When is Eurodollar futures being replaced? And what should traders do now?
After years of anticipation, the transition away from Eurodollar futures is finally on the horizon. The Secured Overnight Financing Rate (SOFR) is set to become the new benchmark interest rate for a wide range of financial products, including futures contracts. This transition will have a significant impact on traders who use Eurodollar futures to hedge risk or speculate on interest rates.
What is Eurodollar futures?
Eurodollar futures are futures contracts that are based on the Eurodollar interest rate. The Eurodollar interest rate is the interest rate on U.S. dollar deposits held outside the United States. It is a key benchmark for short-term interest rates around the world.
Eurodollar futures are traded on the Chicago Mercantile Exchange (CME). They are available in a variety of contract sizes and maturities. Traders use Eurodollar futures to hedge risk or speculate on interest rates.
What is SOFR?
SOFR is a new benchmark interest rate that is based on the overnight repurchase agreement (repo) market. The repo market is a market where banks borrow and lend money on a short-term basis.
SOFR is calculated by taking the average of the interest rates on a set of repo transactions. It is a more robust and reliable benchmark than LIBOR, which is based on the submissions of a panel of banks.
When is the transition to SOFR happening?
The transition to SOFR is happening in two phases. The first phase began on January 1, 2022, when new Eurodollar futures contracts began to be based on SOFR. The second phase will begin on June 30, 2023, when all existing Eurodollar futures contracts will be converted to SOFR.
What should traders do now?
Traders who use Eurodollar futures should start to transition to SOFR as soon as possible. The first step is to become familiar with SOFR and how it differs from LIBOR. Traders should also start to use SOFR-based futures contracts.
There are a number of resources available to help traders make the transition to SOFR. The CME has published a number of articles and webinars on the topic. The Federal Reserve has also published a number of resources on SOFR.
Should traders close out their Eurodollar futures positions now?
Traders who are not comfortable with the transition to SOFR may want to consider closing out their Eurodollar futures positions now. However, it is important to note that the transition to SOFR is not expected to have a significant impact on the value of Eurodollar futures contracts.
Traders who do not close out their Eurodollar futures positions will need to be aware of the following:
All Eurodollar futures contracts will be converted to SOFR on June 30, 2023.
The value of Eurodollar futures contracts will be based on SOFR after June 30, 2023.
Traders who are not comfortable with the transition to SOFR may want to consider closing out their Eurodollar futures positions now.
What are the benefits of SOFR?
SOFR is a more robust and reliable benchmark than LIBOR. It is based on a larger and more diverse set of transactions. SOFR is also less susceptible to manipulation.
The transition to SOFR will benefit traders in a number of ways. SOFR is a more reliable benchmark, which will reduce the risk of disputes and litigation. SOFR is also less susceptible to manipulation, which will help to protect traders from fraud.
What are the risks of SOFR?
SOFR is a new benchmark, and there are some risks associated with its use. One risk is that SOFR could be more volatile than LIBOR. This could make it more difficult for traders to hedge risk or speculate on interest rates.
Another risk is that SOFR could be less liquid than LIBOR. This could make it more difficult for traders to enter and exit positions.
Overall, the benefits of SOFR outweigh the risks. SOFR is a more robust and reliable benchmark than LIBOR. It is also less susceptible to manipulation. The transition to SOFR will benefit traders in a number of ways.
What are the alternatives to Eurodollar futures?
There are a number of alternatives to Eurodollar futures that traders can use to hedge risk or speculate on interest rates. These alternatives include:
SOFR futures
Treasury futures
Fed funds futures
Interest rate swaps
Each of these alternatives has its own advantages and disadvantages. Traders should carefully consider their options before choosing an alternative to Eurodollar futures.
What is the future of Eurodollar futures?
Eurodollar futures are a legacy product that will eventually be phased out. The transition to SOFR is a major step in this process. Traders who use Eurodollar futures should start to transition to SOFR as soon as possible.
The future of Eurodollar futures is uncertain. It is possible that Eurodollar futures will continue to be traded for a number of years. However, it is also possible that Eurodollar futures will be completely phased out in the years to come.
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial advice. The author is not a financial advisor and does not provide personalized financial advice. Please consult a qualified financial advisor before making any investment decisions.
Please indicate：COINLIVEBASE » When is Eurodollar futures being replaced？ And what should traders do now？