CME Group Inc. shed light on what could happen to the exchangegiant's most-traded contracts—eurodollars, which permit bets oninterest rates—if the scandal-plagued LIBOR benchmark they're tiedto goes away in two years.

Officials at CME on Tuesday proposed a methodology forconverting eurodollar futures and options to other derivatives atthe exchange, ones linked to an alternative benchmark called theSecured Overnight Financing Rate, or SOFR. Theplan could be tweaked based on customer feedback.

In 2021, the U.K. regulator that oversees LIBOR, the FinancialConduct Authority (FCA), will stop compelling banks to submit dataused to calculate LIBOR. CME CEO Terry Duffy said in an Octoberinterview that the benchmark isn't guaranteed to go away then.But LIBOR is so deeply embedded in the global financial system thateven a slim chance it disappears means contingency planning isnecessary.

On a Tuesday webinar, CME officials Sunil Cutinho and Agha Mirzaaddressed the question of what would happen if there were a"fallback trigger," meaning the FCA or ICE Benchmark Administration(the company that maintains LIBOR) said the index wouldn't beprovided anymore. In that case, eurodollar futures would be turnedinto SOFR futures, converted to the same month's expiration at aprice determined by the pre-fallback eurodollar price plus a spreadadjustment.

Eurodollar options would continue to be listed becauseconverting them "would result in nonstandard strike pricesdifferent to the standard listed strike prices" for SOFR options,Cutinho said. However, upon exercise, the resulting "synthetic"eurodollar futures contract would convert immediately into acorresponding SOFR futures contract.

"Without a fallback trigger, the eurodollar complex will remainunchanged," Mirza said. "Eurodollar futures and options remaindeeply liquid and continue to grow year after year."

The stakes are high for CME, given that eurodollar futures arethe most-traded interest-rate derivatives tracked by the FuturesIndustry Association. Almost 380 million of them changed handsduring the first half of thisyear, according to the trade group. LIBOR is currently used tosettle $67 trillion in listed products, including eurodollarfutures and options, Cutinho said.

CME plans to offer customers support in converting theireurodollar options to SOFR options, which are slated to debut onJanuary 6, Cutinho and Mirza said. Also, in the event of a fallbacktrigger, CME would immediately create new contracts to fill in anygaps where there are eurodollar expirations but not correspondingones for SOFR.

CME's proposed methodology aligns with the International Swapsand Derivatives Association's (ISDA's) proposed methodology forsettling swaps in the event that LIBOR production ceases, exchangeofficials said.

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