2021-25450
[Federal Register Volume 86, Number 223 (Tuesday, November 23, 2021)]
[Proposed Rules]
[Pages 66476-66488]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-25450]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 50
RIN 3038-AF18
Swap Clearing Requirement To Account for the Transition From
LIBOR and Other IBORs to Alternative Reference Rates
AGENCY: Commodity Futures Trading Commission.
ACTION: Request for information and comment.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is seeking information and public comment on how the Commission could
amend its swap clearing requirement to address the cessation of certain
interbank offered rates (IBORs) (e.g., the London Interbank Offered
Rate (LIBOR)) used as benchmark reference rates and the market adoption
of alternative reference rates; namely, overnight, nearly risk-free
reference rates (RFRs). The Commission is requesting input from market
participants and all interested members of the public on aspects of the
Commission's swap clearing requirement that may be affected by the
transition from certain IBORs to alternative reference rates.
DATES: Comments must be received on or before January 24, 2022.
ADDRESSES: You may submit comments, identified by RIN 3038-AF18, by any
of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above. Please submit your comments using only one of these
methods. Submissions through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied by an
English translation. Comments will be posted as received to https://comments.cftc.gov. You should submit only information that you wish to
make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act, a petition for confidential treatment of
the exempt information may be submitted according to the procedures
established in Sec. 145.9 of the Commission's regulations. The
Commission reserves the right, but shall have no obligation, to review,
pre-screen, filter, redact, refuse or remove any or all of your
submission from https://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language.
FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Deputy Director,
at 202-418-5684 or [email protected]; Melissa D'Arcy, Special
Counsel, at 202-418-5086 or [email protected]; or Daniel O'Connell,
Special Counsel, at 202-418-5583 or [email protected]; each in the
Division of Clearing and Risk at the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. The Commission's Swap Clearing Requirement
B. The End of LIBOR
C. Identification of Alternative Reference Rates
D. Transition to Alternative Reference Rates
E. International Regulatory Developments
II. Market Adoption of Alternative Reference Rates
A. Industry Initiatives
B. Availability of Clearing
C. Current Trends in Alternative Reference Rates
III. Request for Information
A. Swaps Subject to the Clearing Requirement
B. Swaps Not Currently Subject to the Clearing Requirement
IV. Request for Comment
A. General Request for Comment
B. Specific Requests for Comment
[[Page 66477]]
I. Background
A. The Commission's Swap Clearing Requirement
Over a decade has passed since the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act) \1\ established a
comprehensive new regulatory framework for swaps. Title VII of the
Dodd-Frank Act (Title VII) amended the Commodity Exchange Act (CEA) to
require, among other things, that a swap be cleared through a
derivatives clearing organization (DCO) that is registered under the
CEA or a DCO that is exempt from registration under the CEA if the
Commission has determined that the swap, or group, category, type, or
class of swap, is required to be cleared, unless an exception to the
clearing requirement applies.\2\
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\2\ Section 2(h)(1)(A) of the CEA, 7 U.S.C. 2(h)(1)(A).
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The CEA, as amended by Title VII, provides two avenues for the
Commission to issue a clearing requirement determination. First, under
Section 2(h)(2)(A) of the CEA, the Commission may issue a clearing
requirement determination based on a Commission-initiated review of a
swap.\3\ Second, under Section 2(h)(2)(B) of the CEA, the Commission
may issue a clearing requirement determination based on a swap
submission from a DCO.\4\
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\3\ 7 U.S.C. 2(h)(2)(A). Commission regulation 39.5(c) sets
forth the procedures for Commission-initiated reviews of swaps that
have not been accepted for clearing by a DCO to determine whether
they should be required to be cleared. 17 CFR 39.5(c).
\4\ Section 2(h)(2)(B) of the CEA, 7 U.S.C. 2(h)(2)(B), and the
implementing regulations in Commission regulation 39.5(b), require a
DCO to submit to the Commission each swap, or any group, category,
type, or class of swaps, that it plans to accept for clearing.
Section 2(h)(2)(B)-(C) of the CEA describes the process by which the
Commission is required to review swap submissions from DCOs to
determine whether the swaps should be subject to the clearing
requirement. Commission regulation 39.5(b) establishes the
procedures for the submission of swaps by a DCO to the Commission
for a clearing requirement determination.
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The Commission has issued two clearing requirement determinations.
The first clearing requirement determination (First Determination) was
adopted in 2012 and covered certain credit default swap indexes, and
interest rate swaps in four currencies and in four classes: (1) Fixed-
to-floating swaps; (2) basis swaps; (3) forward rate agreements (FRAs);
and (4) overnight index swaps (OIS).\5\ The four classes of interest
rate swaps required to be cleared, along with their specifications,
discussed below, are set forth in Commission regulation 50.4 (Clearing
Requirement).\6\ The second clearing requirement determination (Second
Determination) was adopted in 2016 and covered interest rate swaps in
nine additional currencies.\7\
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\5\ Clearing Requirement Determination Under Section 2(h) of the
CEA; Final Rule, 77 FR 74284 (Dec. 13, 2012).
\6\ 17 CFR 50.4.
\7\ Clearing Requirement Determination Under Section 2(h) of the
Commodity Exchange Act for Interest Rate Swaps; Final Rule, 81 FR
71202 (Oct. 14, 2016). The Commission adopted the Second
Determination largely in order to further harmonize its Clearing
Requirement with those of other jurisdictions, specifically:
Australia, Canada, the European Union, Hong Kong, Mexico, Singapore,
and Switzerland. Id. at 71203-05. Harmonizing the Commission's
Clearing Requirement with other jurisdictions' clearing requirements
serves an important anti-evasion goal. As the Commission explained,
if a non-U.S. jurisdiction issued a clearing requirement and a swap
dealer located in the U.S. were not subject to that non-U.S.
clearing requirement, then a swap market participant in the non-U.S.
jurisdiction could potentially avoid the non-U.S. clearing
requirement by entering into a swap with the swap dealer located in
the U.S. Id. at 71203.
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Section 2(h)(2)(D)(ii) of the CEA requires the Commission to
consider the following five factors when making a clearing requirement
determination: (I) The existence of significant outstanding notional
exposures, trading liquidity, and adequate pricing data; (II) the
availability of rule framework, capacity, operational expertise and
resources, and credit support infrastructure to clear the contract on
terms that are consistent with the material terms and trading
conventions on which the contract is traded; (III) the effect on the
mitigation of systemic risk, taking into account the size of the market
for such contract and the resources of the DCOs available to clear the
contract; (IV) the effect on competition, including appropriate fees
and charges applied to clearing; and (V) the existence of reasonable
legal certainty in the event of the insolvency of the relevant DCO or 1
or more of its clearing members with regard to the treatment of
customer and swap counterparty positions, funds, and property.\8\ The
Commission considered each factor in making both clearing requirement
determinations.
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\8\ 7 U.S.C. 2(h)(2)(D)(ii).
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The Commission has explained in prior clearing requirement
determinations that while there exists a wide degree of variability in
contract specifications for interest rate swaps,\9\ there also exist
certain conventions and specifications that DCOs and market
participants commonly use, and which allow classes of swaps, and
primary specifications within each class, to be identified.\10\ The
Commission has adopted clearing requirement determinations for four
classes of swaps based on these common conventions and specifications,
and submissions from DCOs of swaps accepted for clearing. In the notice
of proposed rulemaking preceding the First Determination, consistent
with the factors set forth in CEA section 2(h)(2)(D)(ii), the
Commission proposed to adopt a clearing requirement after concluding
that each of the four swap classes being cleared had significant
outstanding notional amounts and trading liquidity, and that a large
percentage of each class was already being cleared.\11\ The Commission
reaffirmed those conclusions in the final rule.\12\ The Commission also
identified six specifications for the interest rate swaps that are
subject to the clearing requirement: (1) The currency in which the
notional and payment amounts are specified; (2) the rates referenced
for each leg of the swap; (3) the stated termination date of the swap;
(4) whether the swap contains optionality, as specified by the DCOs;
(5) whether the swap contains dual currencies; and (6) whether the swap
contains conditional notional amounts.\13\ Now, as the international
regulatory community and financial markets transition from IBORs to
alternative reference rates, the Commission is requesting information
and comment on each of the swaps currently subject to the clearing
requirement, and whether the Commission should update any of its prior
determinations due to the
[[Page 66478]]
ongoing and anticipated market-wide shift in reference rates.
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\9\ Clearing Requirement Determination Under Section 2(h) of the
CEA; Notice of Proposed Rulemaking, 77 FR 47170, 47186 & n.77 (Aug.
7, 2012) (citing a Federal Reserve Bank of New York staff report
that over 10,500 different combinations of significant interest rate
swaps terms had been identified in a single three-month period in
2010).
\10\ First Determination, 77 FR 74301.
\11\ 77 FR 47194-96 (discussing data from the Bank of
International Settlements, TriOptima, the G14 Dealers to the OTC
Derivatives Supervisors Group, and LCH).
\12\ First Determination, 77 FR 74307-08.
\13\ Id. at 74302-03, 74332. The term ``conditional notional
amount'' refers to a notional amount that is subject to change over
the term of a swap based on a condition that the swap counterparties
establish upon the execution of the swap, such that the notional
amount of the swap is unknown and may change based on the occurrence
of a future event. Id. at 74302 n.108. Additionally, the Commission
believed that swaps with optionality, multiple currency swaps, and
swaps with notional amounts not specified at the time of execution
give rise to concerns regarding accurate pricing and consistency
across contracts, and should therefore be excluded from the clearing
requirement. Id. at 74332. The Commission also stated that, as of
the time of the final rulemaking for the First Determination, no DCO
was offering swaps meeting these negative specifications for
clearing. Id.
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The Commission's Clearing Requirement covers a number of swaps that
reference IBORs: Swaps in multiple currencies in each of the fixed-to-
floating swap, basis swap, and FRA class that refer to LIBOR are
required to be cleared. The First Determination covered certain
interest rate swaps in each of these classes referencing LIBOR in three
currencies: U.S. dollars (USD), British pounds (GBP), and Japanese yen
(JPY).\14\ The Second Determination covered certain fixed-to-floating
interest rate swaps referencing LIBOR in Swiss francs (CHF).\15\
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\14\ First Determination, 77 FR 74310-11.
\15\ Second Determination, 81 FR 71202.
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The Commission is monitoring changes to benchmark reference rates
around the world and how those changes may affect trading liquidity and
clearing availability, as well as the other factors discussed above, in
different interest rate swap products. Although benchmark reforms are
ongoing, there have been recent updates with respect to LIBOR rates for
the major currencies, including USD, GBP, JPY, and CHF, that may
warrant changes to the Clearing Requirement in the near future.
B. The End of LIBOR
LIBOR is an interest rate benchmark that is intended to measure the
average rate at which a bank can obtain unsecured funding in the London
interbank market for a given tenor and currency. It is among the
world's most frequently referenced interest rate benchmarks and serves
as a reference rate for a wide variety of derivatives and cash market
products. LIBOR is calculated based on submissions from a panel of 11
to 16 contributor banks, depending on the currency, and is published on
every London business day for five currencies (USD, GBP, Euro (EUR),
CHF, and JPY) and seven tenors (overnight or spot next,\16\ 1-week, 1-
month, 2-month, 3-month, 6-month, and 12-month), resulting in 35
individual LIBOR rates. Each contributor bank submits data for all
seven tenors in each currency for which it is on a panel.\17\
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\16\ The shortest tenor for USD, GBP, and EUR LIBOR is
overnight; the shortest tenor for CHF and JPY LIBOR is spot next.
