Secured Overnight Financing Rate

(SOFR) Futures

Launched May 7, 2018

www.cmegroup.com/sofr

© 2018 CME Group. All rights reserved.

 Introduction to SOFR and the ARRC
In 2014, the Federal Reserve commissioned the Alternative Reference Rates Committee (ARRC), tasked
with identifying an alternative USD interest rate benchmark based firmly in market transaction data. After
extensive research, in June 2017 the ARRC selected the Secured Overnight Financing Rate (SOFR),
a broad treasury financing rate, as the preferred alternative reference rate for the USD Marketplace
Recent events have intensified focus on the path forward for short-term interest
rate (STIR) products
July 2014 Nov 2014 Jun 22, 2017 July 27, 2017 April 3, 2018
Financial Federal Reserve
ARRC endorses Financial Conduct Federal
Stability Board Board forms the
SOFR as Authority (FCA) Reserve Bank
(FSB) initiated Alternative
preferred highlights that it of New York
a global effort Reference Rates will not mandate
alternative begins
to review and Committee LIBOR submission
reference rate publishing
reform (ARRC) for U.S. post-2021
for USD market SOFR daily
benchmarks marketplace

CME Group has been deeply involved in this initiative for several years
Member of LIBOR Oversight Committee since April 2013
Member of ARRC since September 2015
Participant in ISDA Working Group on Benchmark Fallbacks
Published White Paper: What’s Next for LIBOR and Eurodollar Futures?
Hosted market-wide webinar on ARRC and SOFR, attended by 900 market participants
Collected feedback from 100+ participants on SOFR Futures design
Launched SOFR Futures on May 7, with 60 participants in the first week

© 2018 CME Group. All rights reserved. 2

What is the Secured Overnight Financing Rate (SOFR)?
• SOFR is endorsed by the Fed-sponsored Alternative Reference Rate Committee (ARRC) as a robust
alternative reference rate for the USD Marketplace

• ARRC’s criteria included liquidity of the underlying market, usefulness to all market participants,
feasibility of calculating the rate, and consistency with IOSCO principles for benchmarks (such as
Benchmark Quality and Governance)*

• Underpinned by the U.S. Treasury overnight repurchase (repo) market, for which the pool of eligible
transactions exceeds $700 billion per day, and is growing**
- Data to be sourced from tri-party repo data from Bank of New York Mellon (BNYM), and cleared bilateral and GCF
Repo data from the Depository Trust & Clearing Corporation (DTCC)

- Calculated as a transaction-volume-weighted median rate

- Various filters and trims are applied to cleared bilateral and GCF transactions from DTCC to clean
idiosyncrasies such as inter-company transactions and repo specials. Also, the Fed’s RRP
transactions are excluded to help determine the representative cost of overnight secured funding.

• SOFR is financially distinct but highly correlated with benchmark Eurodollar and Fed Fund rates.
Therefore, we believe that the Eurodollar, Fed Fund, and SOFR futures may co-exist for a long time
providing valuable choice in investing, risk management, and hedging tools.

*ARRC Second Report, page 4

**ARRC Second Report, page 7
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report

© 2018 CME Group. All rights reserved. 3

 50.0
100.0
150.0
200.0
250.0

0.0
8/22/2014
9/22/2014
10/22/2014
11/22/2014
12/22/2014
1/22/2015
2/22/2015
3/22/2015
4/22/2015
5/22/2015
6/22/2015
7/22/2015
8/22/2015
9/22/2015
10/22/2015
11/22/2015
12/22/2015

3M SOFR Compounded
1/22/2016
2/22/2016
3/22/2016
EFFR, and 3-Month LIBOR®

4/22/2016
5/22/2016
6/22/2016
7/22/2016
8/22/2016
9/22/2016
10/22/2016

3M EFFR Compounded
11/22/2016
12/22/2016
1/22/2017
2/22/2017
3/22/2017
3M LIBOR

4/22/2017
5/22/2017
6/22/2017
7/22/2017
8/22/2017
9/22/2017
10/22/2017
11/22/2017
3-Month Compounded SOFR, 3-Month Compounded

12/22/2017
© 2018 CME Group. All rights reserved.

