Tom Prickett, a senior JP Morgan trader, recently revealed that a transparent but unpopular trading method could become mainstream by next year. He was referring to the risk-free-rates (RFR) currency swap.
What is RFR?
Risk-Free-Rates currency swap was first used by Goldman Sachs and Morgan Stanley exactly one year ago for both legs of the trade. The EURUSD trade was reported to the Depository Trust & Clearing Corporation’s (DTCC) in November 2019, in an effort to mark the lenders’ motivation to move away from the LIBOR reference rates.
LIBOR, a controversial family of reference rates, will become extinct soon but alternatives like RFR are yet to find popularity among financial market participants, regulators, and banks.
Will RFR take over?
The cross-currency swap markets have not accepted alternative methods like the secured overnight financing rate (SOFR) yet. Yet, as LIBOR becomes extinct, these unpopular systems will become the benchmarks for cross-currency swapping overnight for both legs of the trade.
Tom Prickett, the co-head of EMEA Rates at JP Morgan commented on the efforts to move away from LIBOR in August this year. He said that LBBW and JP Morgan engaged in SOFR swaps transactions in early August, which was cleared by Eurex Clearing. Both SOFR Basis Swaps and SOFR Overnight Index Swaps were clearable at Eurex Clearing since July 2021.
Thilo Roßberg, the head of FICC Markets at LBBW said at the time that the institution is committed to finding an alternative European liquidity pool as LIBOR says goodbye. Prickett commented, Being the first to clear USD SOFR swaps at Eurex Clearing demonstrates our commitment to provide liquidity and support our European clients with their multi-currency derivatives clearing needs. This is another important milestone in the benchmark transition process and we’re delighted to be leading our clients through this positive industry change.”
The SOFR rate has been published by the Federal Reserve Bank of New York since April 2018. SOFR provides a broad measure of the cost of cash borrowings overnight that is collateralized by Treasury securities.