\17\ See generally ICE Benchmark Administration (IBA), LIBOR,
available at https://www.theice.com/iba/libor. The current
contributor bank panel members are expected to fulfill their roles
through the end of 2021, and all but one of the current USD LIBOR
bank panel members are expected to continue submissions until June
30, 2023 for the overnight, 1-month, 3-month, 6-month, and 12-month
tenors. IBA, ICE LIBOR Feedback Statement on Consultation on
Potential Cessation, March 5, 2021, at 4 n.2 [hereinafter ``ICE
LIBOR Feedback Statement on Consultation on Potential Cessation''],
available at https://www.theice.com/publicdocs/ICE_LIBOR_feedback_statement_on_consultation_on_potential_cessation.pdf.
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The announcement in 2012 of government investigations concerning
alleged manipulation of LIBOR, and a decline in the volume of interbank
lending transactions that LIBOR is intended to measure, have given rise
to concerns regarding the integrity and reliability of LIBOR and other
IBORs.\18\ Notably, the Commission's enforcement actions against LIBOR
manipulators helped to raise awareness about potential shortcomings in
the reliability of LIBOR reports and calculations.\19\
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\18\ See, e.g., International Organization of Securities
Commissions (IOSCO), Principles for Financial Benchmarks, July 2013,
at 1, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf; David Bowman, et al., ``How Correlated Is LIBOR With
Bank Funding Costs?,'' FEDS Notes, June 29, 2020, available at
https://www.federalreserve.gov/econres/notes/feds-notes/how-correlated-is-libor-with-bank-funding-costs-20200629.htm;
Alternative Reference Rates Committee, Second Report, Mar. 2018, at
1-3 [hereinafter ``ARRC Second Report''], available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report.
\19\ See, e.g., In re Soci[eacute]t[eacute]
G[eacute]n[eacute]rale S.A., No. 18-14 (CFTC June 4, 2018) ($475
million penalty); In re Deutsche Bank AG, No. 15-20 (CFTC Apr. 23,
2015) ($800 million penalty); In re The Royal Bank of Scotland plc,
No. 13-14 (CFTC Feb. 6, 2013) ($325 million penalty); In re UBS AG,
No. 13-09 (CFTC Dec. 19, 2012) ($700 million penalty); In re
Barclays PLC, No. 12-25 (CFTC June 27, 2012) ($200 million penalty).
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In response to calls for reform, LIBOR was brought within the U.K.
Financial Conduct Authority (FCA)'s regulatory scope and placed under
IBA's administration.\20\ IBA has reformed LIBOR in a number of ways,
including enhancing the benchmark's oversight procedures and
establishing a new calculation methodology.\21\ However, regulators and
global standard-setting bodies do not view these reforms as a long-term
solution.
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\20\ Previously, LIBOR was administered by the British Bankers
Association.
\21\ See generally IBA, Methodology, available at https://www.theice.com/publicdocs/ICE_LIBOR_Methodology.pdf (describing
IBA's current LIBOR calculation methodology); H.M. Treasury, The
Wheatley Review of LIBOR: Final Report, Sept. 2012, available at
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/191762/wheatley_review_libor_finalreport_280912.pdf (recommending reforms
to LIBOR). See also Intercontinental Exchange (ICE), ICE LIBOR
Evolution, Apr. 25, 2018, at 4, available at https://www.theice.com/publicdocs/ICE_LIBOR_Evolution_Report_25_April_2018.pdf (describing
IBA's reforms to LIBOR since 2014). Among other revisions, IBA
implemented changes to the way that panel banks form their LIBOR
submissions by relying on a data-driven waterfall methodology.
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Following a public consultation by IBA launched in December 2020,
on March 5, 2021,\22\ the FCA announced that publication of LIBOR would
not be provided by any administrator or be compelled after the final
publication on Friday, December 31, 2021, for the following: \23\
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\22\ See generally ICE LIBOR Feedback Statement on Consultation
on Potential Cessation; IBA, ICE LIBOR Consultation on Potential
Cessation, Dec. 2020, available at https://www.theice.com/publicdocs/ICE_LIBOR_Consultation_on_Potential_Cessation.pdf.
\23\ FCA, FCA Announcement on Future Cessation and Loss of
Representativeness of the LIBOR Benchmarks, Mar. 5, 2021, available
at https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf.
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(i) EUR LIBOR in all tenors;
(ii) CHF LIBOR in all tenors;
(iii) JPY LIBOR in the spot next, 1-week, 2-month, and 12-month
tenors;
(iv) GBP LIBOR in the overnight, 1-week, 2-month, and 12-month
tenors; and
(v) USD LIBOR in the 1-week and 2-month tenors.
The FCA further determined that GBP and JPY LIBOR in 1-month, 3-
month, and 6-month tenors would no longer be representative of the
underlying market and economic reality they are intended to measure
after December 31, 2021, and that representativeness would not be
restored. Additionally, the FCA determined that USD LIBOR in the
overnight and 12-month tenors would cease after June 30, 2023, and that
USD LIBOR in the 1-month, 3-month, and 6-month tenors would not be
representative after that date. The future of USD LIBOR in the 1-month,
3-month, and 6-month tenors is uncertain because the FCA may decide to
continue to publish those tenors based on a new methodology (i.e., on a
synthetic basis). Following a public consultation, on September 29,
2021, the FCA confirmed that it would require LIBOR's administrator to
continue publishing GBP and JPY LIBOR in the 1-, 3-, and 6-month
tenors, using a synthetic methodology based on term RFRs, through
2022.\24\ The Commission is monitoring these developments and will
consider LIBOR's cessation in certain currencies and tenors as it
evaluates potential changes to the Clearing
[[Page 66479]]
Requirement, particularly because the LIBOR rates in four of the five
LIBOR currencies serve as the floating rate in swap transactions that
are currently subject to the Clearing Requirement.
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\24\ FCA, ``Further arrangements for the orderly wind-down of
LIBOR at end-2021,'' Sept. 29, 2021, available at https://www.fca.org.uk/news/press-releases/further-arrangements-orderly-wind-down-libor-end-2021. The FCA also proposed to permit legacy use
of synthetic GBP and JPY LIBOR in all contracts except cleared
derivatives, citing clearinghouses' plans to transition cleared GBP,
JPY, CHF, and EUR LIBOR rates to RFR contracts at the end of 2021.
Accordingly, the FCA published an additional public consultation
regarding the scope of legacy contracts that will be permitted to
rely on the synthetic rates. FCA, ``CP21/29: Proposed decisions on
the use of LIBOR (Articles 23C and 21A BMR),'' Sept. 29, 2021,
available at https://www.fca.org.uk/publications/consultation-papers/cp21-29-proposed-decisions-libor-articles-23c-21a-bmr. The
consultation closed on October 20, 2021. Id.
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Although LIBOR in particular has been a major focus for regulators,
there are other interest rates that have been, or may in the future be,
replaced by alternative reference rates. Additional IBORs and
alternative reference rates are discussed in more detail below.
C. Identification of Alternative Reference Rates
The Commission has supported efforts in the U.S. and around the
world to identify alternative reference rates to replace LIBOR and
other IBORs in the event that they become non-representative.
In 2014, the Federal Reserve Board (FRB) and the Federal Reserve
Bank of New York (FRBNY) convened the Alternative Reference Rates
Committee (ARRC) as a body for private-market participants, alongside
ex-officio banking and financial sector regulators, to identify
alternatives to USD LIBOR and help ensure an orderly transition to
alternative reference rates.\25\ The composition of the ARRC has
changed over time, and currently includes a number of financial
institutions, financial industry groups, and regulators, including the
CFTC, the U.S. Department of the Treasury, and the U.S. Securities and
Exchange Commission.\26\ On June 22, 2017, after studying several
alternative reference rates and considering the input of market
participants, the ARRC selected the Secured Overnight Financing Rate
(SOFR) as its preferred alternative to USD LIBOR.\27\ SOFR measures the
cost of overnight repurchase agreement transactions collateralized by
U.S. Treasury securities.\28\ The FRBNY, in cooperation with the U.S.
Office of Financial Research, first published SOFR on April 3,
2018,\29\ and publishes the rate each New York business day at 8:00
a.m. ET.\30\
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\25\ See generally ARRC, About [hereinafter ``About the ARRC''],
available at https://www.newyorkfed.org/arrc/about. See also ARRC,
ARRC Minutes for the December 12, 2014 Organizational Meeting,
available at https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2014/Dec-12-2014-ARRC-Minutes.pdf.
\26\ About the ARRC.
\27\ ARRC, ``The ARRC Selects a Broad Repo Rate as its Preferred
Alternative Reference Rate,'' June 22, 2017, available at https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-2017.pdf. See also ARRC, Interim Report and
Consultation, May 2016, at 13, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2016/arrc-interim-report-and-consultation.pdf?la=en (discussing other
alternative reference rates that the ARRC considered).
\28\ FRBNY, Statement Introducing the Treasury Repo Reference
Rates, Apr. 3, 2018 [hereinafter ``Statement Introducing the
Treasury Repo Reference Rates''], available at https://www.newyorkfed.org/markets/opolicy/operating_policy_180403. See also
FRBNY, Secured Overnight Financing Rate Data [hereinafter ``SOFR
Data''], available at https://apps.newyorkfed.org/markets/autorates/
SOFR#:~:text=The%20SOFR%20is%20calculated%20as,LLC%2C%20an%20affiliat
e%20of%20the; FRBNY, Additional Information about the Treasury Repo
Reference Rates, available at https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information.
\29\ Statement Introducing the Treasury Repo Reference Rates.
\30\ SOFR Data.
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SOFR is comprised of data from several sources: (1) Tri-party repo
data; (2) the Fixed Income Clearing Corporation's (FICC) General
Collateral Finance Repo data; and (3) bilateral Treasury repo
transactions cleared through FICC.\31\ The ARRC selected SOFR as its
preferred USD LIBOR alternative based on an assessment of a number of
factors, including the depth of the underlying market, the robustness
of the rate over time, the rate's usefulness to market participants,
and consistency with IOSCO's Principles for Financial Benchmarks.\32\
SOFR is based on a far deeper pool of underlying transactions than USD
LIBOR. According to the ARRC, since SOFR was first published, the
volume of underlying transactions has averaged over $980 billion daily,
and reflects trading by a diverse group of market participants.\33\ In
comparison, the median daily volume of 3-month funding transactions
between October 2016 and June 2017, underlying the most heavily-
referenced USD LIBOR tenor, amounted to less than $1 billion.\34\ The
ARRC has developed a Paced Transition Plan, discussed below, to
facilitate an orderly and incremental transition from USD LIBOR to
SOFR.\35\
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\31\ Id.
\32\ ARRC Second Report at 6.
\33\ ARRC, Frequently Asked Questions, Dec. 18, 2020, at 4-5,
available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/ARRC-faq.pdf.
\34\ ARRC Second Report at 1-3.
