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Friday marked the final day of trading for Eurodollars futures, one of the primary instruments that traders have used to telegraph their expectations for Federal Reserve policy or to hedge the direction of short-term interest rates.
Eurodollar futures are ceasing to exist as part of the long and well-telegraphed transition away from derivatives tied to the London interbank offered rate, which was the subject of a scandal a decade ago that involved allegations of traders colluding to fix LIBOR.
Read: Understanding the Libor Scandal and Introduction to Eurodollar Futures and Options
Taking LIBOR’s place is the Secured Overnight Financing Rate, or SOFR. The Chicago Mercantile Exchange, where almost all Eurodollar futures traded, will be converting Eurodollar futures contracts into SOFR contracts. There are roughly $5 trillion in Eurodollar futures still outstanding, or 5 million contracts worth about $1 million each — a number which should go down to zero this weekend, according to TD Securities senior U.S. rates strategist Gennadiy Goldberg.
“LIBOR and eurodollar futures have been critical to finance for the last 40 years so the move to SOFR will mark a new chapter in benchmark rates,” Goldberg said via phone on Friday. “They were critical because they were basically pervasive in almost all financial agreements, easily accessible, and easily understandable.”
Meanwhile, the number of 3-month SOFR futures has been rising since 2021-2022, and there are now around $10 trillion worth of those contracts outstanding, based on figures from TD and Bloomberg. That figure captures most of the entire universe of SOFR futures contracts which exist, the TD strategist said.
Source: Bloomberg, TD Securities
Market participants and central counterparty clearinghouses “have been preparing for the transition for some time and have undertaken ‘dress rehearsals’ on the process,” according to a TD note released earlier this week.
The LIBOR scandal involved allegations that traders and brokers influenced the daily London interbank offered rate, which helped set the value of lucrative derivatives they traded. Though a number of traders ultimately had their guilty convictions overturned, the scandal nonetheless led to a series of reforms.
On Friday, investors and traders were focused on the potential for at least one further rate hike by the Federal Reserve, following comments made by Gov. Christopher Waller and Raphael Bostic of the Atlanta Fed. The 2-year Treasury yield
TMUBMUSD02Y,
jumped 12.8 basis points to 4.103%, its highest level in more than three weeks, while all three major U.S. stock indexes
DJIA,
COMP,
finished lower.
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