SOFR Futures Trading Exceeds Eurodollar Volumes

The notional equivalent amount of SOFR futures transactions has exceeded the equivalent of Eurodollar contracts for three months as the industry switches from Libor according to derivatives analysis provider Clarus Financial Technology.

Clarus’ Chris Barnes said in a blog post: “Remember, I’m often shocked by the size of the Eurodollar market, so this is definitely an achievement.”

Barnes said the notional amount of SOFR first surpassed Eurodollars in May 2022, and in July the notional amount of SOFR traded in futures was $43.3 trillion from $25.7 trillion. dollars into Eurodollars.

“In other words, the SOFR market was 69% larger than Eurodollars in July 2022,” he added.

After the financial crisis, there were a series of scandals regarding banks manipulating their bids to set benchmarks across all asset classes, which led to a lack of trust and threatened participation in the relevant markets. As a result, regulators have increased their oversight of benchmarks and moved to transaction-based risk-free benchmarks (RFRs), so they are harder to manipulate and more representative of the market.

The US Alternative Reference Rates Committee (ARRC) has chosen SOFR to replace US dollar Libor, although other new risk-free benchmark rates have also been launched. The use of US dollar Libor in new contracts has been banned from the end of 2021, with some exceptions, and five parameters of US dollar Libor will continue to be calculated using submissions from banks in the panel until mid-2023.

The proportion of the US dollar short-term interest rate market is increasing according to Clarus, as shown by the green bars below. SOFR is now the largest market among US dollar STIR, with 41.7% of total activity.

Source: Clarus Financial Technology

However, Barnes pointed out that there is still significant trading in federal funds futures as the Federal Open Market Committee continues to target the federal funds rate, not SOFR. The combination of Fed Funds and Eurodollars is always more important than outright SOFR trading.

“Therefore, it makes ‘logical’ to trade the underlying future,” Barnes added. “It would have been great to see this business transition to SOFR in terms of RFR adoption.”

SOFR Options

CME Group reported that open interest in SOFR options reached a record 10.36 million contracts on Aug. 9.

One-day open interest in SOFR futures and options hit a record 17.66 million contracts, with average daily volume in SOFR futures and options hitting a record 2.46 million in August .

Agha Mirza, global head of rates and OTC products at CME, said in a statement that open interest on SOFR options grew at a record pace in 2022 for all options listed on a fixed income product.

“With an open interest of 10 million contracts, SOFR Options has now joined the three largest listed fixed income options markets, becoming a highly liquid and leading risk management tool for our clients,” he added.

So far in August 2022, the average daily volume (ADV) of SOFR options has hit a record high of 606,225 contracts, up 57% from the July 2022 average of 386,018 contracts per day.

Agha Mirza, CME Group

“SOFR futures ADV in August equals 150% of Eurodollar futures ADV and SOFR options ADV equals 138% of Eurodollar options ADV in August,” Mirza added.

The exchange had launched a SOFR First for Options initiative for June and July this year. CME said it would take additional steps to build on the growth seen in SOFR futures to help significantly increase SOFR options trading, including a market-wide fee waiver. for SOFR options and additional market making incentives during these two months to help improve liquidity in all venues.

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