\35\ Although SOFR is widely viewed as the primary replacement
for USD LIBOR, and is preferred by the ARRC, other alternatives are
available to market participants, including those who desire a
benchmark with a credit risk component. One such alternative is
AMERIBOR, which is administered by the American Financial Exchange
(AFX) and is calculated based on actual borrowing costs between
small and midsize banks that are AFX members. William Shaw, ``Libor
Replacement Race Picks Up with Ameribor Swap Debut,'' Bloomberg,
Dec. 3, 2020, available at https://www.bloomberg.com/news/articles/
2020-12-03/libor-replacement-race-picks-up-with-ameribor-swap-deal-
debut#:~:text=The%20push%20to%20replace%20Libor,notional%20%2424%20mi
llion%20on%20Tuesday. Another potential alternative is the ICE Bank
Yield Index (IBYI), which ICE has proposed as a replacement for USD
LIBOR. If implemented, IBYI would measure the average yields at
which investors are willing to invest USD funds on a wholesale,
senior, and unsecured basis in large, international banks over 1-
month, 3-month, and 6-month periods. IBA, U.S. Dollar ICE Bank Yield
Index Update, May 2020, at 3, available at https://www.theice.com/publicdocs/Update_US_Dollar_ICE_Bank_Yield_Index_May_2020.pdf.
Unlike USD LIBOR, IBYI would be fully transaction-based. See id. at
3, 5-6. An additional potential alternative, Bloomberg's Short-Term
Bank Yield Index (BSBY), is a credit-sensitive index which can be
added to SOFR or used as a standalone benchmark. Bloomberg,
``Bloomberg Confirms Its BSBY Short-Term Credit Sensitive Index
Adheres to IOSCO Principles,'' Apr. 6, 2021, available at https://www.bloomberg.com/company/press/bloomberg-confirms-its-bsby-short-term-credit-sensitive-index-adheres-to-iosco-principles/. See also
Bloomberg, Bloomberg Short-Term Bank Yield Index, available at
https://www.bloomberg.com/professional/product/indices/bsby/
#:~:text=The%20Bloomberg%20Short%2DTerm%20Bank,defines%20a%20forward%
20term%20structure; Bloomberg, Bloomberg Short-Term Bank Yield
(BSBY) Index Methodology, Mar. 2021, available at https://assets.bbhub.io/professional/sites/10/BSBY-Methodology-Document-March-30-2021.pdf.
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Regulators and working groups in other jurisdictions are also
endeavoring to identify, develop, and implement alternative reference
rates.\36\ The FSB's November 2020 report Reforming Major Interest Rate
Benchmarks highlights plans to develop alternatives for numerous other
IBORs.\37\ A table of
[[Page 66480]]
those identified alternatives is included below.
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\36\ For further discussion of the ARRC and working groups in
other LIBOR currency jurisdictions and key milestones, see generally
International Swaps and Derivatives Association, Inc. et al. (ISDA),
IBOR Global Benchmark Transition Report, June 2018, at 38-47
[hereinafter ``IBOR Global Benchmark Transition Report''], available
at https://www.isda.org/2018/06/25/ibor-global-benchmark-transition-
report/ibor-transition-report/. See also Working Group on Sterling
Risk-Free Reference Rates (RFRWG) Top Level Priorities--2021, Bank
of England, Jan. 2021, available at https://www.bankofengland.co.uk/
-/media/boe/files/markets/benchmarks/rfr/rfr-working-group-
roadmap.pdf; European Central Bank, ``Working group on euro risk-
free rates,'' available at https://www.ecb.europa.eu/paym/interest_rate_benchmarks/WG_euro_risk-free_rates/html/index.en.html;
The National Working Group on CHF Reference Rates, NWG Milestones,
available at https://www.snb.ch/en/ifor/finmkt/fnmkt_benchm/id/finmkt_NWG_milestones; Study Group on Risk-Free Reference Rates,
Bank of Japan, available at https://www.boj.or.jp/en/paym/market/sg/index.htm/; Financial Stability Board (FSB), Reforming Major
Interest Rate Benchmarks, Nov. 20, 2020, at 14-29 [hereinafter
``Reforming Major Interest Rate Benchmarks''], available at https://www.fsb.org/2020/11/reforming-major-interest-rate-benchmarks-2020-progress-report/.
\37\ See generally Reforming Major Interest Rate Benchmarks at
29-43, 54-55. See also Andreas Schrimpf and Vladislav Sushko,
``Beyond Libor: a primer on the new reference rates,'' BIS Quarterly
Review, Mar. 2019, at 35, available at https://www.bis.org/publ/qtrpdf/r_qt1903e.pdf; Bank of England, Preparing for 2022: What You
Need to Know about LIBOR Transition, Nov. 2018, at 10, https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/what-
you-need-to-know-about-libor-transition.pdf; ISDA, et al., IBOR
Global Benchmark Survey 2018 Transition Roadmap, Feb. 2018, at 32,
https://www.isda.org/a/g2hEE/IBOR-Global-Transition-Roadmap-
2018.pdf; Euro Short-Term Rate ([euro]STR), European Central Bank,
available at https://www.ecb.europa.eu/stats/
financial_markets_and_interest_rates/euro_short-term_rate/html/
index.en.html#:~:text=The%20euro%20short%2Dterm%20rate,activity%20on%
201%20October%202019; Steering Committee for SOR & SIBOR Transition
to SORA, Timelines to Cease Issuance of SOR and SIBOR-Linked
Financial Products, Mar. 31, 2021, available at https://abs.org.sg/docs/library/timelines-to-cease-issuance-of-sor-derivatives-and-sibor-linked-financial-products.pdf.
Alternative Reference Rates Identified for IBORs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Identified Alternative rate
Currency Index alternative rate administrator Secured Published
--------------------------------------------------------------------------------------------------------------------------------------------------------
Australian dollar (AUD)........... Bank Bill Swap Rate Reserve Bank of Reserve Bank of No..................... Yes.
(BBSW). Australia Interbank Australia.
Overnight Cash Rate
(AONIA).
Canadian dollar (CAD)............. Canadian Dollar Canadian Overnight Bank of Canada...... Yes.................... Yes.
Offered Rate (CDOR). Repo Rate Average
(CORRA).
CHF............................... LIBOR................ Swiss Average Rate SIX Swiss Exchange.. Yes.................... Yes.
Overnight (SARON).
EUR............................... LIBOR................ Euro Short-Term Rate European Central No..................... Yes.
([euro]STR). Bank.
Euro Overnight Index [euro]STR............ European Central No..................... Yes.
Average (EONIA) \38\. Bank.
Euro Interbank [euro]STR............ European Central No..................... Yes.
Offered Rate Bank.
(EURIBOR).
GBP............................... LIBOR................ Sterling Overnight Bank of England..... No..................... Yes.
Index Average
(SONIA).
Hong Kong dollar (HKD)............ Hong Kong Interbank Hong Kong Dollar Treasury Market No..................... Yes.
Offered Rate (HIBOR). Overnight Index Association.
Average (HONIA).
JPY \39\.......................... LIBOR................ Tokyo Overnight Bank of Japan....... No..................... Yes.
Average (TONA) Tokyo
Interbank Offered
Rate (TIBOR) Euroyen
TIBOR.
Mexican peso (MXN)................ Term Interbank Overnight TIIE....... Banco de Mexico..... Yes.................... Yes.
Equilibrium Interest
Rate (TIIE).
Singapore dollar (SGD)............ Singapore Dollar Swap Singapore Overnight Association of Banks No..................... Yes.
Offer Rate (SOR). Rate Average (SORA). in Singapore.
Singapore Interbank SORA................. Association of Banks No..................... Yes.
Offered Rate (SIBOR). in Singapore.
--------------------------------------------------------------------------------------------------------------------------------------------------------
On July 6, 2021, the FSB published a progress report discussing the
state of transition efforts and highlighting specific issues and
challenges.\40\ In particular, the report highlighted the need for
supervisory authorities to engage in a greater degree of coordination
and communication to promote awareness of the urgency and scope of the
transition away from LIBOR, and called on market participants to
accelerate their adoption of alternatives. The report noted that, while
significant progress had been made on some fronts, such as decreasing
reliance on GBP LIBOR in favor of SONIA, transition efforts had lagged
in other markets. For instance, the report observed that while use of
SOFR derivatives had increased, activity in USD LIBOR-based derivatives
had grown over the past three years, and the share of outstanding SOFR
derivatives remained small compared with USD LIBOR derivatives.\41\
---------------------------------------------------------------------------
\38\ Under a revised calculation methodology, EONIA is
calculated as a spread of 8.5 basis points over the [euro]STR rate.
EONIA is expected to be discontinued on January 3, 2022. Reforming
Major Interest Rate Benchmarks at 18.
\39\ Multiple alternative reference rates are being offered to
succeed JPY LIBOR. See generally note 66, infra.
\40\ FSB, Progress Report to the G20 on LIBOR Transition Issues,
July 6, 2021, available at https://www.fsb.org/wp-content/uploads/P060721.pdf.
\41\ Id. at 8-10.
\42\ Andrew Bailey, ``The future of Libor,'' July 27, 2017,
available at https://www.fca.org.uk/news/speeches/the-future-of-libor.
---------------------------------------------------------------------------
As regulators and market participants in different jurisdictions
work to identify alternative reference rates, the Commission
anticipates that the interest rate swaps markets will evolve to
incorporate those rates, with the goal of shifting all activity to the
alternative reference rates before the relevant IBOR is discontinued.
The Commission believes this process can occur organically, driven by
market demand and DCO offerings.
D. Transition to Alternative Reference Rates
The transition to alternative reference rates in substitution for
LIBOR, in particular, has been a priority for regulators and market
participants following an announcement by Andrew Bailey, then-Chief
Executive of the FCA, on July 27, 2017, that the FCA would not use its
authority to compel or persuade LIBOR panel banks to contribute to the
benchmark after 2021.\42\ Bailey urged market participants to begin
planning for the cessation of LIBOR and to start transitioning to the
use of alternative reference rates, highlighting the work already done
to identify alternative reference rates in the U.S., U.K., and other
LIBOR currency
[[Page 66481]]
jurisdictions.\43\ Following Bailey's remarks, other regulatory
officials, including previous Chairmen of the Commission and
Commissioners, voiced support for an orderly transition from LIBOR to
alternative reference rates.\44\
---------------------------------------------------------------------------
\43\ Id.
\44\ E.g., Jerome Powell and J. Christopher Giancarlo, ``How to
Fix Libor Pains,'' The Wall Street Journal, Aug. 3, 2017, available
at https://www.wsj.com/articles/how-to-fix-libor-pains-1501801028;
CFTC, Opening Statement of Commissioner Brian D. Quintenz before the
CFTC Market Risk Advisory Committee Meeting, July 12, 2018,
available at https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement071218; CFTC, Remarks of Commissioner Rostin Behnam
at the ISDA/SIFMA AMG Benchmark Strategies Forum 2020, New York, New
York, Feb. 12, 2020, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam14; CFTC, Statement of Chairman Heath P.
Tarbert Regarding the Transition Away from IBORs, Nov. 24, 2020
[hereinafter ``Statement of Chairman Tarbert''], https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement112420.
