Euro/dollar crosses embrace RFRs, while other currencies lag

€STR becomes new standard for euro cross-currency swaps; CAD and AUD stick with legacy rates

euro-cross-currency-swaps-adopt-ESTR montage

The cross-currency swap market is rapidly ditching legacy interest rate benchmarks in favour of overnight risk-free rates (RFRs), with some currencies making the switch even when there is no regulatory obligation to do so.

Since the start of the year, interdealer trades in euro/dollar cross-currency swaps have almost exclusively referenced the secured overnight financing rate (SOFR) and the euro short-term rate (€STR). While there is a regulatory ban on new US dollar Libor issuance, the market has made the switch to €STR despite the absence of a similar edict to ditch Euribor, the legacy market standard for euro swaps.

“Until mid-December we were seeing €STR versus SOFR and Euribor versus US dollar Libor, and people were worried it might become another two-tier market in the new year with Euribor versus SOFR,” says Simon Payne, head of the cross-currency basis swap desk at Icap. “But euros are trading pretty much 100% €STR versus SOFR. I don’t think we’ve done any Euribor trades since December.”

But while euro/dollar crosses have gone all RFR, Australian, Canadian and New Zealand dollar instruments remain stuck in a halfway house, with the market clinging to legacy benchmarks on those currency legs. In Canada, dealers have adopted SOFR for the US dollar leg of cross-currency swaps while continuing to reference the Canadian dollar offered rate (CDOR) on the Canadian dollar leg.

CDOR, like Libor, is a forward-looking benchmark based on panel bank submissions. The Canadian market is in the process of transitioning to the risk-free Canadian overnight repo rate average, or Corra. In February 2020, Icap brokered the first cross-currency swap linked to Corra – a C$5 million ($3.8 million) transaction between JP Morgan and National Bank of Canada.

Payne still views the decisive adoption of SOFR for US dollar legs as an improvement on the confusion before the end of 2021, when there was a three-way liquidity split between CDOR/US dollar Libor, CDOR/SOFR and Corra/SOFR instruments.

“Canadian dollar was a mix until the end of the year, where we had three markets being quoted and didn’t know which one we were going to move to,” says Payne.

“I was hoping it might go straight to Corra/SOFR, as it’s a bit cleaner to move to RFR on both legs, but the market doesn’t think Corra is liquid enough yet. I think maybe it’s also because Aussie and Kiwi dollars went that way.”

RFR first

The transition of euro/dollar cross currency swaps has been powered by the so-called RFR First initiatives led by regulators. The US Commodity Futures Trading Commission’s Market Risk Advisory Committee called for dealers to voluntarily adopt SOFR for the US dollar leg of cross-currency swaps from December 13. A co-ordinated recommendation from the euro risk-free rate working group urged the industry to use €STR for all euro legs.

The ban on new US dollar Libor issuance by prudentially regulated firms, which became effective at the start of this year, added clout to the RFR First initiatives and may have been the main driver for €STR adoption, as traders sought to avoid contracts that mix RFRs with credit-sensitive interbank overnight rates (Ibors) on separate legs.

“In Q4 we were in a bit of a halfway house when we saw plenty of Ibor/Ibor prices and plenty of RFR prices,” says Richard Hogan, head of cross-currency swaps and forward FX at NatWest Markets. “The big change in 2022 is that regulators don’t want people putting on new dollar Libor transactions and that affects all cross-currency swaps. As a result, you’ve seen euro/dollar trades go to 100% RFR. Some people think this is a euro story, but it’s really a dollar story. It’s about the fact that people won’t use dollar Libor.”

In the six trading days of 2022 to January 10, €63 billion ($72 billion) of euro/dollar cross currency swaps were pegged to SOFR and €STR, according to data from the Depository Trust & Clearing Corporation (DTCC). Only €1 billion notional of euro/dollar trades referenced Euribor over this period and most of these were executed away from venues, suggesting they are client rather than interdealer activity.

James von Moltke, chief financial officer at Deutsche Bank and chairman of the euro RFR working group, says the shift in interdealer markets should lead to more client activity moving to RFRs: “It’s very encouraging that EUR/USD RFR is now dominant in the interdealer market, creating the liquidity for clients to follow.”

Hedging disconnect

That may be optimistic. While €STR has emerged as the new standard for cross-currency instruments, the wider euro rates market remains wedded to Euribor. Data from DTCC shows €204 billion of €STR swaps traded since the start of the year (to January 10), representing just 14% of combined €STR and Euribor activity.

“With euro there isn’t any pressure for clients to transition because Euribor isn’t going to be abolished,” says Hogan.

He worries this could lead to a disconnect between the interdealer market, which is hedging €STR, and issuers that prefer to convert foreign bond issuance back to Euribor.

“It’s quite clear from recent client inquiries that this state of affairs will persist,” says Hogan. “It just means what the end-user is asking for is not the same as what is going on in the interbank market, which makes things a bit more complicated and, at the margin, it does add some greater transactional friction.”

Hedging three-month SOFR back to Euribor would require market-makers to trade a SOFR versus €STR cross-currency swap, an €STR versus Euribor basis swap and a three- versus six-month tenor basis – a round trip that could translate to higher costs for issuers seeking direct hedges.

“It’s not going to totally change the dial, but if you’re a European frequent borrower and you’re going to issue dollars and take that to Euribor, you’re now asking the market-making desk to quote on a non-standard cross-currency basis, whereas last year you were asking for complete plain vanilla,” says Hogan.

“The market is functioning perfectly well but will be a bit more multi-faceted going forward.”

Some dealers are seeking more direct cross-currency hedges – a move which could split liquidity. Icap’s Payne says the broker has received some requests to publish Euribor versus SOFR curves, though the broker is holding off for the time being.

“Everything is set up so we can start publishing Euribor versus SOFR if we need to, but we don’t want to take away from what we’re trying to achieve, which is transition to €STR versus SOFR. If we start publishing it and people start quoting it, I worry it might split the liquidity pool, so for the moment it’s hands off,” says Payne.

Halfway house

Other markets are still primarily trading on legacy benchmarks. Much like in Canada, Australian dollar cross-currency swaps have continued to reference the credit sensitive bank bill swap rate (BBSW) even after the US dollar leg moved to SOFR. Similarly, in New Zealand dollars, contracts still reference the bank bill benchmark rate on the local currency leg.

The mixed approach means these markets may have to brace for a further transition in the coming years, given the uncertainty over the future of rates such as CDOR and BBSW.  

On December 16, the Canadian Alternative Reference Rate Working Group recommended that CDOR’s administrator, Refinitiv Benchmark Services Limited, cease publication of all remaining tenors after June 2024.

In a statement emailed to, the working group’s co-chairs, Karl Wildi and Harri Vikstedt, said the ball was now in Refinitiv’s court. “The decision to cease the publication of CDOR lies solely with Refinitiv. CARR will work on developing a plan to transition to Corra-SOFR should Refinitiv decide to stop publishing CDOR.”

Refinitiv plans to conduct its own analysis and engage with market participants over the future of CDOR. The firm expects to provide more detail on the initiative before the end of Q1.

CDOR is referenced in more than C$17 trillion of derivatives, according to Bank of Canada data. Corra, the preferred successor which is administered by the central bank, underpins C$1.7 trillion of financial instruments including overnight index swaps.

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