SOFR: Farewell to LIBORCME: SOFR ( CME:SR31! )
On June 30th, SEC Chairman Gary Gensler posted a 3-minute short video on Twitter. In this educational piece titled RIP LIBOR, he explains what the London Interbank Offered Rate (LIBOR) is, and why its passing away is actually a good thing for consumers.
As CFTC Chairman in 2009-2014 and SEC Chairman since 2021, Mr. Gensler oversaw the investigation of the 2012 LIBOR scandal and its replacement by the Secured Overnight Financing Rate (SOFR) in 2021 as the benchmark interest rate for US dollar.
Eurodollar and LIBOR
Offshore Dollar, the US currency deposited in banks outside of the United States, is commonly known as Eurodollar. Traditionally, offshore dollars were traded mainly among European banks. The name sticks to these days and applies to funds in non-European banks as well.
A key advantage of trading Eurodollar is the fact that it is subject to fewer regulations by the Fed, being outside of the US jurisdiction. London is the largest trading hub for Eurodollar.
The London Interbank Offered Rate came into being in the 1970s as a reference interest rate in the Eurodollar markets. By 1986, the British Bankers' Association (BBA) began publishing the US Dollar LIBOR daily. The BBA Libor was calculated based on interest rates reported by 17 member banks who together represented the bulk of Eurodollar transactions. Libor has been widely used as a reference rate for many financial instruments, including:
• Forward rate agreements
• Interest rate futures, e.g., CME Eurodollar futures
• Interest rate swaps and swaptions
• Interest rate options, Interest rate cap and floor
• Floating rate notes and Floating rate certificates of deposit
• Syndicated loans
• Variable rate mortgages and Term loans
• Range accrual notes and Step-up callable notes
• Target redemption notes and Hybrid perpetual notes
• Collateralized mortgage obligations and Collateralized debt obligations
How important was Libor? It is a reference rate in the documentation by private trade association International Swaps and Derivatives Association (ISDA), which sets global market standard for OTC derivative transactions.
In 2008, 60% of prime adjustable-rate mortgages and nearly all subprime mortgages were indexed to the USD Libor in the US. Furthermore, American cities borrowed 75% of their money through financial products that were linked to the Libor.
Libor has been the indispensable global benchmark for pricing everything from credit card debt to mortgages, auto loans, corporate loans, and complex derivatives.
CME Eurodollar Futures
In 1981, the Chicago Mercantile Exchange launched Eurodollar futures, the first ever cash-settled futures contract. It quickly became the most liquid contract by CME. At its peak, over 1,500 traders and clerks worked at the Eurodollar pit on CME trading floor.
Not to be confused with the Euro currency, Eurodollar futures contracts are derivatives on the interest rate paid on a notional or "face value" of $1,000,000 time deposit at a bank outside of the United. It uses the 3-month USD Libor rate as its settlement index. The late Fred D. Arditti, CME economist, is credited as the brain behind Eurodollar futures.
Eurodollar futures are priced as a Money Market instrument. The CME IMM index is used to convert a coupon-bearing instrument such as bank deposit, into a discounted instrument that does not make regular interest payments.
For instance, a futures price of 95.00 implies an interest rate of 100.00 - 95.00, or 5%. The settlement price of a Eurodollar futures contract is defined to be 100.00 minus the official BBA fixing of 3-month Libor on the day the contract is settled.
The 2012 LIBOR Scandal
The LIBOR Scandal was a highly publicized scheme in which bankers at major financial institutions colluded with each other to manipulate the Libor rate. As the scandal came to light in 2012, investigators found that the banks had been submitting false information about their borrowing costs to manipulate the Libor rate. This allowed the banks to profit from trades based on the artificially low or high rates.
A dozen big banks were implicated in the scandal. It led to lawsuits and regulatory actions. After the rate-fixing scandal, LIBOR's validity as a credible benchmark was over. As a result, regulators decided that Libor would be phased out and replaced.
If you want to learn more about the LIBOR scandal, feel free to check out the 2017 bestseller by David Enrich: “The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History”.
What is the SOFR
In 2017, the Federal Reserve assembled the Alternative Reference Rate Committee to select a Libor replacement. The committee chose the Secured Overnight Financing Rate as the new benchmark for dollar-denominated contracts.
The daily SOFR is based on transactions in the Treasury repurchase market, where firms offer overnight or short-term loans to banks collateralized by their bond assets ,similar to pawn shops.
Unlike LIBOR, there’s extensive trading in the Treasury repo market, estimated at $4.8 trillion in June 2023. This theoretically makes it a more accurate indicator of borrowing costs. Moreover, SOFR is based on data from observable transactions rather than on estimated borrowing rates, as was the case with LIBOR.