---------------------------------------------------------------------------
The transition from USD LIBOR to SOFR has been guided by the ARRC's
Paced Transition Plan, which was first published in 2017 and has been
adjusted over time.\45\ As currently formulated, the plan calls for
five steps to facilitate market-wide adoption of SOFR: (i) The
establishment of infrastructure for futures and/or OIS trading in SOFR
by the second half of 2018; (ii) the start of trading in futures and/or
bilateral, uncleared OIS that reference SOFR by the end of 2018; (iii)
the start of trading in cleared OIS that reference SOFR in the
effective federal funds rate (EFFR) price alignment interest (PAI) and
discounting environment by the end of the first quarter of 2019; (iv)
the Chicago Mercantile Exchange, Inc. (CME)'s and LCH.Clearnet Limited
(LCH)'s conversion of discounting, and PAI and price alignment amount
(PAA), from EFFR to SOFR with respect to all outstanding cleared USD-
denominated swaps by October 16, 2020; and (v) the ARRC's endorsement
of a term reference rate based on SOFR derivatives markets by the end
of the first half of 2021.
---------------------------------------------------------------------------
\45\ See generally ARRC, Paced Transition Plan, available at
https://www.newyorkfed.org/arrc/sofr-transition#pacedtransition.
---------------------------------------------------------------------------
Although the first four steps of the ARRC's Paced Transition Plan
were met on schedule,\46\ in March 2021, the ARRC announced that it
would not be prepared to select an administrator to publish a forward-
looking term SOFR rate by the end of the first half of the year.\47\
The ARRC noted that this fifth step would be contingent on the
continued development of sufficient liquidity in SOFR derivatives
markets and a limited scope of use for the term rate.\48\ CME Group
began publishing 1-, 3-, and 6-month forward-looking term SOFR
benchmark rates in April 2021,\49\ and in May 2021, the ARRC announced
that it planned to recommend CME Group as the administrator for a
forward-looking term rate, once certain market indicators were met.\50\
On July 29, 2021, shortly after the introduction of the first phase of
the Commission's Market Risk Advisory Committee's (MRAC) SOFR First
initiative,\51\ discussed below, the ARRC formally endorsed CME Group's
forward-looking term SOFR rates.\52\
---------------------------------------------------------------------------
\46\ As stated above, the FRBNY began publishing SOFR on April
3, 2018. Shortly thereafter, on May 7, 2018, CME Group Inc. (CME
Group) launched SOFR futures contracts in the 1- and 3-month tenors.
On May 16, 2018, ISDA added a definition of SOFR for use in
contracts governed by ISDA Master Agreements. On October 1, 2018,
ICE Futures Europe launched 1- and 3-month SOFR futures contracts.
On July 18, 2018, LCH began clearing interest rate swaps referencing
SOFR, with PAI and discounting linked to EFFR. On October 9, 2018,
CME began clearing interest rate swaps referencing SOFR, with PAI
and discounting linked to SOFR. Most recently, on October 16, 2020,
CME and LCH converted discounting and PAI/PAA from EFFR to SOFR for
all outstanding cleared USD-denominated swaps. Id.
\47\ ARRC, ARRC Provides Update on Forward-Looking SOFR Term
Rate, Mar. 23, 2020 [hereinafter ``ARRC Provides Update on Forward-
Looking SOFR Term Rate''], available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/arrc-press-release-term-rate-for-publication. At the time, the ARRC recommended that market
participants use existing tools, such as SOFR averages and index
data, instead of waiting for a term SOFR. Id. In May 2021, the ARRC
released a set of market indicators that it would consider before
recommending a forward-looking term SOFR rate. ARRC, ``ARRC
Identifies Market Indicators to Support a Recommendation of a
Forward-Looking SOFR Term Rate,'' May 6, 2021, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210506-term-rate-indicators-press-release.
\48\ ARRC Provides Update on Forward-Looking SOFR Term Rate.
\49\ CME Group, CME Group Announces Launch of CME Term SOFR
Reference Rates, Apr. 21, 2021, available at https://www.cmegroup.com/media-room/press-releases/2021/4/21/cme_group_announceslaunchofcmetermsofrreferencerates.html.
\50\ ARRC, ``ARRC Releases Update on its RFP Process for
Selecting a Forward-Looking SOFR Term Rate Administrator,'' May 21,
2021, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210521-ARRC-Press-Release-Term-Rate-RFP.pdf.
\51\ The MRAC's SOFR First initiative is not Commission action
and should be viewed as a best practice.
\52\ ARRC, ``ARRC Formally Recommends Term SOFR,'' July 29,
2021, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Term_SOFR.pdf. Prior
to its endorsement of CME Group's forward-looking term SOFR rates,
the ARRC released a statement of best practices supporting the use
of SOFR term rates in connection with business loan activities, but
not in connection with the vast majority of derivatives markets
activities, with the exception of end-user facing derivatives
intended to hedge cash products that reference the SOFR term rate.
ARRC, ARRC Best Practice Recommendations Related to Scope of Use of
the Term Rate, July 21, 2021, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Scope_of_Use.pdf.
---------------------------------------------------------------------------
Since its inception, the ARRC has sought to support market-wide
adoption of SOFR through the publication of guidance and
recommendations for market participants, including periodic publication
of transition objectives,\53\ recommendations related to the use of
SOFR and best practices for SOFR adoption,\54\ and the identification
of systems and processes likely to be affected by a transition from USD
LIBOR to SOFR.\55\ The ARRC has also sought regulatory guidance and
relief in order to facilitate an orderly transition away from
IBORs.\56\
---------------------------------------------------------------------------
\53\ E.g., ARRC, 2020 Objectives, Apr. 17, 2020, available at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_2020_Objectives.pdf; ARRC, 2019 Incremental Objectives, June 6,
2019, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARRC_2019_Incremental_Objectives.pdf.
\54\ E.g., ARRC, Addendum to Recommendations for Voluntary
Compensation for Swaptions Impacted by Central Counterparty Clearing
Houses' Discounting Transition to SOFR, Sept. 11, 2020 available at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-swaptions-recommendations.pdf; ARRC, Recommended Best
Practices, Sept. 3, 2020, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Best-Practices.pdf;
ARRC, Vendor Best Practices, May 7, 2020, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Vendor-Recommended-Best-Practices.pdf; ARRC, Recommendations for
Interdealer Cross-Currency Swap Market Conventions, Jan. 24, 2020,
available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/Recommendations_for_Interdealer_Cross-Currency_Swap_Market_Conventions.pdf; ARRC, Buy-Side Checklist for
SOFR Adoption, Jan. 31, 2020, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Buy_Side_Checklist.pdf; ARRC, Practical Implementation
Checklist for SOFR Adoption, Sept. 19, 2019, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARRC-SOFR-Checklist-20190919.pdf. The ARRC's resources include proposed
guidance and recommended fallback language for cash market products.
While many of the ARRC's recommended best practices for SOFR
adoption are intended to apply to users of cash market products,
some are specific to derivatives market participants. They include
adherence to ISDA's Fallbacks Protocol, specific steps that dealers
can take to promote liquidity in, and client access to, SOFR
derivatives, and cessation of new trades in LIBOR derivatives
maturing after 2021, except in limited circumstances.
\55\ ARRC, Internal Systems & Processes: Transition Aid for SOFR
Adoption, July 8, 2020, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Internal-Systems-Processes-Transition-Aid.pdf.
\56\ CFTC staff have addressed concerns raised by ARRC
associated with the transition away from LIBOR in two separate sets
of no-action letters issued in December 2019 and August 2020,
including by issuing no action relief from the Clearing Requirement
with respect to amendments to certain uncleared swaps. CFTC Staff
Letter No. 19-28, Dec. 17, 2019, available at https://www.cftc.gov/csl/19-28/download as superseded by CFTC Staff Letter No. 20-25,
Aug. 31, 2020, available at https://www.cftc.gov/csl/20-25/download.
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[[Page 66482]]
As the end of 2021 approaches, regulators, global standard-setting
bodies, and alternative reference rate working groups have increased
calls for market participants to accelerate their adoption of
alternative reference rates. On November 30, 2020, the FRB, Office of
the Comptroller of the Currency, and Federal Deposit Insurance
Corporation released a joint statement encouraging banks to cease
entering new contracts referencing USD LIBOR ``as soon as practicable''
and no later than December 31, 2021, in light of ``safety and soundness
risks'' posed by continued use of the benchmark.\57\ The statement
advised market participants that new contracts entered into before
December 31, 2021, should utilize a non-LIBOR reference rate, or
otherwise contain ``robust fallback language that includes a clearly
defined alternative reference rate after LIBOR's discontinuation.''
\58\ On June 2, 2021, IOSCO echoed the joint statement in its Statement
on Benchmarks Transition,\59\ and the FSB announced the publication of
a set of documents designed to assist market participants and
regulators in the transition, including a roadmap of steps for firms to
take as they transition their portfolios to alternative reference
rates, a white paper reviewing RFRs and term rates, and a statement
encouraging regulators to set consistent expectations for the cessation
of new USD LIBOR activity.\60\ Additionally, on July 13, 2021, the
Commission's MRAC adopted SOFR First, a phased initiative to switch
interdealer trading conventions from LIBOR to SOFR in a variety of
products.\61\
---------------------------------------------------------------------------
\57\ Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, and Office of the Comptroller of the
Currency, Statement on LIBOR Transition, Nov. 30, 2020, available at
https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20201130a1.pdf.
\58\ Id. The agencies stated that such circumstances may include
``(i) transactions executed for purposes of required participation
in a central counterparty auction procedure in the case of a member
default, including transactions to hedge the resulting USD LIBOR
exposure; (ii) market making in support of client activity related
to USD LIBOR transactions executed before January 1, 2022, (iii)
transactions that reduce or hedge the bank's or any client of the
bank's USD LIBOR exposure on contracts entered into before January
1, 2022; and (iv) novations of USD LIBOR transactions executed
before January 1, 2022.'' Id. A fallback rate refers to the rate
provided for use in a contract if the benchmark that the contract
uses becomes unavailable or unrepresentative. ISDA, Understanding
IBOR Benchmark Fallbacks, June 2, 2020, available at https://www.isda.org/a/YZQTE/Understanding-Benchmarks-Factsheet.pdf. Prior
to ISDA's IBOR Fallbacks Supplement, discussed below, ISDA's 2006
Definitions called for the counterparty serving as the calculation
agent for a swap to calculate a fallback rate based on quotations
obtained by polling banks, an approach which was viewed as
unsustainable in the event of a permanent cessation to a benchmark
rate. See IBOR Global Benchmark Transition Report at 15.
\59\ See generally IOSCO, Statement on Benchmarks Transition,
June 2, 2021, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD676.pdf. See also ARRC, ARRC Recommends Acting Now to
Slow USD LIBOR Use over the Next Six Weeks to be Well-Positioned to
Meet Supervisory Guidance by Year-End, Oct. 14, 2021, available at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20211013-arrc-press-release-supporting-a-smooth-exit-post-arrc
(recommending market participants take steps to curtail new use of
USD LIBOR consistent with federal supervisory guidance).
\60\ FSB, ``FSB issues statements to support a smooth transition
away from LIBOR by end 2021,'' June 2, 2021, available at https://www.fsb.org/2021/06/fsb-issues-statements-to-support-a-smooth-transition-away-from-libor-by-end-2021/.