1/22/2018
2/22/2018
4

3/22/2018
Based on extensive customer input, CME Group
launched 3-Month and 1-Month SOFR Futures contracts
SOFR Futures Product Development Timeline

• The 3-Month SOFR futures strip consists of 20 quarterly contracts which settle to
the compounded SOFR in a given reference period between two IMM dates
• The 1-Month SOFR futures strip consists of 7 monthly contracts which settle to the
arithmetic average of SOFR in a given calendar month

Complementarity between SR3 and SR1: The 1-Month SOFR futures strip will prove useful to market participants
who seek finer granularity in framing market expectations of future SOFR values over the nearby 1-month to 7-
month interval during which the front 3-Month contract becomes more set each day from daily SOFR fixings.
After the nearby contract enters its Reference Quarter, the contract rate becomes a mix of (i) known SOFR values, ie,
published values for all days from start of the Reference Quarter to the present, and (ii) market expectations of SOFR
values for all remaining days in the Reference Quarter that lie ahead.

© 2018 CME Group. All rights reserved. 5

SOFR Futures Contract Design: Launching May 7, 2018
Based on extensive customer input, CME Group launched 3-Month and 1-Month SOFR futures contracts.
The 1-Month SOFR futures strip will prove useful to market participants who seek finer granularity in
framing market expectations of future SOFR values over the nearby 1-month to 7-month interval during
which the front 3-Month contract becomes more set each day from daily SOFR fixings.
3-Month SOFR Futures 1-Month SOFR Futures
Compounded daily Secured Overnight
Average daily Secured Overnight Financing Rate
Financing Rate (“SOFR”) interest during
(“SOFR”) interest during futures contract delivery
Contract Unit contract Reference Quarter, such that each
month, such that each basis point per annum of
basis point per annum of interest = $25 per
interest is worth $41.67 per futures contract.
contract.

Price Basis Contract-grade IMM Index: 100 minus R Contract-grade IMM Index: 100 minus R

Contract Size $25 per basis point per annum $41.67 per basis point per annum

Nearby Delivery Month: 0.0025 IMM Index Nearby Delivery Month: 0.0025 IMM Index
points (¼ basis point per annum) equal to points (¼ basis point per annum) equal to
$6.25 per contract $10.4175 per contract
Minimum Price Fluctuation
All Other Delivery Months: 0.005 IMM Index All Other Delivery Months: 0.005 IMM Index
points (½ basis point per annum) equal to points (½ basis point per annum) equal to
$12.50 per contract $20.835 per contract
Nearest 20 March Quarterly months
Delivery Months Nearest 7 calendar months
(Mar, Jun, Sep, Dec)

Globex Product Code SR3 SR1

For more specific SOFR contract specifications, please refer to Appendix slides 12 and 13

© 2018 CME Group. All rights reserved. 6

 3-Month SOFR vs. Eurodollar Futures: Contract Months
and Reference Periods
• Due to the nature of their underlying rates, Eurodollar Futures are forward looking (using
3-month rates) while SOFR Futures are backward looking (using an overnight rate)
• SOFR Futures are named so that each contract month’s 3-month reference period
begins at the same time of as the most relevant Eurodollar future
• While the reference period is the same for both products, the final settlement date and
last trade date differs

Indicates final settlement day

Sep 2018 IMM Date

9/19/2018 Dec 2018 IMM Date
12/19/2018

EDU8 Reference Period

SR3U8 Reference Period

© 2018 CME Group. All rights reserved. 7

Inter-Commodity Spreads facilitate liquidity formation in
SOFR Futures
• CME Globex offers spread instruments that reduce leg risk and improve
liquidity formation by matching orders from related markets
• We offer inter-commodity spreads between short term interest rate futures
• Eurodollars vs. Fed Fund Futures launched March 12

• 1-Month SOFR vs. Fed Fund Futures available May 7 (with implied)

• 3-Month SOFR Futures vs. Eurodollar Futures available May 7 (with implied)

• 3-Month SOFR Futures vs. 1-Month SOFR Futures available May 7

• 3-Month SOFR Futures vs. Fed Fund Futures available May 7

• Implied functionality creates orders using related spread markets.

