CME Group set to launch two new SONIA futures

As the need to transition away from LIBOR gets more intense, so does the shift to other reference rates. There is nothing astonishing then that financial market participants are starting to roll out products related to these new rates. International derivatives marketplace CME Group Inc (NASDAQ:CME) has just unveiled its plans to launch Sterling Overnight Index Average (SONIA) futures on October 1, 2018, pending regulatory review.

CME Group will launch two new SONIA futures: a quarterly International Monetary Market (IMM) dated contract observing the recommended specifications of the Working Group on Sterling Risk Free Reference Rates; and a Bank of England Monetary Policy Committee (MPC) meeting dated contract. The MPC SONIA future is designed to meet the needs of market participants who require greater precision in managing exposure between the dates of the MPC meetings.

CME Group notes that it has been involved for several years in the global effort to incorporate alternative reference rates as risk management tools and launched the first transaction-based, US dollar interest rate SOFR futures in May 2018.

CME SONIA futures complement CME Group’s successful push into international fixed income markets through OTC Clearing.

Let’s recall that the overall objective of the Working Group on Sterling Risk-Free Reference Rates is to facilitate a broad-based transition from sterling Libor to SONIA by end-2021. The transition, of course, has its challenges. In July this year, Andrew Bailey, Chief Executive of the Financial Conduct Authority (FCA) stressed the need for market participants to be prepared for transitioning away from LIBOR. He made it clear that firms that the FCA supervises will need to be able to demonstrate to FCA supervisors and their PRA counterparts that they have plans in place to mitigate the risks, and to reduce dependencies on LIBOR.

In particular, some firms will also have obligations to disclose and consider risks to investors when they sell LIBOR-related instruments, he explained. Issuers of LIBOR-related listed securities, for instance, owe duties of disclosure under prospectus requirements, and must ensure these have been fulfilled. Banks and investment firms also need to consider the design and risks of any new LIBOR-referencing instruments as part of their product governance obligations, considering and describing the impact of LIBOR discontinuation on those instruments. And they will need to provide all appropriate information to all distributors of those financial instruments.