\61\ CFTC, ``CFTC Market Risk Advisory Committee Adopts SOFR
First Recommendation at Public Meeting,'' July 13, 2021, available
at https://www.cftc.gov/PressRoom/PressReleases/8409-21. The first
phase of the initiative, covering USD-denominated linear swaps,
began on July 26, 2021. The MRAC's SOFR First initiative mirrors a
SONIA-First best practice adopted by the FCA and the Bank of
England. See Bank of England, ``The FCA and the Bank of England
encourage market participants in further switch to SONIA in interest
rate swap markets,'' Sept. 28, 2020, available at https://www.bankofengland.co.uk/news/2020/september/fca-and-boe-joint-
statement-on-sonia-interest-rate-swap. The second phase of MRAC's
SOFR First initiative, covering cross-currency swaps with CHF, GBP,
JPY, and USD LIBOR legs, began on September 21, 2021. See CFTC, SOFR
First: MRAC Subcommittee Recommendation, July 13, 2021 [hereinafter
``SOFR First: MRAC Subcommittee Recommendation''], available at
https://www.cftc.gov/media/6176/MRAC_SOFRFirstSubcommitteeRecommendation071321/download. The third
phase of SOFR First, covering non-linear derivatives, launched on
November 8, 2021. See CFTC, CFTC's Interest Rate Benchmark Reform
Subcommittee Selects November 8 for SOFR First for Non-Linear
Derivatives, Oct. 15, 2021, available at https://www.cftc.gov/PressRoom/PressReleases/8449-21. The fourth and final phase of SOFR
First will cover exchange-traded derivatives. Timing for
implementation of this phase remains to be determined by is expected
to occur no later than December 31, 2021. Id.; SOFR First: MRAC
Subcommittee Recommendation.
---------------------------------------------------------------------------
E. International Regulatory Developments
Under Section 752(a) of the Dodd-Frank Act, the Commission, along
with the Securities and Exchange Commission and other prudential
regulators, was directed to consult and coordinate with non-U.S.
regulatory authorities in order to establish consistent international
standards for regulating swaps.\62\ The Commission complied with this
directive in 2016 when it considered regulatory developments in swap
clearing around the world for the Second Determination and noted that
it was important to harmonize the Clearing Requirement with clearing
mandates in other jurisdictions.\63\ Now, as in the past, the
Commission is reviewing proposals and plans by other regulators to
modify clearing mandates for interest rate swaps. The Commission has
long recognized the interconnectedness of the interest rate swaps
market, and is working cooperatively with other jurisdictions as they
consider and adopt new clearing mandates.\64\
---------------------------------------------------------------------------
\62\ Section 752 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
\63\ Second Determination, 81 FR 71203.
\64\ See Second Determination, 81 FR 71223 (noting that ``the
interest rate swaps market is global and market participants are
interconnected''); First Determination, 77 FR 74287 (``The
Commission is mindful of the benefits of harmonizing its regulatory
framework with that of its counterparts in foreign countries. The
Commission has therefore monitored global advisory, legislative, and
regulatory proposals, and has consulted with foreign regulators in
developing the final regulations.'').
---------------------------------------------------------------------------
On May 20, 2021, the Bank of England launched a public consultation
regarding a proposal to modify its clearing obligation in light of the
cessation of LIBOR and adoption of alternative reference rates.\65\ The
Bank of England proposed three key changes to its clearing obligation.
First, on October 18, 2021, the requirement to clear EONIA OIS with a
maturity of 7 days to 3 years would be replaced with a requirement to
clear [euro]STR OIS for the same maturity range. Second, on December 6,
2021, the requirement to clear JPY LIBOR basis and fixed-to-floating
swaps would be removed.\66\ Third, on December 20, 2021, the
requirement to clear GBP LIBOR basis and fixed-to-floating swaps, and
FRAs, would be replaced with a requirement to clear SONIA OIS with an
amended maturity range of 7 days to 50 years. According to the
proposal, any changes to the clearing obligation would enter into force
shortly after a number of DCOs complete a contractual conversion
process, discussed below. On September 29, 2021, in a final policy
statement, the Bank of England announced that it would adopt these
changes as
[[Page 66483]]
proposed.\67\ However, citing recent announcements by Japanese
authorities \68\ and anticipated changes in market activity,\69\ the
Bank of England proposed to add TONA OIS to the scope of contracts
subject to its clearing obligation. The proposal contemplates that the
clearing obligation for TONA OIS would come into force on December 6,
2021, and would cover a maturity range of 7 days to 30 years.\70\
---------------------------------------------------------------------------
\65\ Bank of England, ``Derivatives clearing obligation--
modifications to reflect interest rate benchmark reform: Amendments
to BTS 2015/2205,'' May 20, 2021, available at https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-
modifications-to-reflect-interest-rate-benchmark-reform-amendments.
The consultation closed on July 14, 2021. Id.
\66\ The Bank of England initially proposed that the JPY LIBOR
clearing obligation be removed, rather than replaced, due to
uncertainty with respect to which alternative reference rate would
become the market standard alternative for JPY LIBOR. While the
Japanese Study Group on Risk-Free Reference Rates has identified
TONA as its preferred JPY LIBOR alternative, the Japanese Bankers
Association, which publishes TIBOR and Euroyen TIBOR, is considering
retaining JPY TIBOR while discontinuing Euroyen TIBOR at the end of
2024. See generally JBA TIBOR Administration, ``Current status and
outlook of JBA TIBOR (March 2021),'' Mar. 2021, available at https://www.jbatibor./or.jp/english/about/
a05337c8b9e2b22ccd2c0464bc4b2e86b76098d3.pdf.
\67\ Bank of England, ``Derivatives clearing obligation--
modifications to reflect interest rate benchmark reform: Amendments
to BTS 2015/2205,'' Sept. 29, 2021, available at https://www.bankof/england.co./uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform.
\68\ Japan's Financial Services Agency published a draft
regulatory notice on September 8, 2021 requesting public comment on
rules related to, among other things, the obligation to centrally
clear over-the-counter derivatives transactions. Financial Services
Agency Weekly Review No. 456, Sept. 16, 2021, available at: https://www.fsa./go.jp/en/newsletter/weekly/2021/456.html.
\69\ Specifically, the Bank of England cited (i) a report from
the Bank of Japan's Sub-Group for the Development of Term Reference
Rates urging market participants to cease new JPY LIBOR swaps
activity by the end of September 2021 and recommending that TONA
become the primary replacement rate for JPY LIBOR; (ii)
recommendations by liquidity providers to change quoting conventions
from JPY LIBOR to TONA; and (iii) a September 8, 2021 consultation
by Japan's Financial Services Agency regarding changes to its
clearing obligation.
\70\ Bank of England, ``Derivatives clearing obligation--
introduction of contracts referencing TONA: Amendment to BTS 2015/
2205,'' Sept. 29, 2021 [hereinafter ``Derivatives clearing
obligation--introduction of contracts referencing TONA: Amendment to
BTS 2015/2205''], available at https://www.bankof/england.co./uk/paper/2021/derivatives-clearing-obligation-introduction-of-contracts-referencing-tona; Bank of England, Public Register for the
Clearing Obligation, available at https://www.bankofengland./co.uk/-
/media/boe/files/eu-withdrawal/clearing-obligation-public-
register.pdf. The consultation closed on October 27, 2021.
Derivatives clearing obligation--introduction of contracts
referencing TONA: Amendment to BTS 2015/2205.
---------------------------------------------------------------------------
On July 9, 2021, the European Securities and Markets Authority
(ESMA) published a public consultation on draft regulatory technical
standards (RTS) amending ESMA's clearing and derivatives trading
obligations.\71\ The draft RTS proposes to eliminate the clearing
obligation for (i) GBP and JPY LIBOR swaps in the basis and fixed-to-
floating swap classes; (ii) GBP LIBOR swaps in the FRA class; and (iii)
EONIA swaps in the OIS class.\72\ It also proposes to add a clearing
obligation to the OIS class for [euro]STR and SOFR swaps (in each case,
for a maturity range of 7 days to 3 years) and extend the maximum
maturity range for SONIA OIS from 3 years to 50 years.\73\ Once ESMA
finalizes the RTS, it will be submitted to the European Commission for
endorsement.\74\
---------------------------------------------------------------------------
\71\ ESMA, ``Consultation Paper: On the clearing and derivative
trading obligations in view of the benchmark transition,'' July 9,
2021, available at https://www.esma./europa.eu/sites/default/files/
library/
consultation_paper_on_the_co_and_dto_for_swaps_referencing_rfrs.pdf.
The consultation closed on September 2, 2021. Id. at 8.
\72\ Id. at 37-39.
\73\ Id.
\74\ Id. at 8. The RTS will become effective on the later of
January 3, 2022 or 20 days after publication in the Official Journal
of the European Union. Id. at 58-59.
---------------------------------------------------------------------------
II. Market Adoption of Alternative Reference Rates
A. Industry Initiatives
Consistent with calls for a broadly coordinated benchmark reform
effort by the FSB Official Sector Steering Group, Financial Stability
Oversight Council, and others, market participants have played a
critical role in the identification, development, and adoption of
alternative reference rates through leadership in and engagement with
alternative reference rate working groups such as the ARRC, as well as
through influencing numerous aspects of the adoption of alternative
reference rates via the provision of feedback in public consultations
by the ARRC, ISDA, ICE, and others.\75\ Market participants also have
provided much of the infrastructure needed for increased market
adoption of, and trading liquidity in, derivatives referencing
alternative reference rates, including providing for the offering of
alternative reference rate-linked futures contracts, clearing of
alternative reference rate-linked swaps, and adjusting PAI and
discounting methodology to rely on alternative reference rates.
---------------------------------------------------------------------------
\75\ See generally ISDA, Summary of Responses to the ISDA 2020
Consultation on How to Implement Pre-Cessation Fallbacks in
Derivatives, May 14, 2020, available at https://www.isda./org/a/
cuQTE/2020./05.14-Pre-cessation-Re-Consultation-Report-FINAL.pdf;
ISDA, Summary of Responses to the ISDA Consultation on Final
Parameters for the Spread and Term Adjustment Methodology, Nov. 15,
2019, available at http://assets./isda.org/media/3e16cdd2/d1b3283f.pdf; ISDA, Anonymized Narrative Summary of Responses to the
ISDA Consultation on Term Fixings and Spread Adjustment Methodology,
Dec. 20, 2018, available at http://assets./isda.org/media/04d213b6/db0b0fd7.pdf; ARRC, ARRC Consultation on Swaptions Impacted by the
CCP Discounting Transition to SOFR, Feb. 7, 2020, available at
https://www.newyorkfed.org/media/library/Microsites/arrc/files/2020/ARRC_Swaption_Consultation./pdf.
