In general, how has the futures market been coping with the transition from LIBOR to SOFR?

Every new futures contract faces an enormous challenge—the new contract must displace similar existing derivatives that are already very liquid.  The liquidity disadvantage means many well designed futures contracts fail to take off.  

But SOFR futures have two enormous edges.  First, the liquidity of some LIBOR alternatives seems likely to decay as the end of 2021 approaches, meaning any liquidity penalty in SOFR futures will be short lived.  Second, it is unclear how LIBOR exposure will be converted into SOFR exposure-- there could be large P&L implications depending on which approach is used.  This gives market participants a powerful incentive to pre-empt the LIBOR/SOFR conversion protocol by migrating to SOFR early.   

What are the recurring challenges with carrying out such a huge transition?

LIBOR’s broad usage has created an enormous number of stakeholders with sharply different priorities.  Coming up with a consistent approach across all exposures will be critical to minimizing disputes.  Coordinating across all of these stakeholders is a monumental task.  

For a significant percentage of the LIBOR exposure, any suggested protocol for shifting to SOFR is not legally enforceable, which means bilateral negotiation will be needed.  There are likely to be capacity limits created by a lack of subject experts, etc.  One of the nice things about SOFR futures is that you can bypass these disputes by moving directly to SOFR.   

What would you like to achieve by attending the Examining the Impact of SOFR on Rate Strategy Conference?

Every stakeholder has different priorities, and we need to coordinate across all stakeholders in order to come up with a good solution for converting LIBOR exposure to SOFR exposure.  I hope to gain a better understanding of others’ viewpoints, so we can incorporate those needs in our approach.

What do you hope attendees will get out of the event?

The time frame to complete LIBOR transition by the end of 2021 is extremely tight.  I hope attendees leave feeling more confident in prioritizing the steps needed to be ready in time.