Clearing Requirement Determination Under Section 2(h) of the Commodity Exchange Act for Interest Rate Swaps To Account for the Transition From LIBOR and Other IBORs to Alternative Reference Rates

Federal RegisterAug 24, 2022

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 50

RIN 3038-AF18

Clearing Requirement Determination Under Section 2(h) of the Commodity Exchange Act for Interest Rate Swaps To Account for the Transition From LIBOR and Other IBORs to Alternative Reference Rates

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final rule.

SUMMARY:

The Commodity Futures Trading Commission (Commission or CFTC) is modifying its existing interest rate swap clearing requirement regulations under applicable provisions of the Commodity Exchange Act (CEA) due to the global transition from reliance on certain interbank offered rates (IBORs) (

e.g.,

the London Interbank Offered Rate (LIBOR)) that have been, or will be, discontinued as benchmark reference rates to alternative reference rates, which are predominantly overnight, nearly risk-free reference rates (RFRs). The amendments update the set of interest rate swaps that are required to be submitted for clearing pursuant to the CEA and the Commission's regulations to a derivatives clearing organization (DCO) that is registered under the CEA (registered DCO) or a DCO that has been exempted from registration under the CEA (exempt DCO) to reflect the market shift away from swaps that reference IBORs to swaps that reference RFRs.

DATES:

This rule is effective September 23, 2022, except for amendatory instructions 3 and 5, which are effective July 1, 2023. Specific compliance dates are discussed in the

SUPPLEMENTARY INFORMATION

FOR FURTHER INFORMATION CONTACT:

Sarah E. Josephson, Deputy Director, at 202-418-5684 or

sjosephson@cftc.gov;

or Daniel O'Connell, Special Counsel, at 202-418-5583 or

doconnell@cftc.gov;

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. Commission's Existing Interest Rate Swap Clearing Requirement

B. End of LIBOR

C. Update on Work by DCOs To Support the Transition to RFRs

D. Update on Work by Market Participants To Support the Transition to RFRs

II. Domestic and International Coordination Efforts

A. Domestic Coordination Efforts

B. International Coordination Efforts

C. Interest Rate Swap Clearing Requirements in Other Jurisdictions

III. Overview of Comment Letters Received

A. Scope of Amendments—Coverage of OIS and Removal of Existing Rules

B. Implementation, Cross-Border Coordination, and Operational Considerations

C. Issues Beyond the Scope of the Rulemaking

IV. Final Amendments to Regulation § 50.4(a)

A. Scope of Amendments—Coverage of OIS and Removal of Existing Rules

B. Clarification Regarding OIS Product Specifications

C. Swaps Referencing CHF SARON and SGD SORA

D. RFR-IBOR Basis Swaps

V. Determination Analysis for RFR OIS

A. General Description of Information Considered

B. Consistency With DCO Core Principles Under Section 2(h) of the CEA

C. Conclusions Regarding Consideration of Section 2(h)'s Five Statutory Factors

VI. Implementation Schedule

A. Overview of Changes to Regulation § 50.26(a)

B. Consideration of Comments on Implementation

C. EUR €STR, GBP SONIA, CHF SARON, and JPY TONA OIS Implementation

D. USD SOFR and SGD SORA OIS Implementation

E. Removal of Rules for Swaps No Longer Offered for Clearing

F. Removal of USD LIBOR and SGD SOR-VWAP Swap Clearing Requirement

G. Technical Changes

VII. Cost Benefit Considerations

A. Statutory and Regulatory Background

B. Overview of Swap Clearing

C. Consideration of the Costs and Benefits of the Commission's Action

D. Costs and Benefits of the Amendments as Compared to Alternatives

E. Section 15(a) Factors

VIII. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

C. Antitrust Laws

D. Congressional Review Act

I. Background

A. Commission's Existing Interest Rate Swap Clearing Requirement

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established a comprehensive new regulatory framework for swaps.

Title VII of the Dodd-Frank Act (Title VII) amended the CEA to require, among other things, that a swap be cleared through a registered DCO or an exempt DCO if the Commission has determined that the swap, or group, category, type, or class of swaps, is required to be cleared, unless an exception to the clearing requirement applies.

The CEA, as amended by Title VII, provides that the Commission may issue a clearing requirement determination based either on a Commission-initiated review of a swap,

or a swap submission from a DCO.

Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).

Section 2(h)(1)(A) of the CEA, 7 U.S.C. 2(h)(1)(A).

Section 2(h)(2)(A) of the CEA, 7 U.S.C. 2(h)(2)(A). Section 2(h)(2)(A) provides for a Commission-initiated review process whereby the Commission, on an ongoing basis, must review swaps, or a group, category, type, or class of swaps, to determine whether a swap, or a group, category, type, or class of swaps, should be required to be cleared.

Section 2(h)(2)(B) of the CEA, 7 U.S.C. 2(h)(2)(B). Section 2(h)(2)(B)(i) requires that each DCO submit to the Commission each swap, or group, category, type, or class of swaps, that it plans to accept for clearing. The swaps subject to this determination were submitted by DCOs pursuant to CEA section 2(h)(2)(B)(i) and regulation § 39.5(b), 17 CFR 39.5(b). Pursuant to section 2(h)(2)(B)-(C) of the CEA, the Commission must review swap submissions from DCOs to determine whether the swaps should be subject to required clearing. Regulation § 39.5(b) implements the procedural elements of section 2(h)(2)(B)-(C) by establishing the process by which a DCO must submit the swaps it offers for clearing to the Commission for purposes of considering a clearing requirement determination.

