7 June, 2022
The impact of the LIBOR to SOFR transition on liquidity pockets

The impact of the LIBOR to SOFR transition on liquidity pockets

How traders can find the best liquidity throughout the complex

The phasing out of LIBOR is having a major impact on futures contracts previously referenced to that rate. We are taking a closer look at the Eurodollar futures, one of the most liquid and heavily traded futures contracts in the world, the migration to SOFR and the impacts of this transition.

Whilst headlines about total open interest and liquidity on Eurodollar and SOFR are well publicised, the Eurodollar futures complex is vast, and the transition profile will vary across the complex.

For example, the packs and bundle strategies for Eurodollar and SOFR are often used by traders to hedge against interest rate swaps. Using BMLL data, we can see where the transition from Eurodollar to SOFR occurred, and how liquidity for the two contracts evolved.


Transition from Eurodollar to SOFR - plots and methodology

Looking at a 1-year pack (white pack) based on a trading average of 4 front Eurodollar/SOFR contracts. In the plots below:

  • The line chart is the average percentage of time the contract spent at each spread in basis points
  • The bar chart shows the average liquidity taken as the average total size on the bid and the offer when at that spread


What the plots show

In Exhibit 1 and Exhibit 2, there is a clear transition from January to March (after the contract has rolled):


Exhibit 1

Three-Month Eurodollar vs Three-month SOFR Futures 1 year on 18-01-2022

LIBOR to SOFR Graph1

Exhibit 2

Three-Month Eurodollar vs Three-month SOFR Futures 2 year on 17-03-2022

LIBOR to SOFR Graph2

  • Before - better liquidity seen on Eurodollar (red line)
  • After- a clear transition to SOFR
  • Overall - a drop in volumes between the two dates


Why is this important? 

The Eurodollar and other STIR (Short-Term Interest Rate)  complexes are vast, and it is a huge data and computation effort to understand the trading microstructure along the entire curve. Traders must be able to access liquidity analysis across the futures complex.

Using a Data Science as a Service solution, such as the BMLL Data Lab, makes it easy to quickly search across the complex, and see precisely how the Eurodollar/SOFR transition has evolved.  Market participants gain access to execution insights, giving them a trading advantage.