I support the Commission’s amended clearing requirement for swaps referencing rates less susceptible to manipulation than the London Interbank Offered Rate (“LIBOR”) because it promotes market integrity and supports the risk-mitigating benefits of central clearing.  I thank the CFTC staff for their work on this and other efforts to support the transition away from LIBOR.

Clearing Requirement

The 2008 financial crisis revealed how over-the-counter derivatives could render market participants vulnerable to the weaknesses of their counterparties and leave the markets and regulators in the dark about risks.  Pre-crisis, risks were hidden, and firms were vulnerable to interconnected and complex, bilateral transactions.  This contributed to the failure of many banks and financial institutions.  American households paid the price, left with the catastrophic consequences of a near meltdown of the U.S. financial system, a housing crisis, the inability to access credit, and an unprecedented government bailout.

One of the most critical reforms in the Dodd-Frank Act was a framework to channel swaps through central clearing, thereby reducing risk and increasing transparency across U.S. financial markets.  The CFTC has been a global leader in driving swaps trading into centralized clearing, and coordinating with international regulators in a globally harmonized approach. 

Central clearing has lived up to its promise.  The markets, investors, end users, and regulators have benefited from increased visibility into swap exposures and from reduced interconnectedness and complexity.

LIBOR Transition

Reliable and sound benchmark rates promote market integrity and protect the American public.  A decade ago, allegations of LIBOR manipulation led to investigations by government authorities, including the CFTC, that resulted in billions of dollars of penalties and other sanctions.  These investigations revealed that a handful of dominant players profited from manipulating LIBOR and markets, including U.S. mortgage markets.  Here again, American households paid the price. 

Through significant coordinated efforts across the public and private sectors, great progress has been made to transition towards sounder, alternative reference rates – namely, overnight, so-called “nearly risk-free” reference rates.  Today’s final rule amends the CFTC’s swap clearing requirement to account for the continuing shift in liquidity to these more reliable rates.  Market reliance on USD LIBOR has already considerably decreased, and we have experienced significant liquidity in, and voluntary clearing of, swaps referencing the Secured Overnight Financing Rate (“SOFR”).  We aim to bolster and accelerate this shift and ensure the risk-mitigating benefits of clearing continue to be realized in the evolving interest-rate swaps markets.

The final rule also reflects the CFTC’s longstanding priority of harmonizing with international regulators.  The certainty of the CFTC’s timeline for adding interest rate swaps referencing USD SOFR to its clearing requirement, and for removing interest rate swaps referencing USD LIBOR, should assist international regulators who are also revising clearing requirements for these swaps. 

Given the global nature of financial markets, international coordination is necessary in order for the LIBOR transition to be successful.  International coordination will also help to ensure that central clearing remains a cornerstone of post-crisis financial reforms.