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 one or more of its clearing members with regard to the treatment of customer and swap counterparty positions, funds, and property.

7 U.S.C. 2(h)(2)(D)(ii).

The Commission adopted its first clearing requirement determination (First Determination) in 2012.

The First Determination was implemented between March 2013 and October 2013

based on the schedule described in regulation § 50.25 and the preamble to the First Determination.

The First Determination applied to interest rate swaps in four classes: fixed-to-floating swaps, basis swaps, forward rate agreements (FRAs), and overnight index swaps (OIS).

Clearing Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 2012) (First Determination).

17 CFR 50.25; First Determination, 77 FR 74319-74321.

See generally

First Determination. By way of background, an interest rate swap is generally an agreement by counterparties to exchange payments based on a series of cash flows over a specified period of time, typically calculated using two different rates. Fixed-to-floating swaps are interest rate swaps in which the payment(s) owed on one leg of the swap is calculated using a fixed rate, and the payment(s) owed on the other leg is calculated using a floating rate. Basis swaps are interest rate swaps for which the payments for both legs are calculated using floating rates. FRAs are interest rate swaps in which payments are exchanged on a predetermined date for a single period and one leg of the swap is calculated using a fixed rate while the other leg is calculated using a floating rate set on a predetermined date. OIS are interest rate swaps for which one leg of the swap is calculated using a fixed rate and the other leg is calculated using a floating rate based on a daily overnight rate.

In making its initial interest rate swap clearing determination, the Commission focused on the size of the interest rate swap market relative to the swap market overall, as well as the fact that these swaps were already widely being cleared.

As set forth in regulation § 50.4(a), the Commission required clearing for four classes of interest rate swaps having six specifications related to (i) the currency in which the notional and payment amounts are specified; (ii) the floating rate index referenced in the swap; (iii) the stated termination date; (iv) optionality; (v) dual currencies; and (vi) conditional notional amounts.

The Commission also limited the interest rate swaps required to be cleared to those denominated in four currencies (U.S. dollar (USD), Euro (EUR), British pound (GBP), and Japanese yen (JPY)). The Commission noted that interest rate swaps denominated in these currencies comprised an outsized portion of the interest rate swap market in terms of notional amounts outstanding and trading volumes compared to interest rate swaps denominated in other currencies.

Id.

at 74287, 74307. To this day, significant amounts of notional in interest rate swaps are traded in markets around the world, and these swaps comprise an outsized portion of notional among all swaps. According to the Bank for International Settlements (BIS), as of December 2021, there was an estimated $475 trillion in outstanding notional of interest rate swaps, which represents approximately 79% of the total outstanding notional of all over-the-counter (OTC) derivatives.

See

BIS, “Interest rate derivatives,” Table D7, H2 2021, updated May 12, 2022, available at

https://stats.bis.org/statx/srs/table/d7?f=pdf;

BIS, “Global OTC derivatives market,” Table D5.1, H2 2021, updated May 12, 2022, available at

https://stats.bis.org/statx/srs/table/d5.1?f=pdf;

BIS, “OTC derivatives statistics at end-December 2021,” May 12, 2022, available at

https://www.bis.org/publ/otc_hy2205.htm;

BIS, “Global OTC derivatives market,” Table D5.2, H2 2021, updated May 12, 2022, available at

https://stats.bis.org/statx/srs/table/d5.2?f=pdf.

17 CFR 50.4(a).

First Determination, 77 FR 74308.

The First Determination covered a number of interest rate swaps that reference IBORs, including fixed-to-floating swaps, basis swaps, and FRAs denominated in USD, GBP, JPY, and EUR, referencing USD LIBOR, GBP LIBOR, JPY LIBOR, and the Euro Interbank Offered Rate (EURIBOR), respectively. The First Determination also included OIS denominated in EUR referencing the Euro Overnight Index Average (EONIA), as well as OIS denominated in USD referencing FedFunds and GBP referencing the Sterling Overnight Index Average (SONIA). The Commission observed that interest rate swaps referencing those rates had significant outstanding notional amounts and trading liquidity.

The First Determination was implemented throughout 2013 by type of market participant pursuant to regulation § 50.25, in subpart B of part 50 of the Commission's regulations.

Id.

at 74309.

The Commission adopted its second clearing requirement determination for interest rate swaps (Second Determination) in 2016.

The Second Determination covered interest rate swaps in nine additional currencies: Australian dollar (AUD), Canadian dollar (CAD), Hong Kong dollar (HKD), Mexican peso (MXN), Norwegian krone (NOK), Polish zloty (PLN), Singapore dollar (SGD), Swedish krona (SEK), and Swiss franc (CHF), and was implemented between December 2016 and October 2018 based on the effective dates of analogous clearing mandates adopted by authorities in non-U.S. jurisdictions.

The Commission adopted the Second Determination largely in order to further harmonize its interest rate swap clearing requirement with those of other jurisdictions that had already issued, or were in the process of issuing, interest rate swap clearing mandates.

The Second Determination also covered swaps that reference other IBORs, including fixed-to-floating swaps denominated in SGD referencing the Singapore Swap Offer Rate (SOR-VWAP) and fixed-to-floating swaps denominated in CHF referencing CHF LIBOR.

Clearing Requirement Determination Under Section 2(h) of the Commodity Exchange Act for Interest Rate Swaps, 81 FR 71202 (Oct. 14, 2016) (Second Determination).