---------------------------------------------------------------------------
One of the most significant industry initiatives to facilitate the
transition from IBORs to alternative reference rates in interest rate
swaps markets has been ISDA's efforts to update its standard contract
documentation to reflect ongoing benchmark reform efforts, including
(i) ISDA's 2020 IBOR Fallbacks Protocol, published on October 23, 2020,
and (ii) ISDA's Supplement number 70 to the 2006 ISDA Definitions,
finalized on October 23, 2020 and published and effective on January
25, 2021 (IBOR Fallbacks Supplement).\76\ The IBOR Fallbacks
Supplement, which applies to new cleared and uncleared derivatives
contracts entered into on or after January 25, 2021 that incorporate
the 2006 ISDA Definitions and reference any of the IBORs to which the
supplement applies, provides that contracts referencing those IBORs
will fall back to adjusted versions of the RFR identified for the
relevant IBOR in the event that an IBOR ceases or, in the case of
LIBOR, either ceases or is deemed non-representative.\77\ Concurrent
with its publication of the IBOR Fallbacks Supplement, ISDA also
launched an IBOR Fallbacks Protocol, which allows counterparties to
uncleared derivatives transactions to bilaterally amend existing
uncleared transactions to incorporate the fallbacks detailed in the
Supplement, effectively allowing counterparties to apply the IBOR
Fallbacks Supplement's amendments to legacy uncleared swaps entered
into prior to the effective date of the IBOR Fallbacks Supplement.\78\
On March 5, 2021, following the FCA's statement that all 35 LIBOR
settings will either permanently cease to be published or become non-
representative, ISDA released guidance explaining that its fallbacks
will become effective on the date that each of the relevant settings
will cease publication or become non-representative.\79\ The ARRC and
regulators have called for widespread adherence to ISDA's IBOR
Fallbacks Protocol as an important means of minimizing potential market
disruption
[[Page 66484]]
as a result of a LIBOR cessation.\80\ As of November 2021, over 14,700
parties had adhered to ISDA's Protocol.\81\
---------------------------------------------------------------------------
\76\ ISDA, ``Amendments to the 2006 ISDA Definitions to include
new IBOR fallbacks,'' Oct. 23, 2020, available at http://assets.isda.org/media/3062e7b4/23aa1658.pdf; ISDA, ISDA 2020 IBOR
Fallbacks Protocol, Oct. 23, 2020 [hereinafter ``IBOR Fallbacks
Protocol''], available at http://assets.isda.org/media/3062e7b4/08268161-pdf/.
\77\ The following IBORs are within the scope of the IBOR
Fallbacks Supplement: GBP LIBOR, CHF LIBOR, USD LIBOR, EUR LIBOR,
EURIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR, BBSW, CDOR, HIBOR, SOR,
and THBFIX. The IBOR Fallbacks Supplement also provides that if a
specific LIBOR tenor is discontinued or declared non-representative,
it is to be determined based on linear interpolation if the next
longest and shortest tenor remain available. See generally IBOR
Fallbacks Supplement. For instance, under ISDA's fallback
methodology, between December 31, 2021 and June 30, 2023, the 1-week
and 2-month USD LIBOR settings are to be calculated using linear
interpolation.
\78\ See generally IBOR Fallbacks Protocol.
\79\ ISDA, Future Cessation and Non-Representative Guidance,
Mar. 5, 2021, available at https://www.isda.org/a/dIFTE/ISDA-
Guidance-on-FCA-announcement_LIBOR-Future-Cessation-and-Non-
Representativeness-April-Update.pdf.
\80\ E.g., Statement of Chairman Tarbert; ARRC, ``ARRC Urges
Timely and Widespread Adherence to the Protocol,'' Oct. 22, 2020,
available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Press_Release_ISDA_Protocol.pdf; FSB, Global
Transition Roadmap for LIBOR [hereinafter ``Global Transition
Roadmap for LIBOR''], Oct. 16, 2020, at 2, available at https://www.fsb.org/wp-content/uploads/P161020-1.pdf.
\81\ ISDA, List of Adhering Parties, https://www.isda.org/
protocol/isda-2020-ibor-fallbacks-protocol/adhering-parties.
---------------------------------------------------------------------------
ISDA's IBOR Fallbacks Supplement also has provided DCOs with a
template to adopt, with adjustments, changes that are required to
transition cleared swaps referencing IBORs to alternative reference
rates, in order to ensure that the swaps can continue to be risk-
managed. The FSB specifically urged providers of cleared products that
reference IBORs to ensure that those products incorporate fallback
provisions aligned with those in the IBOR Fallbacks Supplement.\82\
Several DCOs have adopted rule amendments to facilitate the use of the
alternative reference rates provided for in the IBOR Fallbacks
Supplement in cleared swap contracts.\83\
---------------------------------------------------------------------------
\82\ Global Transition Roadmap for LIBOR at 2.
\83\ ISDA's Fallbacks Supplement and changes to reference rates
have prompted ISDA to undertake a comprehensive review of their
interest rate swap definitions. As a result, ISDA has produced a new
set of interest rate derivatives definitions that DCOs are
incorporating into their rulebooks. E.g., LCH, LCH Limited Self-
Certification: 2021 ISDA Interest Rate Derivatives Definitions,
Sept. 17, 2021, available at https://www.lch.com/system/files/media_root/FINAL%20-%20LCH%20self%20cert_2021%20ISDA%20Defs%202021%2009%2017%20v1.pdf;
CME, CME Submission No. 21-431, CFTC Regulation 40.6(a)
Certification, Amendments to CME Chapters 900 (``Interest Rate
Products'') and 901 (``Interest Rate Swaps Contract Terms'') in
Connection with the Implementation of 2021 ISDA Definitions for
Over-the-Counter Interest Rate Swap Products, Sept. 17, 2021,
available at https://www.cmegroup.com/content/dam/cmegroup/market-regulation/rule-filings/2021/9/21-431.pdf; Eurex, ECAG Rule
Certification 074-21, Aug. 23, 2021, available at https://www.eurex.com/resource/blob/2754378/c6faf642c399f93edfb030274a0c79b4/data/ecag_cftc_filing_for_circular_074-21.pdf.
---------------------------------------------------------------------------
B. Availability of Clearing
As the market for interest rate swaps moves away from IBORs to
alternative reference rates, DCOs have started to transition their
product offerings and are working to assist clearing members with the
process of transferring positions. A number of DCOs have started
clearing OIS in SOFR and other alternative reference rates.\84\ A table
with clearing availability at DCOs registered under the CEA is included
below. This table does not include DCOs exempt from registration under
the CEA or any other central counterparty that is not a registered DCO
where additional liquidity in alternative reference rate products may
exist.
---------------------------------------------------------------------------
\84\ Eurex, EurexOTC Clear Product List, available at https://www.eurex.com/resource/blob/227404/03073af977450b1834d84eae808c7a7e/data/ec15075e_Attach.pdf; CME, Cleared OTC Interest Rate Swaps,
available at https://www.cmegroup.com/trading/interest-rates/cleared-otc.html#; CME, CME OTC IRS Supported Product List,
available at https://www.cmegroup.com/trading/interest-rates/cleared-otc/files/cme-otc-irs-supported-product-list.xlsx; LCH, What
We Clear, available at https://www.lch.com/services/swapclear/what-we-clear; LCH, Product Specific Contract Terms and Eligibility
Criteria Manual, Oct. 15, 2021, available at https://www.lch.com/system/files/media_root/211015%20-%20Product%20Specific%20Contract%20Terms%20%28EMTA%20Template%20and%20JS%20deletions%29.pdf.
Alternative Reference Rate Clearing Availability
----------------------------------------------------------------------------------------------------------------
DCOs clearing the swaps
Swap class Currency Floating rate (termination date range offered)
----------------------------------------------------------------------------------------------------------------
Basis Swaps...................... AUD................. BBSW-AONIA......... LCH (up to 31 yrs).
CAD................. CDOR-CORRA......... LCH (up to 31 yrs).
EUR................. EURIBOR-[euro]ESTR. CME (up to 51 yrs), Eurex (up to
51 yrs), LCH (up to 51 yrs).
GBP................. LIBOR-SONIA........ Eurex (up to 51 yrs), LCH (up to
51 yrs).
JPY................. LIBOR-TONA......... Eurex (up to 31 yrs), LCH (up to
41 yrs).
SGD................. SOR-SORA........... LCH (up to 21 yrs).
USD................. LIBOR-SOFR......... CME (up to 51 yrs), Eurex (up to
Fed Funds-SOFR..... 51 yrs), LCH (up to 51 yrs).
CME (up to 51 yrs), Eurex (up to
51 yrs), LCH (up to 51 yrs).
Overnight Index Swaps............ AUD................. AONIA.............. CME (up to 31 yrs), LCH (up to 31
yrs).
CAD................. CORRA.............. CME (up to 31 yrs), LCH (up to 31
yrs).
CHF................. SARON.............. CME (up to 31 yrs), Eurex (up to
31 yrs), LCH (up to 31 yrs).
EUR................. [euro]ESTR......... CME (up to 51 yrs), Eurex (up to
51 yrs), LCH (up to 51 yrs).
GBP................. SONIA.............. CME (up to 51 yrs), Eurex (up to
51 yrs), LCH (up to 51 yrs).
JPY................. TONA............... CME (up to 31 yrs), Eurex (up to
31 yrs), LCH (up to 41 yrs).
SGD................. SORA............... LCH (up to 21 yrs).
USD................. SOFR............... CME (up to 51 yrs), Eurex (up to
51 yrs), LCH (up to 51 yrs).
----------------------------------------------------------------------------------------------------------------
Certain DCOs have observed that market participants identified some
challenges with respect to implementing ISDA's fallbacks for both
cleared and uncleared contracts: (1) The bifurcation of liquidity
between trading in legacy IBOR contracts that reference alternative
reference rates (a pool of contracts that would become less liquid over
time with increasing adoption of alternative reference rates), and
```new' OIS contracts''; and (2) significant costs related to the
operational upgrades required to calculate floating rate coupons and
update valuation methodologies.\85\ DCOs continue to consider how to
address these concerns through discussions with their clearing members
and other market participants. One way that certain DCOs are attempting
to mitigate these problems is to transition outstanding cleared IBOR-
linked products to market standard RFR OIS through conversion events
prior to the cessation of certain IBORs.
---------------------------------------------------------------------------
\85\ CME, Cleared Swaps Considerations for IBOR Fallback and
Conversion Proposal, Jan. 14, 2021, available at https://www.cmegroup.com/trading/interest-rates/files/cleared-swaps-considerations-for-ibor-fallbacks-and-conversion-proposal.pdf.
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[[Page 66485]]
For example, CME, Eurex, and LCH launched processes to replace
cleared swaps contracts referencing EONIA outstanding after October 15,
2021 with a conversion to [euro]STR.\86\ EONIA will be discontinued on
January 3, 2022. The European Money Markets Institute publishes EONIA
and has committed to publishing the benchmark rate until January 3,
2022.\87\ Nonetheless, these DCOs have conducted an early transition
from cleared positions in EONIA to [euro]STR. LCH plans to convert
cleared CHF, EUR, and JPY LIBOR contracts outstanding at close of
business on December 3, 2021, and cleared GBP LIBOR contracts
outstanding at close of business on December 17, 2021, to standardized
alternative reference rate contracts.\88\ CME and Eurex plan to convert
cleared CHF LIBOR, JPY LIBOR, and GBP LIBOR contracts to standardized
alternative reference rate contracts on the same timeline.\89\ DCOs may
change these plans or decide to stop clearing other products in the
lead up to the IBOR transition as well. The Commission encourages
market participants to consider these changes to product offerings as
they plan to transition their IBOR-linked swaps.
