CME Group to Launch Adjusted Interest Rate S&P 500 Total Return (SOFR) Futures on August 26

Rhea-AI Summary

CME Group (CME) has announced the launch of Adjusted Interest Rate S&P 500 (AIR) Total Return (SOFR) futures on August 26, 2024, pending regulatory review. This new product will use the Secured Overnight Financing Rate (SOFR) instead of the current Effective Federal Funds Rate (EFFR). The move comes as SOFR has become the preferred industry benchmark for short-term U.S. overnight financing.

Key points:

• Year-to-date average daily volume of 9,800 contracts in existing AIR Total Return futures, up 113% year-over-year
• CME Group SOFR futures have a year-to-date average daily volume of 3.3 million contracts
• The new SOFR-based contracts aim to provide additional flexibility for managing swap exposure

Positive

• Launch of new Adjusted Interest Rate S&P 500 (AIR) Total Return (SOFR) futures, expanding product offerings
• Record average daily volume of 9,800 contracts in existing AIR Total Return futures, up 113% year-over-year
• SOFR futures showing strong performance with 3.3 million contracts average daily volume year-to-date

Negative

• None.

Insights

Financial Derivatives Expert

CME Group's launch of Adjusted Interest Rate S&P 500 Total Return (SOFR) Futures marks a significant evolution in the derivatives market. This move aligns with the industry's shift towards SOFR as the preferred benchmark rate, replacing the Effective Federal Funds Rate (EFFR). The transition reflects broader market trends and regulatory changes following the LIBOR scandal.

The new product offers several key advantages:

• Enhanced risk management: It provides a more accurate tool for hedging interest rate risk in equity portfolios.
• Increased liquidity: Given SOFR's growing adoption, these futures could attract more market participants, potentially improving liquidity.
• Regulatory alignment: The shift to SOFR aligns with regulatory push for more robust benchmark rates.

The 113% year-over-year growth in AIR Total Return futures volume indicates strong market demand for these products. With an average daily volume of 9,800 contracts, there's clear appetite for efficient OTC alternatives. The addition of SOFR-based contracts could further accelerate this growth.

However, market participants should be aware of potential challenges:

• Transition period: There may be a learning curve as traders adapt to the new SOFR-based product.
• Basis risk: Differences between SOFR and EFFR could lead to new basis risks in some trading strategies.
• Market fragmentation: The introduction of a new product alongside existing ones could temporarily split liquidity.

Overall, this launch represents a strategic move by CME Group to stay ahead of market trends and regulatory changes, potentially strengthening its position in the equity index derivatives market.

Market Structure Analyst

CME Group's introduction of SOFR-based AIR Total Return futures is a strategic response to evolving market dynamics. This move highlights several key trends in financial market structure:

• Benchmark evolution: The shift from EFFR to SOFR reflects the broader market transition away from LIBOR-based rates, emphasizing the need for more robust and transaction-based benchmarks.
• Product innovation: By combining elements of equity index and interest rate products, CME is blurring traditional asset class boundaries, potentially attracting a wider range of market participants.
• OTC to exchange migration: The 113% year-over-year growth in AIR Total Return futures volume suggests a continued shift from OTC to exchange-traded derivatives, driven by regulatory pressures and the search for operational efficiencies.

The timing of this launch is particularly noteworthy. With SOFR futures already showing strong growth (3.3 million contracts average daily volume), CME is leveraging this liquidity to support a new product category. This cross-pollination between asset classes could create network effects, potentially boosting liquidity across CME's product suite.

However, the success of this new product will depend on several factors:

• Education and adoption: CME will need to educate market participants on the benefits and use cases of the new SOFR-based product.
• Liquidity provision: Ensuring sufficient market maker participation will be important for building initial liquidity.
• Regulatory landscape: Any changes in the regulatory treatment of SOFR or equity derivatives could impact the product's adoption.

In conclusion, this launch represents a significant development in market structure, potentially influencing how market participants manage equity and interest rate exposures in a post-LIBOR world.