17 CFR 50.26; Second Determination, 81 FR 71202-71228.

Second Determination, 81 FR 71203-71205. The Commission explained that such harmonization serves an important anti-evasion goal: if a non-U.S. jurisdiction issued a clearing requirement, and a swap dealer located in the United States were not subject to an analogous a clearing requirement under U.S. law, then market participants potentially could avoid the non-U.S. jurisdiction's clearing requirement by entering into a swap with a swap dealer located in the United States.

Id.

at 71203.

Id.

at 71205. These IBOR rates also were discussed specifically in the notice of proposed rulemaking (NPRM). Clearing Requirement Determination Under Section 2(h) of the Commodity Exchange Act for Interest Rate Swaps To Account for the Transition From LIBOR and Other IBORs to Alternative Reference Rates, 87 FR 32898 at 32914-32915 (May 31, 2022) (NPRM).

B. End of LIBOR

LIBOR is an interest rate benchmark that was 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 had been one of the world's most frequently referenced interest rate benchmarks, serving as a reference rate for a wide variety of swaps and other financial products. Over the years, LIBOR was calculated based on submissions from panels of contributor banks and published every London business day. Immediately prior to January 1, 2022, LIBOR was published for five currencies (USD, GBP, EUR, CHF, and JPY) and seven tenors (overnight or spot-next depending on currency, one-week, one-month, two-month, three-month, six-month, and 12-month), resulting in 35 individual LIBOR rates.

Beginning this year, these LIBOR rates have almost entirely ceased publication or become nonrepresentative of the underlying market they are intended to measure.

See generally

ICE Benchmark Administration (IBA), LIBOR, available at

https://www.theice.com/iba/libor.

Government investigations into LIBOR that occurred nearly a decade ago, as well as a decline in the volume of interbank lending transactions that LIBOR was intended to measure, gave rise to concerns regarding the integrity and reliability of LIBOR and other IBORs.

Although LIBOR was subject to

a number of significant reform efforts,

regulators and global standard-setting bodies did not view these reforms as a long-term solution. On July 27, 2017, Andrew Bailey, then-Chief Executive of the United Kingdom (UK) Financial Conduct Authority (FCA), LIBOR's primary regulator, announced that the FCA would not use its authority to compel LIBOR panel banks to contribute to the benchmark after 2021.

On March 5, 2021, the FCA announced that publication of LIBOR would cease on December 31, 2021, for the following:

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. See also

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;

and Alternative Reference Rates Committee,

Second Report,

Mar. 2018, at 1-3, available at

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report.

See generally

IBA, Methodology, available at

https://www.theice.com/publicdocs/ICE_LIBOR_Methodology.pdf;

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;

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.

Andrew Bailey, “The future of Libor,” July 27, 2017, available at

https://www.fca.org.uk/news/speeches/the-future-of-libor.

FCA, FCA Announcement on Future Cessation and Loss of Representativeness of the LIBOR Benchmarks, Mar. 5, 2021 (FCA Announcement on LIBOR Cessation), available at

https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf.

(i) EUR LIBOR in all tenors;

(ii) CHF LIBOR in all tenors;

(iii) JPY LIBOR in the spot-next, one-week, two-month, and 12-month tenors;

(iv) GBP LIBOR in the overnight, one-week, two-month, and 12-month tenors; and

(v) USD LIBOR in the one-week and two-month tenors.

The FCA further determined that GBP and JPY LIBOR in one-month, three-month, and six-month tenors would become nonrepresentative after December 31, 2021.

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 one-month, three-month, and six-month tenors would not be representative after that date.

At this time, EUR, CHF, JPY, and GBP LIBOR in all tenors, and USD LIBOR in the one-week and two-month tenors, have ceased publication or become nonrepresentative of the underlying market they are intended to measure.

FCA Announcement on LIBOR Cessation. The FCA stated that once a LIBOR rate becomes nonrepresentative, its representativeness will not be restored.

Id.

The circumstances surrounding the transition from IBORs to RFRs are the result of significant private and public sector coordinated efforts.

As plans to retire LIBOR proceeded, regulators in the United States and other jurisdictions worked to identify, develop, and implement reference rates to serve as alternatives to LIBOR and other IBORs.

In the United States, the Alternative Reference Rates Committee (ARRC), convened in 2014 by the Federal Reserve Board (FRB) and the Federal Reserve Bank of New York (FRBNY) and comprised of private market participants and

ex officio

banking and financial sector regulators, selected the Secured Overnight Financing Rate (SOFR)

as its preferred alternative to USD LIBOR.

The ARRC developed a Paced Transition Plan, which has now been completed, to facilitate an orderly transition from USD LIBOR to USD SOFR.

While not all benchmark rates considered to be alternative reference rates for IBORs may be RFRs, efforts to transition markets away from IBORs have focused on RFRs as alternatives. For purposes of brevity, the Commission uses the term “RFR” in this final rulemaking to refer to alternative reference rates.

For additional background information,

see generally

Swap Clearing Requirement To Account for the Transition from LIBOR and Other IBORs to Alternative Reference Rates, 86 FR 66476 at 66480 (Nov. 23, 2021) (Request for Information (RFI)).