---------------------------------------------------------------------------
\86\ See CME, CME Submission No. 21-413, CFTC Regulation 40.6(a)
Certification, Notification Regarding Modification of Cleared Euro
Overnight Index Average (``EONIA'') Overnight Index Swaps to
Reference Euro Short Term Rate (``[euro]STR'') Ahead of Scheduled
Discontinuation of EONIA, Sept. 29, 2021, available at https://www.cmegroup.com/content/dam/cmegroup/market-regulation/rule-filings/2021/9/21-413.pdf; Eurex Clearing, ECAG Rule Certification
081-21, Sept. 16, 2021 [hereinafter ``ECAG Rule Certification 081-
21''], available at https://www.eurex.com/resource/blob/2781070/61d1fccdd00bc1a06753877a5fa3f483/data/ecag_cftc_filing_for_circular_081-21.pdf; Eurex, Eurex Clearing
Circular 111/20 EurexOTC Clear: Summary of Consultation on the
Transition Plan for Transactions Referencing the EONIA Benchmark,
Dec. 14, 2020, available at https://www.eurex.com/ec-en/find/circulars/clearing-circular-2373634; LCH, LCH Limited Self-
Certification: Benchmark Reform--Rates Conversion, Sept. 29, 2021,
(hereinafter ``LCH Limited Self-Certification: Benchmark Reform--
Rates Conversion'') available at https://www.lch.com/system/files/media_root/FINAL%20-%20LCH%20self%20cert_Benchmark%20Reform%202021%2009%2029%20v3%20%28Clean%29.pdf.
\87\ European Money Markets Institute, About EONIA, available at
https://www.emmi-benchmarks.eu/euribor-eonia-org/about-eonia.html.
\88\ LCH Limited Self-Certification: Benchmark Reform--Rates
Conversion; LCH, Supplementary Statement on LCH's Solution for
Outstanding Cleared LIBOR Contracts, LCH Circular No. 4146, Mar. 18,
2021, available at https://www.lch.com/membership/ltd-membership/ltd-member-updates/supplementary-statement-lchs-solution-outstanding.
\89\ ECAG Rule Certification 081-21; CME, CME IBOR Conversion
Plan for Cleared Swaps, June 9, 2021, available at https://www.cmegroup.com/trading/interest-rates/files/cleared-swaps-considerations-for-ibor-fallbacks-and-conversion-plan.pdf. On
September 24, 2021, CME converted LIBOR-linked basis swaps to pairs
of offsetting fixed-to-floating swaps.
---------------------------------------------------------------------------
The Commission anticipates that DCO product offering changes (i.e.,
discontinuing clearing for certain LIBOR products after the contract
conversion date) may make the current Clearing Requirement impossible
to satisfy. The Commission is monitoring the evolution of conversion
plans, and potential conversion-related challenges, and seeks input
from the public about this and other topics in the sections below.
C. Current Trends in Alternative Reference Rates
The effort to shift trading liquidity and outstanding notional
derivatives positions from IBORs to alternative reference rates by the
industry has begun, but certain currency and rate pairs have seen more
activity in alternative reference rates than others. Clarus Financial
Technology (CFT) submitted a response to IBA's December 2020
consultation that outlined their conclusions regarding data on global
trading activity in cleared OTC derivatives and exchange-traded
interest rate derivatives that reference LIBOR in each of the five
LIBOR currencies.\90\ CFT commented that based on its review of
derivatives data: (i) Market participants have shifted derivatives
activity from GBP LIBOR to SONIA positions; (ii) markets have developed
to facilitate the transfer of USD LIBOR positions to SOFR, but market
participants have not made significant progress transferring those
positions; and (iii) there has been some progress in transferring
derivatives activity from CHF and JPY LIBOR to those benchmarks'
respective alternative reference rates, but progress has been slow.\91\
---------------------------------------------------------------------------
\90\ IBA, List of Non-Confidential Responses, at 3, available at
https://www.theice.com/publicdocs/List_of_non-confidential_responses.pdf.
\91\ Id.
---------------------------------------------------------------------------
CFT observed that there have been low volumes of EUR LIBOR-linked
derivatives historically and did not comment on the cessation of EUR
LIBOR.\92\ Data reported by ISDA also indicates that there has been
only limited activity in EUR LIBOR-based derivatives.\93\
---------------------------------------------------------------------------
\92\ Id. at 4.
\93\ ISDA SwapsInfo, updated weekly, available at http://isda.informz.net/z/cjUucD9taT04MzA0NjUwJnA9MSZ1PTg0MzY2NjIxNyZsaT03MDQ4MTA0OA/index.html. ISDA SwapsInfo collects data from the Depository Trust &
Clearing Corporation (DTCC) swap data repository, and in the past
had included data from the Bloomberg swap data repository (BSDR
LLC).
---------------------------------------------------------------------------
With respect to the USD LIBOR market, CFT observed that trading
activity in USD derivatives markets has not changed materially in
response to the calls to transition away from USD LIBOR. CFT stated
that the although SOFR products trading doubled from 2019 to 2020, it
remains at low levels. In October 2020, as market participants managed
the transition from the EFFR to SOFR discounting and PAI/PAA at LCH and
CME, SOFR trading activity increased.\94\ CFT believes this data
demonstrates that market participants are able to use SOFR derivatives
to manage risks when there is demand. The decline in SOFR trading after
the October 2020 discounting event shows that market participants were
able to use SOFR derivatives when needed, but have not continued to use
SOFR and instead have reverted to USD LIBOR. As demonstrated by the
data below, trading in SOFR swaps has not approached the levels of USD
LIBOR trading, in notional value or trade count, but it has increased
substantially in recent weeks.
---------------------------------------------------------------------------
\94\ IBA, List of Non-Confidential Responses, at 11, available
at https://www.theice.com/publicdocs/List_of_non-confidential_responses.pdf. See also ARRC, Progress Report: The
Transition from U.S. Dollar LIBOR, at 6, Mar. 22, 2021, available at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210322-arrc-press-release-USD-LIBOR-Transition-Progress-Report.pdf.
---------------------------------------------------------------------------
The data on GBP LIBOR swaps activity presents evidence that market
participants are transitioning to SONIA derivatives. CFT attributes
some of the success of the transition to the statements made by UK
regulators.\95\ Overall, the swaps activity in SONIA provides evidence
that market participants are shifting derivatives positions in GBP to
SONIA.
---------------------------------------------------------------------------
\95\ IBA, List of Non-Confidential Responses, at 8, available at
https://www.theice.com/publicdocs/List_of_non-confidential_responses.pdf.
---------------------------------------------------------------------------
Levels of trading and swaps activity in CHF SARON and JPY TONA had
previously not been rising rapidly year over year, but data from more
recent months in 2021 have shown substantial increases in the notional
value traded and number of trades alongside a significant decrease in
the trading of CHF LIBOR and JPY LIBOR. Recently, CFT highlighted rapid
shifts from the low levels of trading in CHF SARON and JPY TONA in
March 2021, to almost 50 percent of the market risk in those
currencies.\96\ More detailed data related to notional value traded and
trade count for certain interest rate swaps in recent weeks.
---------------------------------------------------------------------------
\96\ CFT, RFR Trading is Now at 50% in CHF and JPY!, Sept. 15,
2021, available at https://www.clarusft.com/rfr-trading-is-now-at-50-in-chf-and-jpy/.
[[Page 66486]]
Notional Value of Swaps Traded \97\
[Measured in U.S. dollars, billions]
----------------------------------------------------------------------------------------------------------------
Week ending on Week ending on Week ending on
Currency and floating rate October 22, 2021 October 29, 2021 November 5, 2021
----------------------------------------------------------------------------------------------------------------
USD LIBOR.............................................. 1,814.4 2,065.2 1,698.0
SOFR............................................... 294.4 291.0 282.3
GBP LIBOR.............................................. 88.3 31.6 164.1
SONIA.............................................. 1,218.8 668.8 931.3
CHF LIBOR.............................................. 6.2 3.3 1.2
SARON.............................................. 9.2 11.6 14.2
JPY LIBOR.............................................. 5.7 6.4 6.8
TONA............................................... 36.9 33.5 47.0
EURIBOR................................................ 785.3 805.4 1,052.4
[euro]STR.......................................... 178.6 292.0 324.1
----------------------------------------------------------------------------------------------------------------
Trade Count of Swaps Reported \98\
----------------------------------------------------------------------------------------------------------------
Week Ending on Week Ending on Week Ending on
Currency and floating rate October 22, 2021 October 29, 2021 November 5, 2021
----------------------------------------------------------------------------------------------------------------
USD LIBOR.............................................. 12,443 13,742 12,397
SOFR............................................... 2,935 3,093 2,805
GBP LIBOR.............................................. 1,768 552 1,224
SONIA.............................................. 3,201 3,557 4,002
CHF LIBOR.............................................. 124 154 34
SARON.............................................. 199 277 291
JPY LIBOR.............................................. 541 412 250
TONA............................................... 515 586 626
EURIBOR................................................ 7,559 7,798 9,152
[euro]STR.......................................... 666 733 1,009
----------------------------------------------------------------------------------------------------------------
As discussed above, clearing in the alternative reference rates is
available at more than one DCO. According to data from LCH's SwapClear
service, clearing in certain alternative reference rates has increased
over the past few months. Most notably, the outstanding notional amount
of cleared SOFR swaps has increased substantially.
LCH SwapClear Statistics \99\ Notional Amounts Outstanding as of Month-End
[Measured in U.S. dollars, billions]
----------------------------------------------------------------------------------------------------------------
Month ending Month ending Month ending
Currency and floating rate August 2021 September 2021 October 2021
----------------------------------------------------------------------------------------------------------------
USD SOFR............................................... 7,292.45 8,595.71 11,068.33
GBP SONIA.............................................. 23,041.30 25,089.41 29,795.27
CHF SARON.............................................. 633.74 725.71 888.89
JPY TONA............................................... 593.83 776.84 1,073.85
EUR [euro]STR.......................................... 1,959.42 2,329.71 19,075.77
----------------------------------------------------------------------------------------------------------------
Finally, Commission staff has been monitoring data reported to
DTCC's swap data repository and CME's swap data repository in order to
track the rate of voluntary clearing in certain RFRs. Reviewing swap
transaction data from January 2021 to October 2021, the Commission
staff has estimated that over 90% of the volume of fixed-to-floating
swaps referencing USD SOFR, GBP SONIA, CHF SARON, JPY TONA, and EUR
[euro]STR has been cleared on a voluntary basis.\100\ The Commission
will continue to monitor the level of cleared and uncleared swaps
activity in the alternative reference rates as the transition away from
IBORs proceeds.
---------------------------------------------------------------------------
\97\ ISDA SwapsInfo, updated weekly, available at http://isda.informz.net/z/cjUucD9taT04MzA0NjUwJnA9MSZ1PTg0MzY2NjIxNyZsaT03MDQ4MTA0OA/index.html. ISDA SwapsInfo collects data from DTCC, and in the past
had included data from BSDR LLC.
\98\ ISDA SwapsInfo, updated weekly, available at http://isda.informz.net/z/cjUucD9taT04MzA0NjUwJnA9MSZ1PTg0MzY2NjIxNyZsaT03MDQ4MTA0OA/index.html. ISDA SwapsInfo collects data from DTCC swap data
repository, and in the past had included data from BSDR LLC.
\99\ LCH SwapClear reports statistics on the monthly
registration volume as well as the notional amounts outstanding at
the month end of swaps referencing one of the listed RFRs, updated
monthly, available at https://www.lch.com/services/swapclear/volumes/rfr-volumes.
