US funds edge towards SOFR adoption

Pimco led US mutual funds in the industry’s increasing adoption of swaps referencing the US secured overnight financing rate at the end of last year, but funds continued to show large exposures to the outgoing US dollar Libor benchmark, according to an analysis of filings made to the Securities and Exchange Commission (SEC).

Most Libor settings ceased publication at the end of 2021, with the US dollar version awarded a reprieve until mid-2023 to give the market time to transition off the rate. Market-wide swap volumes referencing SOFR grew slowly since the first trade in July 2018 but have increased significantly since the end of September.

Mutual fund holdings mirror this trajectory, with swap notional referencing the alternative rate jumping from 2% of total US dollar swap notionals in the third quarter to 17% in the fourth quarter – a rise of $45.3 billion notional. The surge was largely thanks to Pimco, which was responsible for nearly 40% of the increase, followed by Putnam with 21%.

The number of individual SOFR swaps was also more than four times higher in Q4 compared with Q3.

However, according to the data, there were still 17 managers that had yet to adopt SOFR as a benchmark for their US dollar interest rate swaps and only showed Libor positions on their books in Q4. One additional manager, Franklin Templeton, held US dollar Libor and federal funds-linked swaps.

The data, based on filings that offer a quarterly snapshot of fund positions from the past two years, provide the basis for Counterparty Radar, which allows readers to analyse mutual funds’ derivatives holdings data across asset classes.

• Swaps referencing SOFR totalled $52 billion in the fourth quarter, up from $6.8 billion in the third quarter.
• The growth coincided with a decline in overall US dollar Libor positions. Fourth-quarter positions were down 11% from the third quarter but remained up from the same period the year before.
• In the fourth quarter, SOFR swap positions represented 17% of all US dollar swap notional on managers’ books, its largest proportion on record.

• More than 25 managers listed 1,468 SOFR swaps in the fourth quarter, up from 351 positions a quarter earlier.
• Pimco held the largest position, with $17.7 billion notional in SOFR swaps, or 12% of its total US dollar swap position by notional. The manager’s funds had shown just $168 million in SOFR swap notional in the third quarter.
• The median SOFR swap totalled $3.1 million notional in the fourth quarter, while the largest SOFR swap on funds’ books was a Pimco, CME-cleared $6.1 billion notional trade expiring in September 2024.

• Over 40 mangers listed US dollar Libor trades in the fourth quarter, totalling $236 billion notional.
• Most of the US dollar Libor swap notional listed on funds’ books in the fourth quarter is due to expire after the last fixings cease publication in 2023. Trades still on the books after cessation will be subject to the International Swaps and Derivatives Association’s fallback protocol, to which all major US mutual funds have adhered.

• US mutual funds steadily decreased their sterling Libor positions well ahead of the year-end 2021 cessation. Fourth-quarter positions totalled $55 million, down from $15.4 billion at the start of 2020.
• At the same time, funds grew their Sonia swap postions from $9.5 billion at the end of 2020 to $61.5 billion a year later.
• Swap positions in Euribor, one of the interbank rates that does not have a planned cessation, remained relatively steady over the past two years. Swaps referencing Eonia, which between October 2019 and its January 2022 discontinuation was set at a fixed spread to the new risk-free rate €STR, made up little of the listed notional positions on US mutual funds’ books last year.