CFTC’s First Publication in SOFR First Transition Initiative Series on LIBOR and SOFR Swaps | Moore & Van Allen SARL
In a press release (HERE) On June 8, the Commodity Futures Trading Commission (the “CFTC”) issued the first in a series entitled “SOFR First Transition Initiative” as a best practice. One of the objectives of this type of “best practice” is to have an impact on the liquidity of LIBOR and SOFR swaps, which allows (a) to slowly increase the spread on LIBOR swaps and (b) to tighten the spread on SOFR swaps. In other words, making LIBOR swaps more expensive and SOFR swaps cheaper. Even for non-traders, this announcement is important as it is not only a major step in moving LIBOR away from the liquidity + swap provider of those non-traders, but as LIBOR becomes more expensive for those non-traders. dealers, non-traders will begin to understand that it will be more profitable and competitive for them to demand SOFR products since they can hedge this product and get a lower fixed rate on the SOFR swap (compared to a similar LIBOR swap ). Below I give some thoughts on the impact this has on non-SOFR swaps (e.g. BSBY and Ameribor) and a broader summary of the PDF attached.
I would like to note that the attachment has no impact on exchange traded LIBOR swaps (see the last line of the last page of the PDF). As a result, broker-to-broker-dealer swaps executed on a Swap Execution Facility (a “SEF”) may continue, but the OTC broker-to-broker market will be affected. This is only the first step of the “SOFR First Transition Initiative”… so expect more and more of these “best practices” to be deployed in order to accelerate the transition to LIBOR swaps well before the 1st. January 2022.
- What is the best practice “? As of July 26, 2021, no more LIBOR linear swaps between brokers (i.e. firm swaps, swap spreads and curve trades), but instead they should all be SOFR linear swaps. . The USD LIBOR linear swap screens are expected to be available for informational purposes, but not for trading activity, until October 22, 2021. After October 22, 2021, the Interprofessional Broker screens for USD LIBOR linear swaps should be completely disabled.
- What intermediary LIBOR derivatives are do not impacted? This announcement has no impact on inter-broker swaps which are basic LIBOR / SOFR swaps, basic LIBOR / LIBOR swaps, forward rate agreements and single period swaps. It also does not cover SEF or other exchange traded derivatives and currency swaps. It only covers the OTC LIBOR linear swaps described above (and in the appendix).
- Does this have an impact on trade between concessionaires and non-concessionaires (eg end users and regional banks)? As stated in the “Brokers can still execute USD LIBOR linear swaps with clients after July 26, 2021 and after October 22, 2021.“However, we now have a good indication of how the derivatives market here in the US is going to move away from LIBOR.
- Non-SOFR swaps? There is no mention of credit sensitive rates (eg, BSBY or Ameribor) in this best practice. This is not surprising since this is the inter-dealer market and the exit is “SOFR First”. However, as any particular derivatives market moves away from LIBOR, SOFR has the most liquidity, but it will be the demands and developments of the non-traders (I presume) market that will be the primary driver for the development of a swap market in the credit sensitive sector. rates. It would be great if someone published a “BSBY Second” document, but I think the joke may be lost for many …
- Best practice versus regulation. Although this is not a rule / regulation, I would expect it to have a similar effect to other “best practices” that have been published by the ARRC or US banking regulators – c That is, the schedule and requirements set out in the attached document are largely treated by dealers as a regulation-like requirement, unless a dealer has a strong business case for explain the need for an exception.