SOFR vs Eurodollar Spread

bone said:
Good information from CME on trading the SOFR vs Eurodollar Spread. There are exchange supported spreads for this but be mindful of the expiry settlement differences between the two contracts. I have not personally traded this - but intend to.


https://www.cmegroup.com/education/files/spreading-sofr-ff-and-ed-futures.pdf
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Bone,

Since SOFR is a secured rate and supposed to replace LIBOR which was unsecured, is there any good measure of interbank risk outside of the Eurodollar curve?
 
Maverick1 said:
Bone,

Since SOFR is a secured rate and supposed to replace LIBOR which was unsecured, is there any good measure of interbank risk outside of the Eurodollar curve?
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Yes, the EONIA rate - which is the ECB's version of the US Repo Rate.

As an aside, the US Repo rate liquidity trap is entirely of the Fed's construction - it's a hangover from the massive QE pump. They've been caught out and are now belatedly just playing catch-up. They bought up all of the old coupons and auctioned off fresh, lower yielding paper. And apparently didn't concern themselves much with commercial banks requiring liquidity for operations.
 
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bone said:
Yes, the EONIA rate - which is the ECB's version of the US Repo Rate.

As an aside, the US Repo rate liquidity trap is entirely of the Fed's construction - it's a hangover from the massive QE pump. They've been caught out and are now belatedly just playing catch-up. They bought up all of the old coupons and auctioned off fresh, lower yielding paper. And apparently didn't concern themselves much with commercial banks requiring liquidity for operations.
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I guess it's Eurodollars then? More representative of global liquidity risk than EONIA?
 
Maverick1 said:
I guess it's Eurodollars then? More representative of global liquidity risk than EONIA?
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Euribor and Eurodollars would be the first place I'd go for liquidity risk. At least then you're covered for EU and US STIR risk. The Euroyen (Japanese STIR deposits held outside of Japan) would also be good, but the futures liquidity is spotty.
 
Hi bone, thanks for opening this thread. Also thanks for the link to the CME document on spreading the 3m SOFR vs ED.

If I am going the wording of the contract specs and exchange rule 460, maybe I am being silly for overlooking something, but I think there is some inconsistency.
Rule 460 states:

"46003.A. Final Settlement Price 1. Definition of Reference Quarter For a contract for a given delivery month, the Reference Quarter shall be the interval that ends on (and does not include) the third Wednesday of the contract delivery month, and that begins on (and includes) the third Wednesday of the third calendar month preceding the contract delivery month.
Example: For a hypothetical contract for which the delivery month is March 2022, the contract Reference Quarter shall start on (and shall include) the third Wednesday of December 2021 (December 15, 2021) and shall end on (and shall not include) the third Wednesday of March 2022 (March 16, 2022). "

Yet the above document on spreads reads:

"SFRU0’s final settlement price will be determined by daily compounded SOFR rates during the interval from (and including) Wednesday, 16 September 2020, through (and not including) Wednesday, 16 December 2020. "

Maybe I'm being silly (and tired) here but these two definitions look different to me. What am I missing?
 
I think you’re being a bit overbearing. Make it a point to be out of your SOFR future by the end of the second week of the specific expiry month and you’ll be fine no matter the month and year. As a practical matter you’d want to be out sooner than that because you’ll see bid/offer liquidity dry up so close to expiry.

bd10 said:
Hi bone, thanks for opening this thread. Also thanks for the link to the CME document on spreading the 3m SOFR vs ED.

If I am going the wording of the contract specs and exchange rule 460, maybe I am being silly for overlooking something, but I think there is some inconsistency.
Rule 460 states:

"46003.A. Final Settlement Price 1. Definition of Reference Quarter For a contract for a given delivery month, the Reference Quarter shall be the interval that ends on (and does not include) the third Wednesday of the contract delivery month, and that begins on (and includes) the third Wednesday of the third calendar month preceding the contract delivery month.
Example: For a hypothetical contract for which the delivery month is March 2022, the contract Reference Quarter shall start on (and shall include) the third Wednesday of December 2021 (December 15, 2021) and shall end on (and shall not include) the third Wednesday of March 2022 (March 16, 2022). "

Yet the above document on spreads reads:

"SFRU0’s final settlement price will be determined by daily compounded SOFR rates during the interval from (and including) Wednesday, 16 September 2020, through (and not including) Wednesday, 16 December 2020. "

Maybe I'm being silly (and tired) here but these two definitions look different to me. What am I missing?
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I agree with what you're saying.

Sorry for not being clearer in my previous post. What I was referring to was this: the SOFR contract is backward looking in the sense that its settlement price is based on the compounding of the actually observed daily overnight rates for the 3 months leading up to its settlement date. 3rd Wed June to 3rd Wed (excl.) Sep. for the Sep SOFR contract. The ED contract takes a snapshot observation of the Ice Libor at the end of that reference quarter. So I was curious whether there may be an inherent 3 months lag of the SOFR leg of the spread giving the spread an additional dynamic.
 
bd10 said:
I agree with what you're saying.

Sorry for not being clearer in my previous post. What I was referring to was this: the SOFR contract is backward looking in the sense that its settlement price is based on the compounding of the actually observed daily overnight rates for the 3 months leading up to its settlement date. 3rd Wed June to 3rd Wed (excl.) Sep. for the Sep SOFR contract. The ED contract takes a snapshot observation of the Ice Libor at the end of that reference quarter. So I was curious whether there may be an inherent 3 months lag of the SOFR leg of the spread giving the spread an additional dynamic.
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There is no compounding with Eurodollars - it’s a pure convexity play.
 
I got the SOFR contract now. Was the wording of the rules that confused the heck out of me, hence my stupid question. Sorry. Liquidity is still thin in calendar spreads. Done a test trade, just a calendar spread. For spreading against GE, I'll wait with that a little.
 
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