JPMorgan Taps CME Group’s SOFR Forward Rate in Novel Trade Deal

JPMorgan Taps CME Group’s SOFR Forward Rate in Novel Trade Deal

JPMorgan Chase & Co. executed a novel trade-finance transaction tied to the CME Group Inc.’s forward rates for the Secured Overnight Financing Rate, marking an advancement in the use of the Libor replacement.

The trade, arranged between two of the bank’s clients, was the first ever fully-automated deal in that sector of the firm’s business that was tied to term SOFR, JPMorgan said in a statement. It was linked to the CME Group Inc.’s 90-day forward for SOFR and was between Mumbai, India-based Reliance Industries Ltd. and an energy firm based in Singapore.

JPMorgan put through the trade on Aug. 5, just days after officials overseeing the U.S. transition away from the London interbank offered rate formally endorsed the CME’s series of forward-term SOFR benchmarks. 

Such trade finance provides loans that facilitate exports and imports and JPMorgan said it has a “robust” pipeline of similar transactions into next year. U.S. government regulators have said they are concerned that banks aren’t shifting to Libor alternatives quickly enough when it comes to corporate loans. 

“This is the first automated trade of this type that is scalable and thus allows us to show there is a brave new world outside of Libor,” said Stuart Roberts, global head of trade at JPMorgan. “That will cut the global systemic interbank risk that was systemic in Libor. Having term reference rates that are based off the benchmark in the U.S. might also make the Eurodollar market significantly less volatile.” 

The official endorsement of the SOFR forward rates came before the year-end deadline to ditch Libor for new deals. That’s likely to give the benchmarks an edge amid increasing competition from new reference-rate providers seeking to carve out their own slice of the post-Libor landscape.

Despite the regulators’ push for a move off Libor, it still remains tied to derivative contracts, loans and other products worth trillions of dollars. Deals tied to SOFR have been slowly taking place, with many seeing the addition of term rates speeding that process.

“We believe that Term SOFR, published by Chicago Mercantile Exchange, holds significant promise as an alternate term benchmark rate and this transaction is likely to pave the way for many more to come,” V. Srikanth, joint chief financial officer at Reliance Industries said in a statement regarding the trade with JPMorgan.

JPMorgan does several thousand trade-related financings a day and expects to migrate off of Libor by year end, Tom Fitzgerald, the bank’s head of global trade product delivery, said in an interview. 

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