The Federal Reserve Bank of New York began publishing the SOFR in April 2018. By 2021, SOFR has replaced most of the LIBOR-linked contracts. The LIBOR committee officially folded up on June 30, 2023. Chairman Gensler apparently chose this day to post his RIP LIBOR video to mark the end of an era.
The difference between Fed Funds Rate and SOFR
Fed Funds Rate is set by the Fed’s FOMC meeting, and SOFR is published by the NY Fed. However, they are very different.
• Fed Funds Rate is considered a risk-free interest rate, and only member banks have access to this ultra-low rate through the Fed’s discount window.
• SOFR is a commercial interest rate where banks charge each other. The NY Fed publishes the rate based on transactions in the US Treasury repurchase market.
SOFR is similar to LIBOR because they are both commercial interest rate benchmarks. On the other hand, Fed Funds Rate is a policy rate set by the US central bank.
CME SOFR Futures and Options
CME Group launched the 3-month SOFR futures and options contracts in May 2018. The contracts were based on the SOFR Index, published daily by the New York Fed.
SOFR futures contracts are notional at $2,500 x contract-grade International Monetary Market (IMM) Index, where the IMM Index = 100 minus SOFR. At a 5.215 IMM, for example, each contract has a notional value of $13,037.50. CME requires a $550 margin per contract. An interest rate move by a minimum tick of 0.25 basis point would result in a gain or loss of $6.25.
At the beginning, SOFR contracts traded side-by-side with the Eurodollar contracts. By 2021, Eurodollar liquidity has transitioned to SOFR contracts. By April 2023, All Eurodollar contracts were delisted, and the transition was completed.
For all intended purposes, you could think of the SOFR futures as the same as the legacy Eurodollar contracts, with the only notable exception being the settlement index switched from LIBOR to SOFR.
On June 30th, the daily trading volume and Open Interest of SOFR contracts were 4,443,245 and 9,310,433 contracts, respectively. On the same date, CME Group total volume and OI were 23,769,103 and 104,221,083, respectively.
On the latest trade day, SOFR accounts for 18.7% of CME Group’s trade volume and 8.9% of its total open interest. Indeed, SOFR has successfully replaced Eurodollar as new No. 1 contract at CME and is arguably the most liquid derivatives contract in the world.
Where We Are at the SOFR Market
On June 30th, the JUN SOFR contract (SR3M3) expired and settled at 94.785. This translates to the JUN SOFR rate of 5.215 (100-94.785).
SEP 2023 (SR3U3) is now the new lead contract. It settled at 94.595 and implied a forward SOFR rate at 5.405 (100-94.595). This shows that the futures market expects a rate increase in the next Fed meeting.
Like Eurodollar futures, rising futures price will confer to declining SOFR rate, as rate is equal to 100 minus futures price. Similarly, a decline in futures price equates to a rising SOFR rate.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
Libor
SOFR Futures Curve
SOFR (Secured Overnight Financing Rate) is a benchmark interest rate that is based on the cost of borrowing cash overnight, collateralized by US Treasury securities. It is considered to be a replacement for the LIBOR (London Interbank Offered Rate) benchmark, which is being phased out by the end of 2021. SOFR futures are derivative contracts that allow market participants to trade on the expected future values of the SOFR rate. They are traded on the Chicago Mercantile Exchange (CME).
SOFR futures prices are quoted in terms of the expected SOFR rate at the time the contract expires. For example, a SOFR futures contract expiring in March 2023 may be quoted at a price of 98.50, which would imply an expected SOFR rate of 1.50% at that time. These prices are used by market participants to hedge against interest rate risk and to speculate on the future direction of interest rates.
The importance of SOFR futures lies in their use as a benchmark for a wide range of financial products, including loans, mortgages, and derivatives. As such, movements in SOFR futures prices can have significant implications for the broader financial markets. Traders and investors can use charts of SOFR futures prices to identify trends and patterns in the market and to make informed trading decisions. The ability to analyze and interpret these charts is therefore a valuable skill for anyone involved in the financial markets.
Futures curves are a series of futures contracts for a specific underlying asset with different delivery dates. The SOFR futures curve represents the market's expectation of future SOFR rates over time. It shows the current market pricing for SOFR futures contracts with different maturities. Each point on the curve represents a future SOFR contract with a specific expiration date.
Reading the SOFR futures curve can provide important insights into market expectations about the future path of interest rates. The shape of the curve can provide signals about market sentiment and economic conditions. In a typical yield curve, a steep upward slope suggests the market expects interest rates to rise in the future, while a flat or inverted curve suggests the opposite. The same principles apply to futures curves.