• For example, if there are market makers providing liquidity in 1-Month SOFR vs. Fed Fund
Futures, the CME Globex match engine will use this in combination with the Fed Fund
markets to create orders in the SOFR outrights

CME Clearing provides margin offsets of up to 85% between related STIR Futures

© 2018 CME Group. All rights reserved. 8

Inter-commodity spreads for Short Term Interest Rates
Spreading against established liquidity pools of FF and ED futures assist in developing liquidity in SOFR futures

10:6 Ratio; 4 Listed

Eurodollar Fed Funds

1:1 Ratio; 10:6 Ratio; 4 Listed 1:1 Ratio;

20 Listed 7 Listed

SR3 10:6 Ratio; 3 Listed SR1

Spread Weightings
• Fed Funds and 1-Month SOFR Futures are $41.67 DV01 contracts
• Eurodollars and 3-Month SOFR Futures are $25 DV01 contracts
• To keep positions balanced, spreads between instruments with different DV01s will be weighted to have 10:6 leg ratios
to balance the risk, derived from the DV01s which are $41.67 for 1-Month contracts (Fed Funds and SR1) and $25.00
for 3-Month contracts (Eurodollars and SR3)
• For weighted spreads, Legs are arranged to match exposures between IMM dates: 1 quarterly Eurodollar or 3-Month
SOFR Future spread against the next 2 Fed Fund or 1-Month SOFR Futures contract months (e.g. 3 April FF + 3 May
FF vs. 10 March ED)
Spread
Globex Symbol Example Implied Y/N Front Leg Back Leg Leg Ratio Launch Date
Code
ZQJ8K8-GEH8 EF No Fed Funds Eurodollars (3+3) : 10 March 12
SR3H8-GEH8 IS Yes SOFR 3-Month Eurodollars 1:1 May 7
SR1H8-ZQH8 IS Yes SOFR 1-Month Fed Funds 1:1 May 7
SR1J8K8-SR3H8 EF No SOFR 1-Month SOFR 3-Month (3+3) : 10 May 7
ZQJ8K8-SR3H8 EF No Fed Funds SOFR 3-Month (3+3) : 10 May 7

© 2018 CME Group. All rights reserved. 9

 Secured Overnight Financing Rate (SOFR) Swaps
CME is targeting Q3-2018 for clearing OTC SOFR-based swaps.
• Clearing OTC SOFR Swaps further extends CME Group’s leadership as the only clearing house to
offer clearing for Interest Rate Swaps, Swaptions and Interest Rate futures within a single netting pool.
• The deep liquidity and potential offsets found in our Interest Rate franchise makes CME the natural
home for SOFR clearing.

*Pending regulatory review

© 2018 CME Group. All rights reserved. 10

CME Offerings in light of ARRC’s Paced Transition Plan
2017 2018 2019 2020 2021

1 2 3 4 5 6 7

Step Timing

1 ARRC Nominates SOFR as preferred rate for U.S. Dollar marketplace June 22, 2017 (Complete)

2 SOFR daily publication begins April 3, 2018 (Complete)

3 CME futures contracts launch May 7, 2018 (Complete)

CME provides OTC Clearing for SOFR OIS (Fed Funds used for discounting
4 Q3-2018
and price alignment)

CCPs begin accepting swaps that use SOFR for discounting and price
5 Q1-2020
alignment

CCPs no longer accept new swap contracts for clearing with EFFR as PAI
6 Q1-2021
and discounting, except for the purpose of reducing risk in legacy contracts

Creation of term reference rate, potentially based on SOFR-derivatives

7 Before end of 2021
markets once liquidity has developed sufficiently to produce a robust rate

Source: ARRC Roundtable November 2nd

https://www.newyorkfed.org/arrc/meetings

© 2018 CME Group. All rights reserved. 11

Why Trade SOFR Futures?
• Futures are a reliable indicator of market expectations of SOFR along the curve
• Easy spread trading against Eurodollar and Fed Fund futures via CME Globex inter-commodity
spreads, provides a transparent basis market
• Margin efficiencies against Eurodollar and Fed Fund Futures, up to 85%, and will become eligible for
efficient portfolio margining against CME-cleared swaps
• SOFR futures since launch are supported by over ten market makers

