CME Term SOFR is regulated under UK BMR and is IOSCO compliant, requiring strict governance for benchmarks that include methodology, an oversight committee, and regular third party audits.

CME Group Benchmark Administration Limited (CBA) is a registered Benchmark Administrator under UK BMR and is authorized and supervised by the UK Financial Conduct Authority (FCA).  

CME Term SOFR has a highly robust calculation methodology. The methodology strength was noted by ARRC in its original endorsement statement:

The ARRC identified CME Group’s submission as the strongest proposal after a thorough evaluation of the RFP responses. The ARRC evaluated proposals based on four specific criteria: technical criteria, firm criteria, public policy criteria, and calculation methodology criteria. The ARRC has conclusively identified CME Group’s proposal as having most effectively met those criteria.¹

The methodology highlights that the inputs to the calculation to produce the ARRC approved forward-looking term rate are based on deep trading from the first 13 1-Month and five 3-Month SOFR futures contracts. The methodology elegantly captures the markets view of the term interest rate structure of the trillions of dollars underling both the overnight SOFR (as produced by the NY FED) and CME SOFR futures.

CME Term SOFR is built on deep, liquid, transactional volumes across the trading day of thousands of trades and trillions of dollars. CME Term SOFR is calculated using CME SOFR futures trading activity – 13 1-Month and five 3-Month SOFR futures contracts. In Q4 2022, ADV underlying the calculation of CME Term SOFR was over $1.6 trillion.

ARRC recommended Fallback Rates are based on CME Term SOFR Rates. The ARRC officially endorsed the use of CME Term SOFR in legacy LIBOR cash products under the terms of its recommended fallback language. For Consumer Products, the use of CME Term SOFR is recommended. For Commercial (non-consumer) Cash Products, the ARRC recommends the use of CME Term SOFR plus a spread-adjustment.

The market has work to do to prepare for LIBOR Cessation on June 30, 2023. The ARRC estimated that nearly $74 trillion of USD LIBOR contracts are set to mature after the LIBOR cessation date. Of that amount it further estimated that $5 trillion of these contracts were related to cash linked products². While a great amount of work has been done, time is running out to transition these products to CME Term SOFR. In July 2022, the ARRC released its LIBOR Legacy Playbook to help the market understand the importance, need to plan, and a roadmap for successful transition from LIBOR before June 30, 2023.

Loans linked to CME Term SOFR are growing significantly. CME Term SOFR is already used in loans and securitizations. Since the launch of Term SOFR through to the end January 2023, over 6,000 known loans were underwritten with CME Term SOFR as a reference. This amounts to over $3.2 trillion of loan notional amounts.

OTC Derivatives for associated hedging purposes of cash interments are steadily growing. Derivatives referenced to CME Term SOFR are used to hedge underlying cash transactions linked to CME Term SOFR. This provides additional insights to the growing volumes of activity in the underlying cash market. These figures also show the incredible growth in caps and floors to hedge optionality embedded in these deals. Year-to-date, almost $100 billion of swaps, and closing in on $491 billion, including caps and floors, have traded.

Source: Clarius data includes Fixed/Float swaps and is exclusive of single period swaps, basis swaps, and FRAs

Source: Clarius data inclusive of all activity in Table 1, as well as Caps and Floors

Licensing of CME Term SOFR is large and continues to grow globally. More than 2,200 firms comprising over 8,000 real-time and historic licenses for CME Term SOFR have been executed. In addition to underwriters, issuers, and borrowers, commercial service providers such as loan/risk management platforms and valuation services are also using CME Term SOFR in the provision of their services.

Growth in the underlying market continues to expand exponentially as well. Supporting all this activity is the continued growth of the SOFR futures and options market.

The message is clear. CME Term SOFR is the sole ARRC endorsed term rate, backed by strong methodology, used by thousands of firms, supporting trillions of dollars, and growing in underwritten assets and built on enormous growing transactional volumes.  Use CME Term SOFR to adeptly and smoothly transition from legacy USD LIBOR contracts before June 30, 2023.

1. ALTERNATIVE REFERENCE RATES COMMITTEE, May 21, 2021, ARRC Releases Update on its RFP Process for Selecting a Forward-Looking SOFR Term Rate Administrator, https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210521-ARRC-Press-Release-Term-Rate-RFP.pdf
   
2. LIBOR Legacy Playbook link (https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2022/LIBOR_Legacy_Playbook.pdf)
3. Progress Report: The Transition from U.S. Dollar LIBOR, The Alternative Reference Rates Committee, March 2021 (Updated as of March 31, 2021), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/USD-LIBOR-transition-progress-report-mar-21.pdf