Why Term SOFR Has Not Replaced IBOR FRAs in Practice

Summary

The document explains why forward rate agreements tied to IBOR have become uncommon in markets that have moved to overnight reference rates. Traditional FRAs were designed around IBOR conventions and settlement mechanics. The answer says that FRAs no longer trade in major markets such as the United States and United Kingdom, although they remain in some currencies where IBOR transition is still underway.

A Term SOFR FRA could be constructed in principle, but the respondent has not seen it used and expects limited demand. A single-period swap offers nearly the same economics, with differences in payment timing and discounting, so it is presented as the more likely instrument for Term SOFR exposure. The response also notes a clearing-related operational reason to use swaps for longer maturities: the cited clearing reach for swaps exceeds that for FRAs. These are market-practice observations rather than a detailed comparison of pricing or liquidity, and the descriptions may vary as conventions and clearing offerings change.

Key ideas

• Traditional FRAs use conventions and settlement mechanics built around IBOR rates.
• The answer reports that FRAs ceased trading in several markets after IBOR cessation, while some currencies still retain them.
• A Term SOFR FRA is technically possible, but the respondent reports little observed use.
• Single-period swaps offer similar mechanics and are described as the likely alternative for Term SOFR exposure.
• Clearing availability and maturity coverage can affect whether a trade is booked as an FRA or a swap.

Tags

# FRAs Term SOFR - are they traded?


# FRAs Term SOFR - are they traded?












I've just started reading the 3rd edition of Darbyshire's book. In Chapter 3 the author states that FRAs are (becoming) obsolete after IBOR cessation.

I am not an IR trader, but since there is Term SOFR couldn't these be used for SOFR FRAs? Of course the settlement mechanics will be different compared to IBOR FRAs, but other than this I do not see why FRAs should be / are obsolete, or am I missing something?

## Answer by Attack68 (score 3, accepted)

https://quant.stackexchange.com/a/80914

FRAs are historically products that had specific settlement mechanics and formula constructed around IBOR. In GBP, USD, etc (where there are no more IBOR) there are no FRAs traded. FRAs still trade in SEK, NOK, EUR, possibly some Australisias also.

But in those countries the possibility of transitioning from IBOR, after some cessation announcement, still exists and is still on the agenda. After that FRAs will not trade there either.

Technically, you are right and you could still trade an "FRA" on a term-SOFR index, but I have never seen it, and don't think it would be popular.

You can also trade single-period swaps which have almost identical mechanics to FRAs (except when you make payments and minor changes in discounting), so anyone trading term-SOFR I expect would now trade a swap instead of an FRA.

It is common in EUR to book single-period swaps instead of FRAs for some practical reasons - I believe LCH only clears FRAs to 3Y whilst they clear swaps to 50Y so if you agree an FRA that is longer than 3Y it will be booked as a single-period swap since the mid-market price of these instruments are the same.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.