\100\ Commission staff believes that the volume of swap activity
cleared is a better measure of overall clearing rates than the
number of transactions submitted for clearing. Commission staff has
prepared these conservative estimates by excluding certain
transactions between affiliated entities. Such affiliated entities
may or may not be subject to the Clearing Requirement.
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III. Request for Information
The Commission recognizes that information related to the
transition away from IBORs is changing daily, and that the information
reflected in certain statements above may have changed as of the
publication of this request for information. The Commission invites
commenters to provide new or updated information related to any aspect
of the transition away from IBORs that may offer additional background
for the Commission to consider. In addition, the Commission encourages
commenters to include the assigned number of the specific request for
information below in their responses in
[[Page 66487]]
order to facilitate staff's review of information provided.
A. Swaps Subject to the Clearing Requirement
The Commission requests information related to a DCO's ability to
continue clearing or offering clearing services for swaps that
reference GBP LIBOR, JPY LIBOR, CHF LIBOR, and 1-week and 2-month USD
LIBOR after December 31, 2021, EONIA after January 3, 2022, or in the
case of remaining USD LIBOR tenors and SGD SOR-VWAP, after June 30,
2023, including but not limited to the following:
1. The Commission requests that DCOs provide, for swaps currently
subject to the Clearing Requirement referencing each of GBP LIBOR, JPY
LIBOR, CHF LIBOR, USD LIBOR, and SGD SOR-VWAP, in each of the fixed-to-
floating swap, basis swap, FRA, and OIS classes, data for the month
ending November 30, 2021 concerning: (A) The amount of notional
cleared, including as a percentage of total notional cleared of all
swaps; (B) total notional outstanding, including as a percentage of
total notional outstanding; and (C) total number of clearing members
clearing such swaps, including as a percentage of the total population
of clearing members.
2. The Commission requests that DCOs provide an assessment of the
DCO's ability to conduct an auction of a defaulting clearing member's
positions in swaps referencing LIBOR after December 31, 2021 (not
including certain USD LIBOR tenors and SGD SOR-VWAP that will continue
until June 30, 2023), if the DCO has not conducted, or is not planning
on conducting, a conversion event.
3. The Commission requests that DCOs provide an assessment of the
DCO's ability to transfer or port to other clearing members a
defaulting clearing member's positions in swaps referencing LIBOR after
December 31, 2021 (not including certain USD LIBOR tenors and SGD SOR-
VWAP that will continue until June 30, 2023).
4. The Commission would like to know whether any clearing member
firms of DCOs have experienced challenges with respect to the
transition from any IBOR to an alternative reference rate, and any
related DCO conversion event, including whether and how such challenges
were resolved, and whether clearing member firms believe there are any
steps the Commission can take to help resolve ongoing challenges.
5. The Commission requests that registered swap dealers and other
market participants provide data related to market participants'
outstanding net LIBOR risk as of November 30, 2021.
B. Swaps Not Currently Subject to the Clearing Requirement
6. The Commission requests that DCOs file submissions with the
Commission under Commission regulation 39.5 for any swaps that have
been or may be identified as swaps that reference an alternative
reference rate that are not currently subject to the Clearing
Requirement and for which a DCO has not previously filed a submission
under Commission regulation 39.5(b).
7. The Commission requests that DCOs provide for swaps that
reference one of the alternative reference rates including, GBP SONIA,
JPY TONA, CHF SARON, [euro]STR, and USD SOFR in each of the fixed-to-
floating swap, basis swap, FRA, and OIS classes, data from the quarter
ending September 30, 2021 concerning: (A) The amount of notional
cleared, including as a percentage of total notional cleared of all
swaps; (B) total notional outstanding, including as a percentage of
total notional outstanding; and (C) total number of clearing members
clearing such swaps, including as a percentage of the total population
of clearing members.
IV. Request for Comment
A. General Request for Comment
The Commission requests comment on all aspects of the swap clearing
requirement and any related regulations that may be affected by the
transition away from LIBOR and the other IBORs to alternative reference
rates. The Commission seeks comments on these matters generally and
commenters are encouraged to address any relevant matters that are not
specifically identified in the requests for comment below. Detailed
instructions on how and when to submit comments in response to this
request for comment are located at the beginning of this document in
the ADDRESSES and DATES sections.
In responding to this general request for comment, and the specific
requests for comment below, the Commission encourages commenters to
provide empirical support for their arguments and analyses.
Furthermore, comments that identify and provide specific information or
data that would be relevant to the Commission's considerations
discussed in this request for comment would be of the greatest
assistance to the Commission.
As noted above in the Commission's request for information section,
the Commission recognizes that the information related to the IBOR
transition is changing daily and that some of the information reflected
in the statements above may have changed as of the publication of this
request for comment. The Commission invites commenters to assume
certain facts or information that may have changed or been released
after this document was published for comment, and would appreciate
comments identifying any relevant information that the Commission may
have missed in its review. The Commission welcomes comments based on
new or updated information when responding to the questions below. In
addition, the Commission encourages commenters to include the assigned
number of the specific request for comment below in their responses in
order to facilitate staff's review of information provided.
B. Specific Requests for Comment
i. Current Swap Clearing Requirement-Related Questions
1. Are market participants concerned about access to clearing for
certain swaps that are subject to the Clearing Requirement? If so, are
there any Commission actions or regulatory amendments that could
facilitate the IBOR transition for market participants?
2. Please discuss recommendations for how the Commission should
modify its Clearing Requirement under Commission regulation 50.4 and
any related advantages or disadvantages (including anticipated costs)
that might be expected from a specific approach.
3. More specifically, should the Commission modify the termination
date range, or any other specifications, with respect to SONIA OIS,
AONIA OIS, CORRA OIS or any other OIS that are subject to the Clearing
Requirement and for which the index has been nominated as an
alternative reference rate? If such an amendment is recommended, please
discuss a potential timeline for considering and adopting a
modification and the reasons for adopting such timeline.
4. Should the Commission revise the clearing requirement related to
the SGD SOR-VWAP rate as part of the initial LIBOR transition or should
market participants be given additional time to consider changes to SGD
SOR-VWAP Clearing Requirement because it is based on USD LIBOR (and may
continue until 2023)?
ii. Swap Clearing Requirements for Alternative Reference Rates
5. Are market participants concerned about access to clearing for
certain swaps that reference alternative reference rates and are not
currently
[[Page 66488]]
subject to the Clearing Requirement? If so, please explain current or
anticipated barriers to clearing swaps in alternative reference rates.
6. Are there any steps related to the SOFR transition that have not
been completed that would enable a significant number of market
participants to submit swaps referencing SOFR to clearing? Are there
specific metrics or products associated with the new SOFR rate that
need to be developed before swaps referencing SOFR can be used by a
broad range of market participants?
7. Would requiring the clearing of swaps referencing SOFR or other
alternative reference rates that are not currently subject to the
Clearing Requirement affect the ability of a DCO to comply with the
CEA's core principles for DCOs?
8. Are there specific data the Commission should consider in
determining whether significant notional amount and liquidity exists in
swaps referencing SOFR or other alternative reference rates that are
not currently subject to the Clearing Requirement?
9. Are there specific thresholds that the Commission should apply
with respect to notional amount and liquidity in determining whether
swaps referencing SOFR or other alternative reference rates that are
not currently subject to the Clearing Requirement should be subject to
the clearing requirement?
10. Have market participants observed sufficient outstanding
notional exposures and trading liquidity in swaps referencing SOFR
during both stressed and non-stressed market conditions to support a
clearing requirement?
11. Is there adequate pricing data for DCO risk and default
management of swaps referencing SOFR? Why or why not?
12. What are the challenges that DCOs may face or have faced in
accepting new SOFR swaps or swaps referencing other alternative
reference rates for clearing that are not currently subject to the
Clearing Requirement from a governance, rule framework, operational,
resourcing, or credit support infrastructure perspective?
13. Would requiring the clearing of swaps referencing SOFR mitigate
systemic risk? Please explain why or why not and provide supporting
data.
14. Would requiring the clearing of swaps referencing SOFR increase
risk to DCOs? If so, are DCOs capable of managing that risk? Please
explain why or why not and provide supporting data.
15. Would adopting a clearing requirement for swaps referencing
SOFR or other alternative reference rates that are not currently
subject to the Clearing Requirement materially and beneficially affect
trading activity in those swaps?
16. How and when should the Commission evaluate whether to require
clearing for interest rate swaps denominated in USD that reference
alternative reference rates other than SOFR, such as credit-sensitive
benchmark rates (e.g., Ameribor and BSBY)? Provided that one or more
DCOs have made such swaps available for clearing, are there additional
factors or considerations beyond those specified in Section
2(h)(2)(D)(ii) of the CEA that the Commission should consider in
determining whether to adopt a clearing requirement for such swaps?
17. Would adopting a clearing requirement for a new product that
references an alternative reference rate, or expanding the scope of the
Clearing Requirement to cover additional maturities, create conditions
that increase or facilitate an exercise of market power over clearing
services by any DCO that would: (i) Adversely affect competition for
clearing services and/or access to product markets for swaps
referencing alternative reference rates (including conditions that
would adversely affect competition for these product markets and/or
increase the cost of such swaps); or (ii) increase the cost of clearing
services? Please explain why or why not and provide supporting data.
18. What new information, if any, should the Commission consider as
it prepares to review whether interest rate swaps linked to the
alternative reference rates should be subject to a clearing
requirement? Are there specific regulatory requirements that the
Commission should consider when reviewing overall market conditions,
such as uncleared margin requirements implemented by prudential
regulators and/or the uncleared margin requirements for swap dealers
and major swap participants under part 23 of the Commission's
regulations?
iii. New Swap Product Documentation
19. With respect to all new swap products, including those
referencing alternative reference rates, is there additional
documentation that the Commission should require DCOs to submit with
swap submissions beyond the documentation that Commission regulation
39.5 currently requires?
iv. Swap Clearing Requirement Specifications
20. The Commission recognizes that at this time a majority of the
swaps subject to the Clearing Requirement fall within the fixed-to-
floating swap class. That may change as new alternative reference rates
are adopted and will be characterized as OIS or other types of swaps.
Should the Commission designate any additional classes of swaps or
specifications for purposes of classifying swaps under Commission
regulation 50.4? Do DCOs or market participants have suggestions about
how to reorganize or structure the classes of swaps subject to the
clearing requirement under Commission regulation 50.4? Should the
Commission include a new class covering variable notional swaps as a
table under Commission regulation 50.4(a)?
v. Cost-Benefit Considerations
21. The Commission requests comment from DCOs and market
participants on the nature and extent of any operational, compliance,
or other costs they may incur as a result of potential changes to the
Clearing Requirement in response to the market-wide shift to
alternative reference rates. Please provide supporting data.
Issued in Washington, DC, on November 17, 2021, by the
Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix To Swap Clearing Requirement Amendments To Account for the
Transition from LIBOR and Other IBORs to Alternative Reference Rates--
Commission Voting Summary
On this matter, Acting Chairman Behnam and Commissioner Stump voted
in the affirmative. No Commissioner voted in the negative.
[FR Doc. 2021-25450 Filed 11-22-21; 8:45 am]
BILLING CODE 6351-01-P