As derivatives market participants transition from using the London Interbank Offered Rate (LIBOR) to using other benchmarks, namely the Secured Overnight Financing Rate (SOFR), I am pleased that Commodity Futures Trading Commission (CFTC) Acting Chairman Behnam today noted the important work we will soon undertake to ensure that existing clearing mandates for interest rate swaps can transition to preserve their effectiveness.  Mandatory clearing is an important element of the post-financial crisis reforms that I wholeheartedly support.  And as the use of LIBOR ceases, all of the CFTC’s clearing mandates for interest rate swaps need to be revisited.

But continuing to mandate clearing of any specific product, while at the same time disallowing access to a robustly regulated, non-U.S. clearinghouse providing the type of liquidity U.S. clients seek to most effectively comply with the mandate to clear that product, is a critical issue that can no longer go unaddressed.  The need to update our clearing mandates presents an opportunity to reconsider the restrictions the CFTC has imposed that prevent U.S. clients from accessing central counterparties (CCPs) around the world.  Simply put, U.S. market participants cannot fulfill the clearing obligations we demand if they cannot access clearing infrastructure around the world.  In my opinion, clearing mandates and clearing access are undeniably linked.

In response to the financial crisis, the G-20 in 2009 took great care to recognize that derivatives markets are global and that international coordination and regulatory deference would be essential to effectively strengthen them.[1]  It is, therefore, not surprising that many of our clearing mandates have an international currency element.

Because the CFTC implemented our clearing mandates and requisite clearing infrastructure updates ahead of other jurisdictions, at that time we could not recognize other regulatory structures as comparable to our own.  But this should always have been recognized as a temporary state.  As other jurisdictions adopted their own measures to achieve the common goals agreed to by the G-20, the CFTC should have long ago revisited its policies to allow U.S. persons to access clearing services at non-U.S. CCPs that are subject to a comparable regulatory structure to our own, without requiring them to register and be directly overseen by the CFTC.

The need to reconstitute existing clearing mandates presents us with another opportunity to get clearing access right.  Only then can we as regulators fairly demand compliance with the clearing obligations in interest rate swaps tied to various global currencies.