• Clients have indicated that

SOFR futures will have
immediate investing, risk
management, and hedging
applications for repo and
relative value traders.
• Differences in SOFR and
EFFR are affected by supply
and demand dynamics in
each market, and create
relative value trading
opportunity for futures market
participants

See the latest version of this chart (and more) at www.cmegroup.com/stiranalytics

© 2018 CME Group. All rights reserved. 12

SOFR Activity
• Day 1 volume 3,200 contracts, with participants using both 1-Month SOFR Futures
(SR1) and 3-Month SOFR Futures (SR3)
• Open Interest reached 11,000 at the end of the first month (6/1/2018)
• 60 Global Firms participated in the first week of activity, including a mix of banks,
hedge funds, asset managers, and proprietary trading firms
• There are a dozen participants in the market making program providing 2-sided quotes

Markets often trading at 0.5 basis points wide (min. tick) across the
front five expiries in both SR1 and SR3

© 2018 CME Group. All rights reserved. 13

For more information…

Visit our website at www.cmegroup.com/sofr to find

contract specifications, educational materials, analytical
tools, and more.

Or contact the interest rate product team at

[email protected]

© 2018 CME Group. All rights reserved. 14

Appendix

© 2018 CME Group. All rights reserved.

SOFR Futures – Vendor Codes for Outrights and Spreads

© 2018 CME Group. All rights reserved. 16

Contract Specifications: Three-Month SOFR futures
Three-Month SOFR futures

Trading Unit Compounded daily Secured Overnight Financing Rate (“SOFR”) interest during contract Reference Quarter, such that each basis point per
annum of interest = $25 per contract. Reference Quarter: For a given contract, interval from (and including) 3rd Wed of 3rd month
preceding Delivery Month, to (and not including) 3rd Wed of Delivery Month.
Price Basis Contract-grade IMM Index: 100 minus R.
R = compounded daily SOFR interest during contract Reference Quarter.
Contract Size $25 per basis point per annum

Minimum Price Contracts with Four Months or Less Until Termination of Trading: 0.0025 IMM Index points (¼ basis point per annum) equal to $6.25
Increment per contract All Other Contracts: 0.005 IMM Index points (½ basis point per annum) equal to $12.50 per contract
Last Trading Day Exchange Business Day first preceding 3rd Wed of Delivery Month. Termination of Trading: Close of CME Globex trading on Last Day of
Trading.

Delivery Cash settlement, by reference to Final Settlement Price, on first US government securities market business day following Last Day of
Trading.
Final Settlement Price: Contract-grade IMM Index evaluated on the basis of realized SOFR values during contract Reference Quarter
R = [ Πi {1+(di/360)*(ri/100)} – 1 ] x (360/D) x 100
n = Number of US government securities market business days in the Reference Quarter
i ~ Running variable indexing US government securities market business days during Reference Quarter
Πi denotes the product of values indexed by the running variable, i = 1,2,…,n.
ri = SOFR value for i th US government securities market business day
di = Number of calendar days to which ri applies D = Σidi (ie, number of calendar days in Reference Quarter)
Contract Months Nearest 20 March Quarterly months (Mar, Jun, Sep, Dec).

For each contract, Contract Month is the month in which Reference Quarter begins. Example: For a “Sep” contract, Reference Quarter
starts on IMM Wed of Sep and ends with Termination of Trading on the first US government securities market business day before IMM
Wed of Dec, the contract Delivery Month.
CME Globex Allocation (A Algorithm, with Top Order Allocation = 100% and Pro Rata Allocation = 100%)
Algorithm
Block Minimum 4pm–12am CT, Mon-Fri on regular business days and at all weekend times: 1,000 contracts
12am– 7am CT, Mon-Fri on regular business days: 2,000
7am–4pm CT, Mon-Fri on regular business days: 4,000
Product Code SR3

Bloomberg Code SFRA Comdty <GO>

© 2018 CME Group. All rights reserved. 17

Contract Specifications: One-Month SOFR futures
One-Month SOFR futures

Trading Unit Average daily Secured Overnight Financing Rate (“SOFR”) interest during futures contract Delivery Month, such that each basis point per
annum of interest is worth $41.67 per futures contract.

