In the wake of the Fed’s statement introducing SOFR, several US dollar swaptions referencing the federal funds rate have been traded. Compounded fed funds offer similar rate exposure and allow users to trial systems with an overnight rate that they are familiar with. “I’m not sure how long this stepping stone is going to last, but for now we are still quoting the [fed funds] OIS swaptions,” says Ali Khan, head of euro and US dollar non-linear rates market-making at Nomura. Despite these developments, it is expected that regulatory directives may force some of the market to move to SOFR regardless, which may create a tipping point for the industry.

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