On July 13, 2021, the CFTC's Market Risk Advisory Committee (MRAC) unanimously recommended CFTC adoption of a market best practice known as SOFR First, under which the interdealer US dollar (USD) linear interest rate swaps (IRS) market would transition from USD LIBOR to the Secured Overnight Financing Rate (SOFR) for transactions entered into on July 26, 2021 and thereafter.

The SOFR First Phase 1 recommendations apply only to the interdealer market and do not impact USD LIBOR linear swap transactions between dealers and customers. SOFR First has four phases; the remaining three SOFR First phases are:

The CFTC's Interest Rate Benchmark Reform Subcommittee (subcommittee) has notified MRAC that it expects to complete subsequent SOFR First phases before the end of 2021.

As recommended by MRAC, under phase one of SOFR First, on July 26, 2021 and thereafter, interdealer brokers would replace trading of USD LIBOR linear swaps with trading of SOFR linear swaps. SOFR First is designed to help market participants decrease reliance on USD LIBOR in light of statements from the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) on LIBOR transition, which reinforce US regulatory guidance that banks stop entering into new contracts that reference USD LIBOR after December 31, 2021 (see Legal Update, ARRC Confirms Occurrence of "Benchmark Transition Event" Under Recommended Fallback Language).

The SOFR First market best practice recommends:

According to the MRAC, the products impacted by phase one of SOFR First include outright swaps, swap spreads, and curve trades but excludes LIBOR/SOFR basis, LIBOR/LIBOR basis, forward rate agreements (FRAs) and single period swaps.

The subcommittee submitted the SOFR First recommendations to MRAC for additional consideration on June 8, 2021 (see Legal Update, CFTC Recommends July 26, 2021 for LIBOR-to-SOFR Transition in Interdealer Swap Market Trading). In a follow up meeting on June 24, 2021, the subcommittee broadened the SOFR First recommendation to add the additional phases.

Update: In a July 13, 2021 press release, the Alternative Reference Rates Committee (ARRC) commended the MRAC for its formal adoption of its unanimous recommendation of a SOFR First trading convention switch during MRAC's July 13, 2021 meeting. The ARRC observed that the unanimous vote of the MRAC on the SOFR First recommendation further supports a market best practice that prioritizes derivatives trading in SOFR in replacement of USD LIBOR.

Update: In a joint statement issued July 14, 2021 by the CFTC's Market Participants Division and Division of Market Oversight, market participants and swap execution facilities (SEFs) were advised of the importance of ensuring a smooth and timely transition away from LIBOR. The joint statement noted that the cessation of and transition away from LIBOR remains one of its significant regulatory priorities and will require market participants to take steps to stop issuance of new derivatives linked to LIBOR and to transition away from LIBOR in legacy contracts. For this purpose, the joint statement cautioned that the use of LIBOR rates in new contracts should, with limited exception, be ceased as soon as practicable, and no later than December 31, 2021, to avoid these risks.

For additional information on fallbacks to LIBOR, see Practice Note, Practice Point: Understanding the ISDA 2021 IBOR Fallbacks Supplement and Protocol and LIBOR Replacement Toolkit.