Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080 

Commodity Futures Trading Commission

Office of Public Affairs

Three Lafayette Centre

1155 21st Street, NW

Washington, DC 20581

www.cftc.gov

October 15, 2021

CFTC’s MRAC Subcommittee on Interest Rate Benchmark Reform Responses to 

Frequently Asked Questions (FAQs) on “SOFR First” for Non-Linear Derivatives1

What is the “SOFR First” recommendation for non-linear derivatives from the MRAC 

Subcommittee on Interest Rate Benchmark Reform (“MRAC Subcommittee”)?

The MRAC Subcommittee believes that it is appropriate for interdealer brokers to change USD nonlinear derivative trading conventions to SOFR on November 8, 2021, and for dealers to specify 

physical settlement for SOFR-based swaptions until a benchmark for SOFR swap rates is published 

in a tradeable form and ISDA publishes updated settlement provisions for the USD SOFR ICE Swap 

Rate.

How does “SOFR First” for non-linear derivatives relate to the previous “SOFR First” 

milestone date for linear derivatives?

The “SOFR First” Transition Initiative represents a prioritization of interdealer trading in the Secured 

Overnight Financing Rate (SOFR) rather than the London Interbank Offered Rate (LIBOR). The 

MRAC has recommended “SOFR First”, inclusive of four distinct phases to occur sequentially: linear 

swaps (July 26, 2021), cross currency swaps (September 21, 2021), non-linear derivatives 

(November 8, 2021) and exchange-traded derivatives (TBD).

What products are considered USD non-linear derivatives?

For purposes of the “SOFR First” Transition Initiative, USD non-linear derivatives include swaptions, 

caps and floors. Other products like exotic options, Bermudan options and constant maturity swaps 

are not included in the MRAC Subcommittee’s recommended “SOFR First” Transition Initiative, and 

may continue trading in the interdealer market after November 8, 2021.

Can end users still transact using USD LIBOR non-linear derivatives after November 8, 2021?

Yes, the “SOFR First” Transition Initiative is designed for the interdealer market only. Dealers may 

still execute USD LIBOR non-linear derivatives with clients after November 8, 2021. However, global 

banking regulators have stated that supervised entities should cease entering into new contracts that 

use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. 

 

1 The “SOFR First” Transition Initiative was approved on July 13, 2021 by the Market Risk Advisory Committee (MRAC). 

The views, analyses, and conclusions expressed herein reflect the work of the Subcommittee on Interest Rate Benchmark 

Reform of the MRAC, and do not necessarily reflect the views of the Commodity Futures Trading Commission or its staff, 

or the U.S. government. 
Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080 

The “SOFR First” recommendation for linear swaps in July 2021 has been beneficial in removing 

liquidity impediments to transacting in SOFR linear swaps for end users, and the MRAC 

Subcommittee expects the “SOFR First” recommendation for non-linear derivatives to provide a 

similar benefit for end user activity in swaptions, caps and floors.

How can SOFR First for non-linear derivatives occur if there is not yet a tradeable benchmark 

for SOFR swap rates (for instance, the USD SOFR ICE Swap Rate), which may be important for 

valuing certain cash-settled non-linear products?

The MRAC Subcommittee recommends that dealers specify physical settlement for all interdealer 

swaption trades in connection with the SOFR First recommendation for non-linear derivatives. 

Swaptions that are physically settled do not create reliance on a benchmark for SOFR swap rates.

The MRAC Subcommittee understands from ICE Benchmark Administrator that a USD SOFR ICE 

Swap Rate benchmark is expected to become available in a tradeable form in the near term. The 

USD SOFR ICE Swap Rate is currently available in ‘beta’ form, and will be made tradeable by IBA 

once all necessary data validation and regulatory checks are completed.

Will the International Swaps and Derivatives Association (ISDA) update its Definitions for a 

SOFR Swap benchmark rate once available?

Yes, ISDA is in close coordination with ICE Benchmark Administrator to publish a Rate Option and 

updated settlement provisions for the USD SOFR ICE Swap Rate once available in a tradeable 

version.

Once the USD SOFR ICE Swap Rate is available in tradeable form, will the MRAC 

Subcommittee continue to recommend that interdealer swaption trades specify physical 

settlement?

No, once the ‘beta’ period for the USD SOFR ICE Swap Rate ends such that the rate is considered 

usable in transactions and ISDA publishes updated settlement provisions for the USD SOFR ICE 

Swap Rate, the MRAC Subcommittee encourages brokers and dealers to document SOFR-based 

swaption transactions however they deem most appropriate. The MRAC Subcommittee’s 

recommendation for physical settlement of SOFR-based swaptions is intended to remove any 

uncertainty around swaption expiries while the USD SOFR ICE Swap Rate is not yet available in a 

tradeable form.

What would be the potential outcome if a SOFR swaption were cash settled prior to IBA 

publishing the USD SOFR ICE Swap Rate in a tradeable form and ISDA publishing updated 

settlement provisions for the USD SOFR ICE Swap Rate?

A SOFR-based swaption may require cash settlement if such settlement is specified in a trade 

confirm, or if physical settlement is specified but a clearing fail occurs upon swaption expiry. To the 

extent market participants are required to cash settle such a swaption transaction documented 

without updated settlement provisions for the USD SOFR ICE Swap Rate, the determination of the 

cash settlement amount may be uncertain. Depending on the version of the settlement provisions 

incorporated into the swaption transaction, the calculation of such a cash settlement amount may rely 

on the USD LIBOR ICE Swap Rate, which would create unintended economic consequences.
Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080 

After November 8, 2021, the recommended date for the transition of USD non-linear 

derivatives, will the MRAC Subcommittee focus on a similar “SOFR First” Transition Initiative 

for other products impacted by the transition away from LIBOR?

In the fourth quarter of 2021, the MRAC Subcommittee will communicate to the market its 

recommendation for a “SOFR First” Transition for exchange traded derivatives.