Banks face conduct risk threat as term SOFR trading grows

Trades linked to forward benchmark at risk of falling foul of strict client hedging remit, lawyers warn

The burgeoning market for swaps linked to the term version of the secured overnight financing rate (SOFR) is creating headaches for lawyers and compliance staff tasked with advising dealers on the strictures governing the products’ use. Term SOFR derivatives should only be used to directly hedge end-user’s exposure to loans and cash instruments, according to guidelines published by the Alternative Reference Rates Committee (ARRC), the Federal Reserve-backed group tasked with weaning US markets

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