Price Basis Contract-grade IMM Index: 100 minus R.

R = average daily SOFR interest during contract Delivery Month.
Contract Size $41.67 per basis point per annum

Minimum Price 0.005 IMM Index points (½ basis point per annum) equal to $20.835 per contract, provided that:
Increment • If first day of contract Delivery Month is Sat, Sun, or Mon, then MPI is 0.0025 Index points, equal to $10.4175 per contract, as of first
trading day of contract Delivery Month.
• If first day of contract Delivery Month is Tue, Wed, Thurs, or Fri, then MPI is 0.0025 Index points, equal to $10.4175 per contract, as of
last Sunday of month preceding contract Delivery Month.
Last Trading Day Last Exchange Business Day of contract Delivery Month.

Delivery Cash settlement, by reference to Final Settlement Price, on first US government securities market business day following Last Day of
Trading. Final Settlement Price: Contract-grade IMM Index evaluated at R = arithmetic average of daily SOFR during Delivery Month.

Contract Months Nearest 7 calendar months

CME Globex Split FIFO and Pro-Rata (K Algorithm, with Top Order Allocation = 100% and Pro Rata Allocation = 100%)
Algorithm
Block Minimum 4pm–12am CT, Mon-Fri on regular business days and at all weekend times: 500 contracts
12am– 7am CT, Mon-Fri on regular business days: 1,000
7am–4pm CT, Mon-Fri on regular business days: 2,000
Product Code SR1

Bloomberg Code SERA Comdty <GO>

© 2018 CME Group. All rights reserved. 18

Disclaimer
CME (“the Exchange”) has entered into an agreement with ICE Benchmark Administration Limited which permits the Exchange to use ICE LIBOR as the basis for
settling Three–Month Eurodollar futures contracts and to refer to ICE LIBOR in connection with creating, marketing, trading, clearing, settling and promoting Three–
Month Eurodollar futures contracts.

Three–Month Eurodollar futures contracts are not in any way sponsored, endorsed, sold or promoted by ICE Benchmark Administration Limited, and ICE
Benchmark Administration Limited has no obligation or liability in connection with the trading of any such contracts. ICE LIBOR is compiled and calculated solely by
ICE Benchmark Administration Limited. ICE LIBOR® is a registered trademark of Intercontinental Exchange Holdings, Inc. and is used under license. However,
ICE Benchmark Administration Limited shall not be liable (whether in negligence or otherwise) to any person for any error in ICE LIBOR, and ICE Benchmark
Administration Limited shall not be under any obligation to advise any person of any error therein.

ICE BENCHMARK ADMINISTRATION LIMITED MAKES NO WARRANTY, EXPRESS OR IMPLIED, EITHER AS TO THE RESULTS TO BE OBTAINED FROM
THE USE OF ICE LIBOR AND/OR THE FIGURE AT WHICH ICE LIBOR STANDS AT ANY PARTICULAR TIME ON ANY PARTICULAR DAY OR OTHERWISE.
ICE BENCHMARK ADMINISTRATION LIMITED MAKES NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE FOR USE WITH RESPECT TO THREE–MONTH EURODOLLAR FUTURES CONTRACTS.

Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors
who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged
investments and, because only a percentage of a contract's value is required to trade, it is possible to lose more than the amount of money deposited for either a
futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds
should be devoted to any one trade because traders cannot expect to profit on every trade. All references to options refer to options on futures.

Any research views expressed those of the individual author and do not necessarily represent the views of the CME Group or its affiliates. The information within
this presentation has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. All examples are
hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience.

All matters pertaining to rules and specifications herein are made subject to and are superseded by official rulebook of the organizations. Current rules should be
consulted in all cases concerning contract specifications

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Copyright © 2018 CME Group. All rights reserved.

© 2018 CME Group. All rights reserved.