USD SOFR is an RFR that measures the cost of overnight repurchase agreement transactions collateralized by U.S. Treasury securities. FRBNY, Statement Introducing the Treasury Repo Reference Rates, Apr. 3, 2018, available at

https://www.newyorkfed.org/markets/opolicy/operating_policy_180403. See also

FRBNY, Secured Overnight Financing Rate Data, available at

https://apps.newyorkfed.org/markets/autorates/SOFR#:~:text=The%20SOFR%20is%20calculated%20as,LLC%2C%20an%20affiliate%20of%20the;

and FRBNY, Additional Information about the Treasury Repo Reference Rates, available at

https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information.

USD SOFR has been published each New York business day at 8 a.m. ET since April 3, 2018, by the FRBNY in cooperation with the U.S. Office of Financial Research (OFR).

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.

ARRC, Paced Transition Plan, available at

https://www.newyorkfed.org/arrc/sofr-transition#pacedtransition.

The Paced Transition Plan called for (i) the establishment of infrastructure for futures and/or OIS trading in USD SOFR by the second half of 2018; (ii) the start of trading in futures and/or bilateral, uncleared OIS that reference USD SOFR by the end of 2018; (iii) the start of trading in cleared OIS that reference USD 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) Chicago Mercantile Exchange, Inc. (CME)'s and LCH Limited (LCH)'s conversion of discounting, and PAI and price alignment amount, from EFFR to USD 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 USD SOFR derivatives markets by the end of the first half of 2021. All steps in this plan have been completed as of July 29, 2021.

Table 1 that follows this paragraph contains a non-exhaustive list of RFRs that have been identified to replace IBORs. Each of these RFRs is currently being published.

See generally

Financial Stability Board (FSB), Reforming Major Interest Rate Benchmarks, Nov. 20, 2020, at 29-43, 54-55, available at

https://www.fsb.org/2020/11/reforming-major-interest-rate-benchmarks-2020-progress-report/. 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;

European Central Bank, Euro Short-Term Rate (€STR), 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.

Table 1—RFRs Identified for IBORs

Currency

Index

Identified RFR

RFR administrator

Secured

AUD

Bank Bill Swap Rate (BBSW)

Reserve Bank of Australia Interbank Overnight Cash Rate (AONIA)

Reserve Bank of Australia

No.

CAD

Canadian Dollar Offered Rate (CDOR)

Canadian Overnight Repo Rate Average (CORRA)

Bank of Canada

Yes.

CHF

LIBOR

Swiss Average Rate Overnight (SARON)

SIX Swiss Exchange

Yes.

EUR

LIBOR

Euro Short-Term Rate (€STR)

European Central Bank (ECB)

No.

EONIA

€STR

ECB

No.

EURIBOR

€STR

ECB

No.

GBP

LIBOR

SONIA

Bank of England

No.

HKD

Hong Kong Interbank Offered Rate (HIBOR)

Hong Kong Dollar Overnight Index Average (HONIA)

Treasury Market Association

No.

JPY

LIBOR

Tokyo Overnight Average Rate (TONA)

Bank of Japan

No.

MXN

Term Interbank Equilibrium Interest Rate (TIIE)

Overnight TIIE

Banco de Mexico

Yes.

SGD

SOR

Singapore Overnight Rate Average (SORA)

Association of Banks in Singapore (ABS)

No.

Singapore Interbank Offered Rate (SIBOR)

SORA

ABS

No.

USD

LIBOR

SOFR

FRBNY

Yes.

Regulators and global standard-setting bodies have urged market participants to accelerate their adoption of USD SOFR and other RFRs and cease entering new swaps referencing LIBOR and other IBORs,

and Commission staff have issued no-action letters to facilitate the transition.

In the United States, on July 13, 2021, the Commission's Market Risk Advisory Committee adopted SOFR First, a phased initiative to switch interdealer trading conventions from reliance on USD LIBOR to USD SOFR as a reference rate for swaps.

SOFR First was implemented in four phases between July 26, 2021 and December 16, 2021.

SOFR First mirrors similar best practices adopted in other jurisdictions to increase activity in swaps referencing RFRs.

See, e.g.,

FSB, FSB Statement Welcoming Smooth Transition Away from LIBOR, Apr. 5, 2022, available at

https://www.fsb.org/wp-content/uploads/P050422.pdf.

See, e.g.,

CFTC Letter Nos. 20-25 and 21-28, available at

https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm.

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.

CFTC, CFTC's Interest Rate Benchmark Reform Subcommittee Issues User Guide for the Transition of Exchange-Traded Derivatives Activity to SOFR, Dec. 16, 2021, available at

https://www.cftc.gov/PressRoom/PressReleases/8469-21.

SOFR First spurred a significant shift in liquidity toward USD SOFR, particularly in the interbank market.

See

J.P. Morgan, SOFR Takes Over, Mar. 30, 2022, available at

https://www.jpmorgan.com/solutions/cib/markets/libor-sofr-transition;

Chatham Financial, “LIBOR transition update—2022,” Apr. 19, 2022, available at

https://www.chathamfinancial.com/insights/libor-transition-update.

See, e.g.,

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;

Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks, “Transition of Quoting Conventions in the JPY interest rate swaps market (`TONA First'),” July 26, 2021, available at

https://www.boj.or.jp/en/paym/market/jpy_cmte/data/cmt210726b.pdf;

European Securities and Markets Authority (ESMA), “Recommendations from the Working Group on Euro Risk-Free Rates on the switch to risk free rates in the interdealer market,” July 1, 2021, available at

https://www.esma.europa.eu/sites/default/files/library/esma81-391-73_eur_rfr_wg_statements_on_estr_first_and_ccs.pdf.

