Remarks of CFTC Commissioner Rostin Behnam at the Bipartisan Policy Center, Reference Rate Reform: Impact on the Economy and Consumers

October 11, 2018

Introduction

Thank you for the kind introduction. I want to thank the International Swaps and Derivatives Association (ISDA), and the Bipartisan Policy Center for hosting this important event and giving me an opportunity to participate and share my views.  As long as I have worked in Washington, I have relied on BPC’s consensus driven, bipartisan solutions, which in many respects can themselves be considered benchmarks, for policymakers. Before I begin my remarks, please allow me to remind you that the views I express today are my own and do not represent the views of the Commodity Futures Trading Commission (the CFTC or Commission) or my fellow Commissioners.

This morning’s discussion has highlighted that reference rates, despite being little known outside of discrete financial circles, are a crucial component of the global economic ecosystem, woven into countless products that touch the lives of nearly every American consumer.  From the terms of the most basic home mortgage, to student loan agreements, auto financing contracts, and credit card purchases, reference rates are pervasive throughout our real economy. Given the everyday consumer use of these financial products, the past findings of benchmark fraud and manipulation have real word impacts on consumers. Reference rate reform requires an all hands on deck approach to ensure American consumers do not feel the weight of misaligned or manipulated reference rates.  To me, reference rate reform can be summed up in one word:  “trust.”

In the coming years, market participants, regulators, and end-users must leverage all available resources to find consensus driven solutions that will restore transparency, credibility, and above all else accuracy – in a word, trust – to ensure reference rates properly reflect fair and equitable borrowing costs.  With this in mind, I cannot think of a better venue to trust than BPC to host today’s discussion.

The CFTC has been working diligently as a member of the Official Sector Steering Group, the coordinating body set up by the Financial Stability Board in 2013 to drive the reform effort.[1]  To that end, I want to recognize the tremendous work of the Alternative Reference Rates Committee (AARC), and also the work done by the Federal Reserve, U.S. Treasury Department, the UK’s Financial Conduct Authority, the Bank of England, the European Central Bank, and other key stakeholders across the globe.[2] 

The timeline of events since the financial crisis is a powerful story of recognition and reform as well as collaboration and innovation in the benchmark space.  Given the Financial Conduct Authority’s decision to no longer compel banks to submit to LIBOR at the end of 2021, we only have a few years to reach consensus and lay the foundations for the next generation reference rates.[3] 

CFTC’s Role: Past, Present & Future

Since allegations of benchmark manipulation first surfaced nearly a decade ago, the CFTC has been at the forefront of the global effort to eliminate fraud and manipulation within the rate setting process.  Since June 2012, the CFTC has levied sanctions of more than $3.3 billion for LIBOR-related misconduct. These important enforcement actions, initiated by prior CFTC leadership and continued under current leadership, have not only addressed the bad actions of numerous individuals, but also a failure of financial institutions to police employees.

Personally, I have recently provided a forum for additional discussion of LIBOR through the CFTC’s Market Risk Advisory Committee (MRAC), which I sponsor.

At the CFTC, each Commissioner sponsors an Advisory Committee to provide input and make recommendations to the Commission on a variety of regulatory and market issues that affect the integrity and competitiveness of U.S. markets. The MRAC advises the Commission on matters relating to evolving market structures and the movement of risk across clearinghouses, exchanges, intermediaries, market makers and end users.  The Committee examines systemic issues that threaten the stability of derivatives and other financial markets, and makes recommendations to the Commission on how to improve market structure and mitigate risk.  MRAC members include representatives from clearinghouses, exchanges, intermediaries, academia, and end-users.  

In July, I convened the MRAC to focus on benchmark reform in an effort to unpack the myriad impending issues specifically related to the derivatives market.[4]  As a starting point, members of the ARRC and key market participants first discussed the role of interest rate benchmarks in the economy, the impetus for LIBOR reform, and the current status of global reform initiatives.  The discussion focused on the efforts of the Financial Stability Board (FSB) and the ARRC, as well as public and private sector coordination efforts in other jurisdictions.  A second panel of speakers addressed the development of the Secured Overnight Financing Rate (SOFR), and SOFR derivatives, and efforts to improve LIBOR. 

A final panel discussed the effect of LIBOR reform on the derivatives markets.  The discussion focused on LIBOR reform’s impact on legacy derivatives contracts, the development of fallback language, and key risk management and governance considerations for market participants.  End user and dealer representatives discussed the risks their firms and clients face with respect to LIBOR Reform and how they or their clients are preparing to mitigate those risks.

Just last week, the Commission approved my effort to establish the Interest Rate Benchmark Reform Subcommittee to provide reports and recommendations to the MRAC regarding ongoing efforts to transition U.S. dollar derivatives and related contracts to SOFR, and the impact of such transition on the derivatives markets.[5]

I am excited to lead this important next step by convening market experts from all disciplines to assist the MRAC, and ultimately the Commission, to find regulatory solutions within the jurisdiction of the CFTC that will ensure a smooth transition to an alternative risk-free reference rate.  Topics and issues this subcommittee may consider include the treatment, under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act,[6] of existing derivatives contracts that are amended to include new fallback provisions or otherwise reference RFRs such as SOFR and new derivatives contracts that reference RFRs. The subcommittee also may consider the impact of the transition on liquidity in derivatives and related markets.  I am currently seeking nominations for membership on the subcommittee to ensure that it benefits from the expertise of a diverse and skilled body of individuals.

My goal is to use the subcommittee to complement the work of the AARC by shedding more light on the potential challenges heading toward 2021, identifying the risks for financial markets and individual American consumers, and above all else providing solutions within the derivatives space. My expectation is that the subcommittee’s work – and that of the Commission itself – will recognize the critical importance of benchmarks while demanding integrity and reliability. 

There are a number of clear-cut outstanding issues related to the treatment of legacy derivatives that can benefit from in depth discussions within the MRAC, including margin requirements, mandatory clearing, trade execution, and reporting.  Further, it is critical that the CFTC, through the MRAC, establish a robust record in order to resolve and defend any regulatory changes that potentially lie ahead.

Closing

In the past decade, American consumers have overcome significant economic challenges as a result of the financial crisis.  On the heels of the crisis, as consumers struggled with these challenges, benchmark fraud and manipulation further eroded trust between consumers and the financial industry.  I am determined to work, within the context of reference rate reform, to help rebuild trust by shedding light on the importance of reference rates to consumers, and facilitating an inclusive, bipartisan conversation to resolve issues related to derivatives markets.  In that light, I am certain the CFTC and more specifically the Market Risk Advisory Committee can play an important supporting role of all the work that has been done dating back more than five years, but also in the few years ahead.