April 11, 2019

CFTC Chairman Gives Remarks at FSB Meeting on LIBOR Reform

Washington, DC — Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo joined Randal K. Quarles, Chair of the Financial Stability Board (FSB) and Vice Chairman of Supervision, Board of Governors of the Federal Reserve System, UK Financial Conduct Authority CEO Andrew Bailey, and Deputy Governor Bank of England Sir David Ramsden for an FSB Roundtable discussion to highlight the need for continued progress to reform major interest rate benchmarks.

Chairman J. Christopher Giancarlo gave the following remarks at the public session of the meeting:

“I want to commend Chairman Quarles and staffs of the FSB, the FED and the CFTC for their work in putting together this roundtable discussion.  It is as timely as it is important.

Two years ago, it was the CFTC’s privilege to host another FSB roundtable.  Its agenda was an overall review of the global implementation of the swaps market reforms agreed by the G-20 in Pittsburgh in 2009.

Today, we are here to consider progress in another post-crisis work stream: this one a public-private work partnership developing protocols for the move away from LIBOR to alternative risk-free, benchmark interest rates.

For the past few years, many of the authorities present at this roundtable have been warning market participants of the high likelihood that LIBOR will no longer be available after 2021 for use as a reference benchmark for the global markets.

Today there is growing evidence of a shift in sentiment among market participants from “why are we moving away from LIBOR” to “how do we adopt SOFR”.  That is critical progress.

In fact, judging by timelines set out in the ARRC’s phased implementation plan, we are making good progress here in the U.S. as well as in other currency jurisdictions like Sterling and Swiss Franc, where the transition is well under way.

It was less than a year ago that CME, and then later, ICE, launched SOFR-futures contracts.  Already in 2019, average daily volume is over 100,000 contracts – a roaring success for a brand new index. If one goes purely by press reports, then one will likely form the impression that SOFR’s development has been slow; but from the CFTC’s perspective, the markets are making steady progress.

There is broad consensus that development of SOFR swaps markets will follow SOFR futures. Our expectation is that in the next 12 months, both these markets – SOFR futures and swaps, as well as related debt markets - will hit critical levels where liquidity begets liquidity.

Thanks to the work of the ARRC, major legal and operational steps necessary for the switch from LIBOR to SOFR-based rates  have been identified that are critical for the switch from LIBOR to SOFR-based rates for derivatives, loan products, mortgages, retail loans and others.  Institutions represented at this roundtable today, and many others, are participating actively in various working groups to define the issues and design and implement solutions. One specific project we would like to highlight is the hugely important work by ISDA on new fallback language and triggers, both pre- and post-cessation, for OTC derivatives. We would like to make sure that all market participants participate in the protocol to adopt the new language.

All this is hard work.  We in the official sector would be remiss, indeed, ungracious not to acknowledge the commitment and effort of market participants to work on these issues.  And, so we do express our acknowledgement to them.  Yet, we also assert our determination that progress must continue through to completion of the move away from LIBOR to SOFR.

From the official sector perspective, we collectively stand ready to provide any guidance, relief, and other support required. While there is strong interest in addressing regulatory hurdles, we are also open to suggestions on regulatory tools to incentivize transition to SOFR-based benchmarks.

As for the CFTC, we are active participants in the efforts of the FSB’s OSSG and the US ARRC.  We also have our own initiative focused on regulatory and related issues through the work of the Benchmark Reform Subcommittee of the CFTC’s Market Risk Advisory Committee, sponsored by my fine colleague, Commissioner Russ Behnam.  That subcommittee is chaired by Tom Wipf, Vice Chairman of Institutional Securities at Morgan Stanley, who will speak to us shortly.

At the end of the day, markets exist to serve the need of end users - American families, corporates, municipalities and others. These users are exposed to the greatest risk if we do not fix this market vulnerability – reliance on an index which has clearly outlived its economic relevance as a benchmark.  The authorities represented in this roundtable and the market institutions assembled today remain committed to this effort.  Together, we can get this done.”