C. Update on Work by DCOs To Support the Transition to RFRs

As explained in the NPRM,

the Chicago Mercantile Exchange Group (CME),

the London Stock Exchange Group (LSEG),

and Eurex Clearing AG (Eurex) all operate or are registered DCOs that offer for clearing RFR swaps subject to this final rule. Japan Securities Clearing Corporation (JSCC), an exempt DCO, offers JPY TONA swaps for clearing. OTC Clearing Hong Kong Limited (HKEX), another exempt DCO, offers USD SOFR and EUR €STR swaps for clearing.

Exempt DCOs, such as JSCC and HKEX, do not offer customer clearing to U.S. customers.

NPRM, 87 FR 32902.

CME Group is the parent company of CME.

LSEG has majority ownership of LCH Group, which operates LCH.

See

Hong Kong Exchanges and Clearing, Interest Rate Swaps, available at

https://www.hkex.com.hk/Products/OTC-Derivatives/Interest-Rate-Swaps?sc_lang=en.

DCOs played an important role in the transition from IBORs to RFRs by offering clearing services for RFR swaps and converting cleared EUR EONIA and GBP, EUR, CHF, and JPY LIBOR swaps to RFR OIS.

These efforts have helped to facilitate a smooth transition from cleared IBOR swaps to cleared RFR swaps.

Conversion events were intended to address market participant concerns related to potential bifurcation of liquidity between trading in legacy IBOR swaps that had fallen back to RFRs (

i.e.,

as a result of the operation of DCO rules implementing ISDA's fallbacks) and new RFR OIS, as well as certain operational costs. NPRM, 87 FR 32902;

see also

RFI, 86 FR 66484.

In responding to the Commission's November 23, 2021 RFI regarding updates to the clearing requirement to account for the transition to RFRs, CME, LSEG, and Eurex also discussed plans to convert cleared USD LIBOR swaps to market standard USD SOFR OIS. In April 2022, LCH published a consultation on its proposed conversion process.

Having learned from the conversion process for non-USD LIBOR and EUR EONIA interest rate swaps at the end of 2021 and received input based on this consultation, LCH is “working closely with industry bodies, such as ARRC and [International Swaps and Derivatives Association (ISDA)], and with [its] user-base, to ensure clarity around the [USD LIBOR] transition process.”

In response to LCH's consultation, market participants have not raised any operational concerns about the USD LIBOR swap conversion process.

LCH, USD LIBOR Contract Conversion, Apr. 2022, available at

https://www.lch.com/system/files/media_root/LCH_USD%20LIBOR%20Conversion_Consultation.pdf

(proposing a two-stage conversion based on product category over two weekends in April and May 2023).

LCH, LCH Benchmark Reform Overview, available at

https://www.lch.com/Services/swapclear/benchmark-reform.

Since the publication of the NPRM, CME and Eurex published more detailed information regarding their plans to convert cleared USD LIBOR contracts to USD SOFR OIS, ahead of the June 30, 2023 end date for USD LIBOR.

Additionally, JSCC converted all its JPY LIBOR interest rate swaps into JPY TONA swaps pursuant to plans announced in 2021.

Finally, HKEX implemented RFR fallback rates identified by the ISDA in its IBOR Fallbacks Supplement for the interest rate swaps it offers for clearing.

CME, CME Conversion for USD LIBOR Cleared Swaps, June 2022, available at

https://www.cmegroup.com/trading/interest-rates/files/cme-conversion-for-usd-libor-cleared-swaps.pdf

(proposing a two-stage conversion (based on product category) occurring on two dates in May and July 2023); Eurex, “Eurex Clearing Readiness Newsflash: EurexOTC Clear: Details on OTCClear transition plan for transactions referencing the USD Libor benchmark,” June 8, 2022, available at

https://www.eurex.com/ec-en/find/circulars/Eurex-Clearing-Readiness-Newsflash-EurexOTC-Clear-Details-on-OTCClear-transition-plan-for-transactions-referencing-the-USD-Libor-benchmark-3103098

(proposing a conversion on a single date ahead of June 30, 2023).

This conversion process is discussed in JSCC's response to the RFI, available at

https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx.

HKEX, Benchmark Reform, Feb. 4, 2021, available at

https://www.hkex.com.hk/Services/

Clearing/OTC-Clear/Special-Topics/Benchmark-Reform?sc_lang=en.

For further discussion of ISDA's fallbacks,

see

RFI, 86 FR 66483-66484.

To be clear, these final rules apply only to swaps entered into on or after the implementation dates discussed below. As was in the case with the First Determination in 2012 and the Second Determination in 2016, only these new swaps are required to be cleared. Market participants may wish to clear other interest rate swaps in their portfolios on a voluntary basis, as has been the case with a majority of RFR OIS. As reflected in the data presented below, the overwhelming majority of RFR OIS are being voluntarily cleared already.

D. Update on Work by Market Participants To Support the Transition to RFRs

Market participants also play a critical role in the transition from reliance on IBORs to the adoption of RFRs through engagement with RFR working groups, such as ARRC, and the provision of trading liquidity in interest rate swaps referencing RFRs.

As explained in the NPRM, many RFR swaps are now voluntarily cleared by market participants in large proportions.

In its recent public announcements, ISDA reported that the proportion of cleared OTC and exchange-traded interest rate derivatives denominated in USD and referencing SOFR climbed to a record high of more than 50% in May 2022.

