On April 8, 2022, ISDA® published a market practice note recommending an approach to the calendars applicable to the determination of effective dates for swaps referencing the Secured Overnight Financing Rate (SOFR). ISDA notes that the market convention for SOFR swaps is for the effective date to be the day that is two business days following the trade date and, historically, there has been no convention regarding whether those two business days should be New York Business Days, US Government Securities Business Days, or both.

The ISDA notes that in the 2021 ISDA Interest Rate Derivatives Definitions and the 2006 ISDA Definitions and (collectively the ISDA IRD definitions), the fixing calendar for SOFR Floating Rate Options is based on the Securities Industry and Financial Markets Association (SIFMA) calendar that uses US Government Securities Business Days, however, ISDA acknowledges that it is common practice for SOFR swaps to use the New York Business Day calendar for payments.

ISDA notes specifically that there was confusion among market participants in relation to SOFR swaps with a trade date of Wednesday, December 22, 2021, because Friday, December 24, 2021 was a New York Business Day, but that date was not a US Government Securities Business Day. ISDA reported that this discrepancy caused some confusion in the market resulting in different effective dates for certain SOFR swaps with the same trade date. ISDA reports that a similar discrepancy will occur on Friday, April 15, 2022 which will be a New York Business Day but not a US Government Securities Business Day. Typically, these coincide, so no other issues have arisen with market participants.

To avoid this confusion, ISDA recommends that market participants, including trading venues, refer to both US Government Securities Business Days and New York Business Days when determining the Effective Date for a SOFR swap. Under this ISDA recommendation, the Effective Date for a SOFR swap will then only occur on a day that is both a US Government Securities Business Day and a New York Business Day.

ISDA recognizes that the adoption of this recommendation is voluntary but hopes that broad acceptance as market practice will avoid the confusion caused in December 2021.

Under this ISDA recommendation, SOFR swaps with a trade date of Wednesday, April 13, 2022 will have an effective date of Monday, April 18, 2022 and SOFR swaps with a trade date of Thursday, April 14, 2022 will have an effective date of Tuesday, April 19, 2022.

ISDA further notes that its recommendation would also resolve all other differences between US Government Securities Business Days and New York Business Days that could arise in the future, including, for example if an event such as an extreme weather event results in banks being closed for business in New York if the date of that closure remains a US Government Securities Business Days.

For information on ISDA documents, see Practice Note, ISDA Documents: Overview (US).