The SOFR futures curve is particularly important for markets as it serves as a benchmark for pricing various financial products, such as swaps and interest rate derivatives. Changes in SOFR futures prices can have a significant impact on the broader financial markets and the economy as a whole. As such, traders, investors, and policymakers closely monitor the SOFR futures curve to gain insights into the market's outlook for interest rates and to inform their investment and policy decisions.
old LIBOR is rising signaling distress, plus debt ceiling drama GE2! is euro dollar (dollars outsside usa) and is commonly known as libor.
its important because thats the common rate for non bank entities who enter into contractual lending. they are not supported by the federal reserve directly. Libor is unsecured funding.
zq2! is fed funds which the banks lend to each other and the fed sets this rate. also unsecured funding.
Its important because when LIBOR has gotten ahead and higher than fed funds, its historically signaled distress in the credit markets.
yes libor is set to go away by june this year. but that shift hasnt been completed. there is change to the sofr and repo collateralized lending rate buy june, which is also around when the us treasury runs out of spending power.
UNDERSTAND THE EURODOLLAR!THE EURODOLLAR FUTURES CONTRACT REFLECTS THE L.I.B.O.R. INTEREST RATE (A BENCHMARK FOR THE INTEREST RATE AT WHICH MAJOR BANKS LEND TO EACH OTHER)!
WHEN THE PRICE OF THE CONTRACT INCREASES, THE L.I.B.O.R. INTEREST RATE IS DECREASING, WHEN THE PRICE FALLS, IT IS INCREASING!
THE PERIOD I HAVE HIGHLIGHTED IN THIS POST IS THE PERIOD OF DOLLAR ILLIQUIDITY THAT OCCURRED IN THE LATE 00s-EARLY 10s!
AS THE FEDERAL RESERVE INTERVENED AND PROVIDED LIQUIDITY, L.I.B.O.R. WAS SUPPRESSED, AND THE SIZE OF THE INTERVENTION ALMOST PUSHED THE RATE TO 0!
THE SIZE OF THE INTERVENTION IS IMPORTANT IN THAT IT REFLECTS THE SIZE OF THE PROBLEM, INDICATING THAT THE GLOBAL LACK OF DOLLARS WAS SEVERE!
WHILE THE INTERVENTION SUCCEEDED IN SUPPRESSING L.I.B.O.R. OVERALL, THERE WERE SEVERAL PERIODS DURING WHICH THE LACK OF AVAILABLE U$Ds CAUSED LENDING BETWEEN FINANCIAL INSTITUTIONS TO CONTRACT, INCREASING L.I.B.O.R., CAUSING A NUMBER OF PROBLEMS AND FORCING FURTHER ACTION BY THE FEDERAL RESERVE!
THE 2008 GLOBAL FINANCIAL CRISIS WAS NOT NECESSARILY CAUSED BY A REDUCTION IN U.S. HOME PRICES, BUT BY A SYSTEMIC BANKING DOLLAR SHORTAGE!
THE LACK OF U$Ds REMAINS, AND HAS EVEN INCREASED, HOWEVER ENTIRE NATIONS ARE AT RISK OF SUFFERING THE CONSEQUENCES, NOT ONLY THEIR BANKS!
NOW THE IMPORTANT QUESTIONS ARE:
1. IS THE GLOBAL ECONOMY NOW DEPENDENT ON THE FEDERAL RESERVE PROVIDING NEW U$Ds TO AVOID A COMPLETE DEFLATIONARY COLLAPSE? (MOST LIKELY YES)
2. IS THE FEDERAL RESERVE ABLE TO SATISFY THE INTERNATIONAL DEMAND FOR U$Ds, NOT IN TERMS OF AMOUNT, BUT IN TERMS OF DEPTH, REACHING FINANCIAL INSTITUTIONS AND CORPORATIONS NOT DIRECTLY TIED TO THE MAJOR U.S. BANKS? (QUITE POSSIBLY NO, BUT THEY WILL TRY THEIR HARDEST)
3. IF WE ASSUME THIS IS THE DEATH RATTLE OF THE DOLLAR'S WORLD RESERVE CURRENCY STATUS, WHICH IS THE MOST LIKELY OUTCOME, THAT IT IS INFLATED AWAY OR THAT IT IMPLODES ON ITSELF? (I WOULD ARGUE GIVEN THE FED'S ACTIONS, THAT IT WILL BE INFLATED AWAY)
4. REGARDLESS OF HOW THE LOSS OF RESERVE CURRENCY STATUS OCCURS, A CONSEQUENCE OF THIS PROCESS WILL BRING ABOUT A COMPLETE SELL-OFF IN THE U.S. TREASURY MARKET, FORCING THE FEDERAL RESERVE TO COMPLETELY MONETIZE THESE BONDS TO PREVENT INTEREST RATES FROM RISING: IF THIS UNFOLDS, CAN ANY OTHER POSSIBILITY BUT HYPERINFLATION BE CONSIDERED? (NO)
COVID-19 effects on money marketInteresting to see this move in advance of Fed and other central bank cuts.
