With USD Libor transitioning to the Secured Overnight Financing rate (SOFR) by the end of 2021, Central Counterparties (CCPs) which reference this rate for certain derivatives contracts have begun their transition from the previous interbank offered rates (IBORs) to the new reference rates which will underpin countless financial transactions.
The SOFR discounting transition has been underway for a couple of years at a number of CCPs, which have just recently completed a switch away from USD Libor. LCH have recently switched to SOFR which involved contracts worth an estimated notional amount of USD 120 trillion. In addition, CME have also transitioned over a large volume of interest rate swaps to the new reference rate. This switch to SOFR has been part of an initiative set by the US Federal Reserve’s Alternative Reference Rates Committee (ARRC) who are responsible for this particular SOFR transition.
Since CCPs have generally held the largest pool of swaps products and swaps liquidity in the market, this in turn could prompt the wider market to follow suit in the swift adoption of SOFR. The underlying aim would be for the wider community of market participants to reference SOFR in their swap transaction activities.
In conjunction with the transition to SOFR from USD Libor, the International Swaps and Derivatives Association (ISDA) released a press statement on the 23rd October 2020 highlighting the launch of the IBOR Fallbacks Supplement and IBOR Fallbacks Protocol, which marks a very significant step at reducing the possible impact of key IBOR’s becoming unavailable while certain market participants continue to reference the rate through their exposures.
ISDA have stated that from 25th January 2021, all new cleared and non-cleared derivatives that reference the now amended ISDA Standard Definitions for Interest Rate Derivatives; will include the fallbacks.
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