Is RFR Trading Now Ready for Lift-Off?

We are 12 days from SOFR First.

12 days from the point that interdealer markets plan to switch to trading SOFR instead of LIBOR as the market standard. The CFTC yesterday officially adopted the SOFR First recommendations at the Market Risk Advisory Committee meeting.

We are 12 days away from interdealer swaps “prioritising” SOFR first rather than USD LIBOR.

According to our freshly published ISDA-Clarus RFR Adoption Indicator, we currently see 6.0% of the USD Rates market transacted versus SOFR. 6.0%!

6.0% is a low base from which to start a SOFR First initiative. SONIA had two bites at the cherry for the SONIA First initiative. We covered the precise occasions on this blog:

  1. 02 Mar 2020, SONIA Day – LIVE Blog and 11 Mar 2020 SONIA Update
  2. 26 Oct 2020, SONIA Day 2 – LIVE Blog

From our RFR Adoption Indicator charts, you can see that the adoption of SONIA was already at:

  1. 28.8% in March 2020
  2. 40.4% in October 2020

Looking at that chart of SONIA adoption, do we think that the specific date of July 26th 2021 for SOFR will change much in the market? Whilst there is clearly a lot of regulatory weight being thrown behind the announcements, markets are notoriously slow to change at the point of execution.

Nevertheless, there has been an upward trend of SONIA adoption since the October 2020 SONIA Day (take two), so we should be optimistic for SOFR adoption from the end of this month.

Please bear in mind that the MRAC also confirmed we are only ~60 days from the Cross Currency interdealer market adopting a SOFR first principle. That applies to GBP, CHF and JPY vs USD. Therefore, the adoption of RFRs in these other currencies is also vital.

With that stated, let’s therefore take a look into this months data!

11.7% is a new ALL TIME HIGH for RFR Adoption

June 2021 was a good month for RFR trading. Some of the highlights:

  • A new all-time high of 11.7% for overall RFR Adoption, beating the previous high water mark from January 2020 of 11.2%.
  • The total SOFR DV01 traded hit an all time high of $1.1bn, the first time over $1bn DV01 has traded in SOFR in a single month.
  • SONIA adoption increased to 61% in GBP markets, an all time high.
  • JPY continued the positive path, with 6.9% traded versus TONA (a new high).
  • CHF SARON trading remained at relatively high levels of 13.7% (up from 6-8% at the beginning of 2021).
Charts and free data available at rfr.clarusft.com

Please check out the whole ISDA-Clarus RFR Adoption Indicator monthly report over at the ISDA website:

$1 Billion of USD SOFR DV01 Traded for the first time

Underlying the whole time-series of RFR Adoption Indicators here at Clarus is tenor-specific, product-level DV01 data. Therefore, with a subscription to CCPView, it is possible to monitor the total DV01 traded in each currency. This is also split between RFR indices and all other indices.

This data shows that it was a record month for the amount of USD SOFR risk traded in June 2021:

This looks like a very positive run up to the SOFR First initiative on July 26th. SOFR OTC Swaps in particular had their best month in quite a while. Swaps recorded 45% of total SOFR risk traded, their highest print since the October 2020 discounting switch.

A Welcome Change to our Input Data

We continue to be huge proponents of increased transparency here at Clarus. Whether that be MIFID II (eurrrgh, what a missed opportunity), changes to Dodd-Frank transparency (now incoming in 19 months time!) or how added transparency helps markets to function.

Therefore we were VERY pleased to see LCH SwapClear increase the granularity of their tenor data underlying their RFR volumes. Credit where credit is due, this is great news for the market:

Showing;

  • As of June 2021, LCH SwapClear now publish RFRs volumes split into 4 tenor buckets, including new 2-5Y, 5-10Y and 10Y+ buckets.
  • Importantly, they also updated the entire history of RFR volumes back to July 2020.
  • Clarus include all of this data in our CCPView data product, including an updated historic time-series.
  • We look forward to LCH also including a 30Y+ tenor in due course! ;-P (we can live in hope, right?!).

This change to the input data does have some implications for the ISDA-Clarus RFR Adoption Indicator methodology:

  • As of June 2021, the entire historic time-series has been restated to include this more accurate, more timely data.
  • This impacts our calculations for both USD SOFR and EUR €STR DV01 amounts.
  • We still use the DV01-weighted average maturity from SDR data for the CME SOFR data.

There have therefore been some historic modifications to our calculated amounts of SOFR traded each month in the USD market. The updated time-series of data is of course available for download at rfr.clarusft.com:

The changes are relatively small (~<0.25% per month), apart from in September and October 2020. The SOFR Adoption in these months has dropped to 4.6% and 7.5% as a result of the new data (1-2-2.2% points lower than originally calculated).

If nothing else, this new data highlights how representative US SDR data is of the overall market and we are pleased that our original estimates were so close to the mark.

In Summary

  • 11.7% was a new all time high for the ISDA-Clarus RFR Adoption Indicator.
  • The total SOFR DV01 traded hit an all time high of $1.1bn, the first time over $1bn DV01 has traded in SOFR in a single month.
  • SONIA adoption increased to 61% in GBP markets, an all time high.
  • JPY and CHF also showed signs of increased adoption.
  • All eyes in July will be on the SOFR First initiative for interbank markets. Stay tuned to our blog to see the impact on RFR trading of this important date on Monday July 26th.

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