Deutsche Bank? More like Deutsche Bankrupt am I right guys?I have no idea what I am doing but im gonna post this for clout anyway.
Lets get it.
LIBOR-OIS Curve Trade Mar19 - Dec19LIBOR-OIS Spread between March19 - December19
((FFN2019-QEDM2019)-(FFF2020-QEDZ2019))*100
What LIBOR is Warning InvestorsLIBOR, the rate banks charge to borrow from each other, is a key measure of short-term borrowing costs that often serves as a gauge of financial distress. It's estimated that 50 trillion of assets are pegged to the LIBOR rate and lately it's been rising fast. Certainly a rise in LIBOR can be attributed to increases in the Fed Funds rate. But is that all, or is a perfect storm of financial conditions forming ahead?
Subtract the difference between LIBOR and the 3 mo T-Bill rate and we find the notorious TED spread. When the 2008 financial crisis unfolded, one of the key signals was a soaring TED. Lately the TED has suddenly exploded above the 20 year median range to 58 points, almost as high as was reached during the 2016 earnings recession. In the chart we can see the increase in LIBOR beyond that of the rise in the Fed funds rate. This rapid widening in the TED spread implies stress in the short term credit markets, liquidation of speculative positioning, and a tightening of financial conditions. Consider that Floating Rate Junk debt totals almost 2.5 trillion alone, and you get a sense of why the impact can be significant. Over-leveraged entities could be in for some trouble because the LIBOR surge may run higher for some time yet.
So whats going on? Certainly the cost of borrowing money has climbed, and may be forcing some marginal trade positions to be closed. We know that currently markets are facing a triple threat of :
1) Repatriation of overseas cash. Companies that were holding their offshore earnings in short term corp credit are no longer doing so because of 'repatriation'. The new tax law has made for tighter credit conditions and less available capital in the short term credit markets.
2) Federal Reserve tightening through rate hikes and unwinding its balance sheet. In addition to the expected 3 or 4 rate hikes this year, the Fed plans to unload 600 billion in Treasury securities, eventually selling $50 billion a month later this year.
3) Treasury issuance is expected to reach 1 Trillion this year and in subsequent years.
Perhaps there may be other reasons for the surge in LIBOR? Feel free to contribute to the discussion...
USDSEK: UpdateWe have reentered longs on this dip back to the FOMC/Rate hike key level support.
I'm buying a position gradually for a couple more days, so far, I have fills at 9.1643 and 9.2085, which will constitute my reentry to ride the long term uptrend here. My trading plan lets me increase position size and reduce stops gradually, until the trend takes me out if it starts retracing, after which I wait to reenter at the end of the corrections.
Risking a drop under today's low is probably good, but also a bit aggressive for now. If it were to get oversold, we would have a bit less risk with tight stops, so for now, I risk 3 average ranges down from my avg. entry price. I'll gradually add, and eventually trail stops up in profit, and continue to add as per the plan if the trend remains up.
When markets are trending strongly, we can make a lot of money, so, make sure to not miss the moves here.
See related ideas for more information on this pair's signals. If interested in learning more, contact me via pm here.
Cheers,
Ivan Labrie.
USDSEK: Long term explosion pattern triggeredWe can enter longs safely here in USDSEK, this is potentially the final chance to catch this massive uptrend.
For the long term position, a wide stop is important but we can take a swing trade risking a stop at a new daily low under today's loww as well, additionally, but you will have to trail stops more aggressively with this 2ndary position.
Risk a total of 1-2% on the whole thing.
Good luck!
Ivan Labrie.
LONG EURCHF: POSSIBLE SNB INTERVENTION AT THE 1.08 HANDLELong EURCHF:
1. Having watched the 1.08 level closely post-brexit it certainly looks as if there is some FX intervention going on at the 1.08 handle - suspicions enforced even more as SNB President Jordan says FX intervention is on the cards should CHF move even higher/ Rate cut possible another 50bps.
2. Plus EUR vs CHF september rate expectations are skewed for a long EUR carry going forward + already EUR is more attractive than CHF (-0.4% vs -0.75% depo) - 1m CHF Libor currently pricing 25bps at 19% vs 1m EUR libor pricing 25bps at 12%.
3. Volatility is also v low so risk of downside is limitted, plus SNB are clear they will can intervene so the chance of long-term losses with this trade are close to 0.
Trading Strategy - buy EURCHF <1.0799 dips 1.081/5TP:
1. Buy EURCHF on any dips below the 1.08 level, maximum of 100pips TP but much more advisable to take 50 or by looking at the intra day moves even taking 10-20pips is possible several times a day as the market constantly moves higher after ANY dipping below the 1.08 handle.
- i wont be running a stop on this trade given the SNB's commitment and low IV and HV.