ISDA played a key role in the development of contractual fallbacks for IBORs, ensuring that swaps documented under ISDA agreements that reference certain key IBORs can transition to adjusted versions of corresponding RFRs when those IBORs cease or become non-representative. 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, available at

http://assets.isda.org/media/3062e7b4/08268161-pdf/;

ISDA 2021 Fallbacks Protocol, December 2021 Benchmark Module, Dec. 16, 2021, available at

https://www.isda.org/a/UhtgE/ISDA-2021-Fallbacks-Protocol_December-2021-Benchmark-Module_Publication-Version.pdf. See also

RFI, 86 FR 66483-66484 (discussing ISDA's IBOR fallbacks protocol and supplement).

NPRM, 87 FR 32903.

ISDA, ISDA-Clarus RFR Adoption Indicator, May 2022, available at

https://www.isda.org/a/AlWgE/ISDA-Clarus-RFR-Adoption-Indicator-May-2022.pdf?_zs=gOSgP1&_zl=PRxk6. See also

ISDA, SwapsInfo, Interest Rate and Credit Derivatives Weekly Trading Volume: Week Ending June 10, 2022, June 13, 2022, available at

http://analysis.swapsinfo.org/2022/06/interest-rate-and-credit-derivatives-weekly-trading-volume-week-ending-june-10-2022/

(showing for the week ending June 10, 2022 a year-to-date increase over 2021 of 258% in traded notional and 364% in trade count for OIS, versus a 2% increase in traded notional and 16% decrease in trade count for fixed-to-floating swaps).

II. Domestic and International Coordination Efforts

The global shift from IBORs to RFRs represents a historic effort by international bodies such as IOSCO and FSB, regulators, cross-jurisdictional working groups, market infrastructure providers, market participants, and others, to move the global interest rate swap market toward more reliable benchmarks.

Due to the cross-border nature of this effort and the size of the affected markets, the Commission believes it is a priority to engage with domestic and international regulators, as it makes changes to the swap clearing requirement. As with prior clearing requirement determinations, the Commission engaged in ongoing consultation and coordination with regulatory authorities and with market participants.

See generally

NPRM, 87 FR 32903-32904; and RFI, 86 FR 66478-66482.

A. Domestic Coordination Efforts

The Commission is committed to working with domestic authorities, such as the FRB, FRBNY, and the Securities and Exchange Commission, to ensure transparency in its efforts and, to the greatest extent possible, consistency in the transition from IBORs to RFRs. For example, the Commission sought input from domestic authorities through this rulemaking process and continued its participation in relevant coordinating committees. Commission staff also shared a draft of this final rulemaking with certain domestic authorities.

B. International Coordination Efforts

Section 752(a) of the Dodd-Frank Act directs the Commission to consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards for the regulations of swaps.

The Commission accomplished this with respect to the Second Determination by considering the ways in which it could harmonize its clearing requirement with clearing requirements in other jurisdictions.

The Commission has long recognized the interconnectedness of the interest rate swap market and the importance of consulting and coordinating with its counterparts in other jurisdictions in the adoption of clearing requirements in order to (1) promote regulatory consistency and certainty and (2) prevent the evasion of clearing requirements.

Section 752 can be found in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This section is not codified in the CEA.

Second Determination, 81 FR 71203.

E.g.,

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.”).

In particular, as part of the ongoing regulatory dialogue among authorities, Commission staff consulted with counterparts, including those at Australian Securities and Investments Commission (ASIC), Bank of England, ESMA, Hong Kong Securities and Futures Commission (HKSFC),

Japanese Financial Services Agency (JFSA), Monetary Authority of Singapore (MAS), and Swiss Financial Market Supervisory Authority (FINMA). This type of dialogue reflects an effort to ensure consistency in interest rate swap clearing requirements across jurisdictions.

In Hong Kong, clearing rules are issued by HKSFC in consultation with the Hong Kong Monetary Authority (HKMA). For further information please see the FAQs issued by Hong Kong authorities, available at

https://www.sfc.hk/-/media/EN/files/SOM/OTC/FAQ-CLearing-Rules-20220103-FINAL.pdf.

The discussion below sets forth relevant updates and coordination efforts among international authorities. As part of this rulemaking process, the Commission sought input from overseas counterparts to ensure a coordinated approach to required clearing of interest rate swaps during the move from use of swaps referencing IBORs to swaps referencing RFRs and shared information regarding this final rulemaking with international counterparts.

Commission staff also participate in a number of international groups, including FSB Official Sector Steering Group, that work on IBOR transition issues.

C. Interest Rate Swap Clearing Requirements in Other Jurisdictions

Regulators and public-private working groups have been working to identify, develop, and encourage market uptake of interest rate swaps referencing RFRs to replace interest rate swaps referencing IBORs. As relevant to these amendments, RFRs identified as alternatives for IBORs, in addition to SOFR for USD, include: (i) SONIA for GBP; (ii) SARON for CHF; (iii) TONA for JPY; and (iv) €STR for EUR.

In finalizing these amendments, the Commission considered relevant changes to clearing requirements in other jurisdictions. As noted in the NPRM, the Commission sought to

harmonize these part 50 amendments to the greatest extent possible with those adopted by international counterparts. This goal is consistent with the Commission's approach in the Second Determination and the views of commenters on both the NPRM and the RFI. The discussion that follows addresses specific IBOR swap reform efforts by jurisdiction.

