Do you know how much now trades in RFRs after the CME conversion exercises?

May 17, 2023 by No comments
  • The ISDA-Clarus RFR Adoption Indicator jumped significantly higher in April 2023.
  • This reflects the conversion activity at CME for both Futures and Swaps referencing USD LIBOR.
  • Read on to find out how much larger the SOFR market is compared to expectations.

We’ve covered the CME conversion exercises in detail here on the Clarus blog because they were really significant events for market participants and for the broader transition to SOFR in US markets. You can catch up on the recent publications below:

  1. CME CONVERTED YOUR EURODOLLARS. THIS IS WHAT HAPPENED NEXT
  2. CLEARING HOUSES ARE ABOUT TO CONVERT YOUR USD LIBOR SWAPS. WHAT DO YOU NEED TO KNOW?
  3. THE EURODOLLAR IS NO MORE…

All of these blogs were written before we could assess the overall impact to RFR trading as a whole. That is the downside of writing a weekly blog (subscribe here – it’s free!) when the data isn’t necessarily available with the same periodicity.

That didn’t stop me from predicting:

Seeing as marking-to-market is part and parcel of our jobs, lets look at how my predictions faired. I postulated that SOFR adoption would increase to 64% of the market (let’s pretend I wasn’t silly enough to include a decimal point in my predictions!) and the overall index to move up to 58%.

Let’s look at the data….

RFR Adoption Indicator April 2023

The RFR Adoption Indicator for April saw most of the CME USD LIBOR positions converted to SOFR in both futures and OTC. The report shows some very good news for SOFR, and this before the LCH OTC conversion too:

Showing;

  • The index has increased to a new all-time high of 60.7%, 4.2% higher than last month.
  • SOFR adoption hit 70.9%, a new all-time high.
  • There were strong numbers again for EUR, CAD and AUD.
  • Will EUR or AUD be the first market to “voluntarily” adopt RFRs?

As seems typical on the Clarus blog, my predictions were in the right direction but quite a far way out. I somewhat underestimated the overall impact of Eurodollar cessation. We saw 4% more risk traded in RFRs than ever before, and SOFR trading increased by almost 10% of the total risk traded.

The one blot on the landscape was that April was a subdued month for trading activity – compared to March 2023. Looking back over a longer time period, trading activity dipped to levels last seen in Q4 last year:

CME OTC Data

We can do a little bit more with the transparency data out of CCPs now that SOFR conversion is complete. Previously, we had the following information for SOFR activity at CME:

Our CME OIS data in CCPView is split into a lot more tenors, but includes volumes versus both Fed Funds and SOFR indices:

We can now combine the two sources of data and standardise the maturities. This acts as a good proxy to reveal the volumes traded in “Legacy Rates” (i.e. LIBOR and Fed Funds) and SOFR per maturity in April:

Showing;

  • Virtually all volumes were in SOFR during April 2023.
  • The “Legacy” volumes in the 2YR bar on the chart are as a result of the conversion exercise – nothing to worry about from a transition stand-point.

CCPView now allows us to apportion the “2+years” SOFR data into the appropriate tenor buckets – very handy when you are calculating DV01s for a risk-weighted measure such as the RFR Adoption Indicator. It is likely we will adopt this (more accurate) calculation going forward once all CCPs have converted.

In Summary

The CME conversion processes have had a really significant impact on RFR Adoption. It was a much larger impact than my previous analysis had expected:

  • RFR Adoption increased by over 4% to 60.7%. This is the first time that over 60% of risk in any given month has traded versus an RFR.
  • The 4% increase contrasts to an expectation that the overall indicator would move higher by only 1.5% when all of the Eurodollar activity was converted.
  • SOFR Adoption saw an even sharper increase, increasing by 9.4% to 70.9%.
  • This ~10% increase compares to an expectation of a mere ~3% increase!

RFR Adoption will likely spike once more this month (May 2023) as LCH SwapClear converts most of their USD positions to SOFR. See my previous blog for more on that conversion exercise:

And Finally….

Remember to come back next month to check on the latest data and please feel free to download what is now a very long time-series of the whole data-set at rfr.clarusft.com:

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