LONDON, Oct 26 (IFR) - The InterContinental Exchange will launch futures referencing the Sterling Overnight Index Average on December 1, ahead of a planned phase-out of Libor and the adoption of Sonia as the preferred replacement for sterling contracts.
The exchange will offer one-month cash-settled contracts on the Bank of England-administered benchmark, which is currently undergoing a series of reforms, with the new-look rate set to be published from April 2018.
“We are pleased to introduce Sonia futures to our sterling interest rate portfolio alongside the highly liquid short sterling and gilt futures markets,” said Stuart Williams, president of ICE Futures Europe, in a statement.
“We’ve seen significant growth in demand in both sterling and euro interest rate futures and options this year, and remain committed to developing innovative solutions that meet the needs of our customers.”
Regulators around the world aim to wean over US$350trn of derivatives and other financial contracts away from Libor, after a widespread rate-rigging scandal brought the benchmark into disrepute and left submitting banks facing billions of dollars in regulatory fines.
Confirmation of ICE’s plans come just a week after CEO, Jeff Sprecher, raised concerns at an industry conference around global plans to phase-out Libor, which the exchange group has administered since 2014.
“While these other efforts are going on to replace, which are going to be difficult, there is also an effort going on to make even better,” Sprecher told delegates at Futures Industry Association’s annual futures and options Expo in Chicago last week. “Today it is much better than it was years ago and would be very hard to manipulate.”
ICE trades as many as 1m futures each day on three-month sterling Libor and three-month Euribor, with open interest of around 4m contracts in each.
He said that overnight rates may not be an appropriate reference for many financial contracts, noting ICE’s recent bond and loan refinancing, which extended the group’s reliance on three-month Libor for another five years.
Sprecher was sceptical that liquid forward-pricing curves would develop to address that mis-match.
“It has been my experience that when you force people to trade something, when there’s not an underlying economic reason for it, it’s very difficult,” said Sprecher. “If we could do that, we would all be doing that every day.”
Earlier this week, CurveGlobal, the London Stock Exchange Group’s fixed income derivatives platform, told IFR that it was in the process of confirming contract specs for new Sonia futures with its clients, for launch in 2018.
”We will launch something in this space next year and plan to offer futures on a number of rates, potentially one per currency,“ Andrew Ross, CEO of CurveGlobal, told IFR. ”The Bank of England have a clear plan to move the market away from Libor and we are in the perfect position to launch innovative products based on the new rates to support this.”
Eurex is also considering new products referencing alternative risk-free rates. The Deutsche-Boerse owned derivatives exchange already offers futures on Sonia’s euro-equivalent, Eonia, but has seen limited activity in the contracts.
“There is certainly the need to come up with a benchmark on real traded prices and it will help if regulators provide guidance,” said Thomas Book, CEO of Eurex, speaking at the FIA event. “We will closely look at it, there is now a view in the UK and not yet a view on the EU, but certainly we’ll come up with products to support it,” he said.
European regulators are yet to agree on a Euribor replacement for euro-denominated contracts. Eonia was originally perceived as a likely candidate, but a slump in unsecured lending used to determine the rate raised questions around its robustness. The ECB recently announced plans for a new unsecured overnight rate whose features will be determined over the coming year.
The US Federal Reserve aims to start publishing a new Secured Overnight Funding Rate (SOFR) by mid-2018. The new benchmark, a broad Treasury repo rate, was selected in June by the Alternative Reference Rates Committee. (Reporting by Helen Bartholomew)