December 9, 2023

Friday marked the last day of trading for eurodollar futures, one of the primary instruments traders use to telegraph their expectations for Federal Reserve policy or hedge the direction of short-term interest rates.

Eurodollar futures have not existed as part of the long and well-telegraphed transition that has been tied to derivatives. london interbank offered ratewho was the subject of the scandal a decade ago that involved allegations of merchants collusion to fix Libor.

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Understanding the LIBOR Scandal And Introduction to Eurodollar Futures and Options

LIBOR’s substitute is the Secure Overnight Financing Rate, or SOFR. The Chicago Mercantile Exchange, where nearly all Eurodollar futures are traded, will convert Eurodollar futures contracts to SOFR contracts. According to TD Securities senior US rates strategist Gennady Goldberg, there are about $5 trillion still outstanding in eurodollar futures, or 5 million contracts worth $1 million each – a number that should turn to zero later this week.

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“LIBOR and eurodollar futures have been key to finance for the past 40 years, so the move to SOFR will mark a new chapter in benchmark rates,” Goldberg said Friday via phone. “They were important because they were pervasive in basically almost all financial agreements, easily accessible and easily understood.”

Meanwhile, the number of 3-month SOFR futures due 2021-2022 has been rising, and there are now nearly $10 trillion worth of contracts outstanding, based on data from TD and Bloomberg. The TD strategist said this figure reflects the entire universe of SOFR futures contracts that exist.

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Sources: Bloomberg, TD Securities

According to a TD note released earlier this week, market participants and the central counterparty clearing house “have been preparing for the transition and ‘dress rehearsal’ on the process for some time.”

The LIBOR scandal involved allegations that traders and brokers influenced the daily London Interbank Offered Rate, helping to determine the price of the lucrative derivatives they traded. Although many traders eventually overturned their guilty convictions, the scandal sparked a series of reforms.

On Friday, investors and traders were focused on the prospect of at least one more rate hike by the Federal Reserve, following comments by Atlanta Fed Govs Christopher Waller and Raphael Bostic. 2-Year Treasury Yield TMUBMUSD02Y,
rose 12.8 basis points to 4.103%, its highest level in more than three weeks, while all three major US stock indexes DJIA,


low end.

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