ARRC Issues Statement of Support for CME SOFR Options

The US Alternative Reference Rates Committee (ARRC), which operates under the auspices of the Federal Reserve Bank of New York has issued a statement “applauding” CME Group’s announcement regarding the launch of SOFR First for Options, an initiative aimed at accelerating the growth of Secured Overnight Financing Rate (SOFR) options trading.

This significant initiative is consistent with supervisory guidance and the ARRC’s recommendation to cease entering into new Libor contracts immediately, as well as the Commodity Futures Trading Commission Market Risk Advisory Committee’s SOFR First recommendation, the group says in the statement. “In particular, SOFR First for Options will help propel successful transition of the exchange-traded options market, one of the last key remaining markets that still needs to shift away from US dollar Libor ahead of its cessation in mid-2023,” it says.

CME announced that under its SOFR First for Options initiative set for June and July of this year, it will be taking additional steps to build on the impressive growth already seen in SOFR futures to help significantly increase SOFR options trading based on a deep and liquid marketplace. These steps include providing a market-wide fee waiver for SOFR options in June and July, accompanied by introducing additional market making incentives during this period to help enhance liquidity in all venues. CME Group will also sunset the listing of long-dated quarterly mid-curve and eurodollar options which, upon expiration, will be replaced by SOFR options.

“Moving exchange-traded options to robust reference rates like SOFR is essential to accomplishing a successful transition away from US dollar Libor,” says John Williams, president of the Federal Reserve Bank of New York and co-chair of the Financial Stability Board’s Official Sector Steering Group. “This initiative will play an important role in accelerating growth in SOFR options trading, so that we can use the final 12 months until Libor ends to focus on addressing legacy contracts.”

Tom Wipf, ARRC chairman and vice chairman of institutional securities at Morgan Stanley, adds, “CME Group’s SOFR First initiative is a critical tool for increasing SOFR options liquidity now. This strategy builds upon the notable progress we have already seen in SOFR futures, so move now to make sure that you are prepared.”

Meanwhile, Rostin Behnam, chair of the CFTC, says, “The transition of exchange-traded options to SOFR is another important milestone and step forward in the shift away from US dollar Libor. Increasing SOFR options trading will further develop overall SOFR derivatives liquidity and bolster the transition effort as we focus our collective efforts on the last 12 months of Libor.”