CHICAGO, July 25, 2024 /PRNewswire/ -- CME Group, the world's leading derivatives marketplace, today announced plans to launch Adjusted Interest Rate S&P 500 (AIR) Total Return (SOFR) futures on August 26, pending regulatory review.

AIR Total Return futures on U.S. indices are designed to provide total return exposure with an overnight floating rate built in. The model for the new AIR S&P 500 Total Return futures remains the same; however, the new product will use the Secured Overnight Financing Rate (SOFR) as the embedded rate instead of the current Effective Federal Funds Rate (EFFR).

"As SOFR has become the preferred industry benchmark rate for short-term U.S. overnight financing, the addition of a SOFR-based AIR TRF contract will complement our current offerings and provide additional flexibility for managing swap exposure," said Paul Woolman, Global Head of Equity Index Products at CME Group. "Year-to-date, we have seen record average daily volume of 9,800 contracts in our existing suite of AIR Total Return futures, up more than 113% year-over-year, underscoring the demand for effective and cost-efficient alternatives to OTC equivalents."

AIR Total Return futures, based on the EFFR, are available across a range of major global indices – S&P 500, Nasdaq-100, Russell 1000, Russell 2000, Dow Jones Industrial Average, and the FTSE 100.

Launched in May 2018, CME Group SOFR futures have become the leading tool for hedging short-term interest rates, with a year-to-date average daily volume of 3.3 million contracts. Building on the growth and liquidity of the existing AIR TRF suite, these new SOFR-based contracts will combine the risk management strengths of CME Group's Equity Index and Interest Rate franchises.

For more information on these products, please visit www.cmegroup.com/sofrairtrf.com. 

As the world's leading derivatives marketplace, CME Group (www.cmegroup.com) enables clients to trade futures, options, cash and OTC markets, optimize portfolios, and analyze data – empowering market participants worldwide to efficiently manage risk and capture opportunities. CME Group exchanges offer the widest range of global benchmark products across all major asset classes based on interest rates, equity indexes, foreign exchange, energy, agricultural products and metals. The company offers futures and options on futures trading through the CME Globex platform, fixed income trading via BrokerTec and foreign exchange trading on the EBS platform. In addition, it operates one of the world's leading central counterparty clearing providers, CME Clearing. 

CME Group, the Globe logo, CME, Chicago Mercantile Exchange, Globex, and E-mini are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of Board of Trade of the City of Chicago, Inc. NYMEX, New York Mercantile Exchange and ClearPort are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. BrokerTec is a trademark of BrokerTec Americas LLC and EBS is a trademark of EBS Group LTD. The S&P 500 Index is a product of S&P Dow Jones Indices LLC ("S&P DJI"). "S&P®", "S&P 500®", "SPY®", "SPX®", US 500 and The 500 are trademarks of Standard & Poor's Financial Services LLC; Dow Jones®, DJIA® and Dow Jones Industrial Average are service and/or trademarks of Dow Jones Trademark Holdings LLC. These trademarks have been licensed for use by Chicago Mercantile Exchange Inc. Futures contracts based on the S&P 500 Index are not sponsored, endorsed, marketed, or promoted by S&P DJI, and S&P DJI makes no representation regarding the advisability of investing in such products. All other trademarks are the property of their respective owners.

CME-G

 

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SOURCE CME Group

FAQ

When will CME launch the Adjusted Interest Rate S&P 500 Total Return (SOFR) Futures?

CME Group plans to launch the Adjusted Interest Rate S&P 500 Total Return (SOFR) Futures on August 26, 2024, pending regulatory review.

What is the main difference between the new AIR S&P 500 Total Return futures and the existing ones?

The new AIR S&P 500 Total Return futures will use the Secured Overnight Financing Rate (SOFR) as the embedded rate instead of the current Effective Federal Funds Rate (EFFR).

What is the year-to-date average daily volume for CME's existing AIR Total Return futures?

The year-to-date average daily volume for CME's existing AIR Total Return futures is 9,800 contracts, which is up more than 113% year-over-year.

What is the year-to-date average daily volume for CME Group SOFR futures?

CME Group SOFR futures have a year-to-date average daily volume of 3.3 million contracts.