loans, term rate, etc.), plan for the disposal,
  2. Transition: the actual part of it, trade mainly the new stuff and stop trading the old LIBOR, except to initiate the disposal of old tools
  3. Disposal: the cleaning part, including fallback, agreements to cancel/transform the old toys, etc.

The preparation started slowly from 2017, a good part came at the start of 2021 with the ISDA fallback decisions. But up to now we have been far away from the actual transition. The new benchmark, SOFR, has been far away from being first as claimed by the different "SOFR First" initiative. Up to the week before last, we regularly reported on the "SOFR Third" truth. This is changing. We are still far from actual SOFR first, but there is clear signs of it being possible in the near future.

In Figure 1, we display our usual shares of SOFR, EFFR and LIBOR at LCH, currently the main clearing house for USD interest rate products. For the first time, the SOFR share is above the LIBOR share with 28.3% versus 23.0%. SOFR is still not at the first place as EFFR is leading with 44.1%. There is a general decrease in LIBOR volume but it does not go all to SOFR.

Figure 1: Weekly share of product types at LCH

We also provide the SOFR volume in absolute volume in Figure 2. Over the last weeks, SOFR has not really increased, with the volume of the week ending on 11 February still the highest. The change has to be attributed to a decrease of LIBOR, not an increase of SOFR.

Figure 2: SOFR volume evolution and share among tenors.

This lead us to some remark on the tenor distribution of SOFR swaps. In Figure 2 the share between the different tenor ranges is also provided. We focus on that part for the 8 first weeks of 2022 in Figure 3 and we add the same numbers (same scale, same colors) for ESTR.

Figure 3: Share by tenor for SOFR and ESTR.

What comes out clearly in this comparison is not really that the volume of SOFR is smaller but that the short term part is significantly smaller. With the expectations of monetary policy changes, the short term volume (gray in the figures) increased significantly for ESTR but not for SOFR.

This is a problem in the building of the Term SOFR that would be useful for the transition and fallback. Remember that GBP and JPY LIBOR have now a synthetic version based on Term SONIA and TORF. The CHF does not have a term SARON and the EU regulation had to invent a tortuous way to deal with this absence. One may argue that there is already a Term SOFR, but it is based on futures, uses arbitrary interpolation scheme and is not using point-in-time fixing mechanism; it is not ideal for hedging and difficult to replicate in the market. The large part of the EFFR volume is probably on the short term. SOFR is replacing LIBOR as a long term interest rate risk management tools but does not seems to win the heart of market participants as a monetary policy risk management tool.

Note (2022-03-02): A first version of the Figure 3 graphs were missing the last two weeks. The graphs have been updated.