1. Australia

On December 6, 2021, ASIC published a consultation proposing changes to its interest rate swap clearing requirement. The consultation proposed (i) removing contracts referencing EUR EONIA from the OIS class and replacing them with OIS referencing EUR €STR with a termination date range of seven days to two years; (ii) removing contracts referencing JPY LIBOR from the fixed-to-floating swap, basis swap, and FRA classes and replacing them with OIS referencing JPY TONA with a termination date range of seven days to 30 years; and (iii) removing contracts referencing GBP LIBOR from the fixed-to-floating swap, basis swap, and FRA classes, and extending the termination date range for OIS referencing GBP SONIA to include seven days to 50 years.

ASIC, Consultation Paper 353, “Proposed amendments to the ASIC Derivative Transaction Rules (Clearing) 2015,” Dec. 6, 2021, at 5, 14, available at

https://download.asic.gov.au/media/mjknuhlh/cp-353-published-6-december-2021.pdf.

On May 12, 2022, Australia finalized changes to its clearing requirement. There was only one change from the proposal: the termination date range for EUR-denominated €STR OIS required to be cleared was expanded from two years to three years, in line with final European Union (EU) rules.

In its explanatory statement, ASIC referenced the Commission's NPRM and suggested ASIC may be waiting for final rule changes to part 50 before updating its USD-denominated interest rate swap clearing obligation.

ASIC Derivative Transaction Rules (Clearing) Amendment Instrument 2022/224, May 12, 2022 (ASIC Derivative Transaction Rules), available at

https://www.legislation.gov.au/Details/F2022L00697.

ASIC's adopted termination date range for EUR €STR OIS is consistent with changes adopted in the UK and EU and proposed in Switzerland. It is also consistent with the termination date range established for EUR €STR OIS in this final rulemaking.

Id.

(noting ASIC would revisit the removal and replacement of swaps referencing USD LIBOR “once the US authorities settled their approach”).

2. European Union

In the EU, the Working Group on Euro Risk-Free Rates, convened in 2018 by the ECB in connection with Belgian Financial Services, ESMA, and European Commission (EC), identified EUR €STR as its preferred alternative to EUR EONIA, which ceased publication on January 3, 2022.

ESMA, Working Group on Euro Risk-Free Rates, available at

https://www.esma.europa.eu/policy-activities/benchmarks/working-group-euro-risk-free-rates;

European Money Markets Institute, EONIA, available at

https://www.emmi-benchmarks.eu/benchmarks/eonia/.

In 2021, ESMA published a consultation proposing to (i) remove swaps referencing EUR EONIA from the OIS class and replace them with swaps referencing EUR €STR with a termination date range of seven days to three years; (ii) remove swaps referencing GBP LIBOR from the fixed-to-floating swap, basis swap, and FRA classes and extend the termination date range for OIS referencing GBP SONIA to include seven days to 50 years; (iii) remove swaps referencing JPY LIBOR from the fixed-to-floating and basis swap classes; and (iv) add swaps referencing USD SOFR to the OIS class with a termination date range of seven days to three years.

The changes were proposed to come into force on the later of January 3, 2022, or 20 days after publication in the Official Journal of the European Union.

ESMA, Consultation Paper, “On the clearing and derivative trading obligations in view of the benchmark transition,” July 9, 2021, at 37-39, 58-59, available at

https://www.esma.europa.eu/sites/default/files/library/consultation_paper_on_the_co_and_dto_for_swaps_referencing_rfrs.pdf.

On February 8, 2022, ESMA adopted final regulatory technical standards (RTS), which also removed swaps referencing USD LIBOR from the fixed-to-floating swap, basis swap, and FRA classes.

These RTS changes were approved by the EC and published on May 17, 2022.

Commission Delegated Regulation (EU) 2022/750 of 8 February 2022 amending the regulatory technical standards laid down in Delegated Regulation (EU) 2015/2205 as regards the transition to new benchmarks referenced in certain OTC derivative contracts (Text with EEA relevance), May 17, 2022, available at

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32022R0750&qid=1654283051240. See also

ESMA, Final Report, “On draft RTS on the clearing and derivative trading obligations in view of the benchmark transition to risk free rates,” Nov. 18, 2021, at 31 (ESMA Final Report), available at

https://www.esma.europa.eu/sites/default/files/library/esma70-156-4953_final_report_on_the_co_and_dto_re_benchmark_transition.pdf.

On July 11, 2022, ESMA proposed adding OIS referencing JPY TONA (seven days to 30 years) to its clearing obligation, as well as expanding the termination date range for OIS referencing USD SOFR to include seven days to 50 years.

ESMA noted trading activity increased for USD SOFR activity up to and including 50 years. In terms of implementation timing, ESMA considered it unnecessary to provide a specific implementation date. Rather, ESMA proposed that its modified clearing obligation for USD SOFR OIS, and its new clearing obligation for JPY TONA OIS, would take effect on the twentieth day following publication of the final RTS, as per common practice. ESMA also indicated that it will analyze the feedback received on its consultation and to publish final rules by the end of 2022 or beginning of 2023.

ESMA, Consultation Paper, “On the clearing and derivative trading obligations in view of the 2022 status of the benchmark transition,” July 11, 2022, available at

https://www.esma.europa.eu/file/124582/download?token=rnNMa9ak.

3. Hong Kong

HKSFC and HKMA have jurisdiction over the clearing obligation in Hong Kong. As of September 1, 2016, clearing mandate rules promulgated jointly by HKSFC and HKMA require that swaps between certain local and foreign-incorporated entities covering fixed-to-floating and basis swaps denominated in USD, GBP, and JPY each referencing LIBOR, fixed-to-floating and basis swaps denominated in EUR referencing EURIBOR, and fixed-to-floating and basis swaps denominated in HKD referencing HIBOR be cleared.

The same mandate requires that OIS denominated in USD referencing Fed Funds, EUR referencing EONIA, and GBP referencing SONIA be cleared.

The Securities and Futures (OTC Derivative Transactions—Clearing and Record Keeping Obligations and Designation of Central Counterparties) Rules impose a clearing obligation on transactions between prescribed persons, including local and foreign (i) licensed corporations, (ii) authorized financial institutions, and (iii) approved money brokers, that have reached the clearing threshold of USD $20 billion during the applicable three-month calculation period. In addition, any transactions between such a prescribed person and a financial services provider must be cleared. Financial services providers are designated by HKSFC, with the consent of HKMA. Securities and Futures (OTC Derivative Transactions—Clearing and Record Keeping Obligations and Designation of Central Counterparties) Rules, The Government of the Hong Kong Special Administrative Region Gazette, available at

http://www.gld.gov.hk/egazette/pdf/20162005/es22016200528.pdf.

A recent publication of frequently asked questions indicated that “certain indexes may not be relevant if they are no longer maintained. For example, we do not expect HIBOR-ISDC will be used as it is no longer maintained by [ISDA]. The list of indexes may evolve over time but changes will be subject to consultation and the industry will be given time to make necessary arrangement before changes are implemented.”

The list of designated

central counterparties (CCPs) in Hong Kong includes CME, JSCC, LCH, and HKEX.

Frequently Asked Questions on the Implementation and Operation of the Mandatory Clearing Regime, January 2022, available at

https://www.sfc.hk/en/faqs/OTC-derivatives.

However,

HKMA recently noted that there is no plan to discontinue HIBOR. HKMA, Reform of Interest Rate Benchmarks, Feb. 2, 2022, available at

https://www.hkma.gov/hk/eng/key-functions/banking/banking-regulatory-and-supervisory-regime/reform-of-interest-rate-benchmarks/.

4. Japan

On December 6, 2021, proposed changes to JFSA's clearing rules became effective.

The changes removed contracts referencing three-month and six-month JPY LIBOR from the fixed-to-floating swap class and replaced them with OIS referencing JPY TONA with a termination date range of seven days to 40 years.

In a May 2022 report, Bank of Japan stated that a smooth transition from JPY LIBOR has been achieved due to JFSA and Bank of Japan support of efforts by financial institutions and market participants.

The report went on to indicate that “[f]uture challenges include the transition from USD LIBOR, for which the publication of some of the tenor settings will be ceased at the end of June 2023, and the development of infrastructure to facilitate the smooth use of JPY interest rate benchmarks to replace LIBOR.”

Prior to implementation of the changes, Bank of Japan urged market participants to cease entering new JPY LIBOR transactions by the end of September 2021 and announced that JPY TONA would become the primary replacement RFR for JPY LIBOR interest rate swaps. Bank of Japan, “Preparations for the discontinuation of LIBOR in the JPY interest rate swaps market,” Mar. 26, 2021, available at

https://www.boj.or.jp/en/paym/market/jpy_cmte/cmt210326c.pdf.

Although JFSA does not clearly prescribe a termination date range in its public notice regarding its JPY TONA clearing requirement, JSCC rules provide for the clearing of JPY TONA OIS with a termination date range of seven days to 40 years. JSCC, Interest Rate Swap Clearing Products: List of Cleared Products, available at

https://www.jpx.co/jp/jscc/en/cash/irs/product.html.

Review of JPY LIBOR Transition and Future Initiatives, Bank of Japan Review, May 2022, available at

www.fsa.go.jp.

Id.

Japanese authorities accomplished the smooth transition from swaps referencing JPY LIBOR to JPY TONA OIS in coordination with JSCC. As JSCC explains in its comment letter,

the conversion of JPY IRS referencing LIBOR was completed without any issue and market liquidity has now completely shifted to JPY TONA OIS. JSCC no longer accepts clearing of any new JPY interest rate swaps referencing LIBOR. As discussed further below, JSCC now clears increased volumes of JPY TONA OIS.

A complete discussion of comment letters received in response to the NPRM is found in section III.

It is the Commission's understanding that under Japanese law, all swaps entered into by two Japanese entities must be cleared through a CCP located in Japan.

5. Singapore

With regard to SGD denominated interest rate swaps, MAS established the Steering Committee for SOR & SIBOR Transition to SORA. This group has been working to oversee a transition from SGD SOR-VWAP to SGD SORA.

SGD SOR-VWAP relies on USD LIBOR as an input and is expected to be discontinued across all tenors after June 30, 2023.

Commission staff updated MAS regarding the status of IBOR OIS conversion efforts as part of this rulemaking process and staff identified no major concerns. Additional discussion of SGD SORA OIS is included below.

ABS, About SC-STS, available at

https://www.abs.org.sg/benchmark-rates/about-sc-sts.

Steering Committee for SOR & SIBOR Transition to SORA, Update to the SORA Market Compendium: Transition from SOR to SORA, Nov. 17, 2021, at 4, available at

https://www.abs.org.sg/docs/library/sora-market-compendium-on-the-transition-from-sor-to-sora-version-1-1.pdf.

6. Switzerland

On May 9, 2022, FINMA launched a consultation on amendments to its Financial Market Infrastructure Ordinance to, among other things, update the list of interest rate swaps subject to mandatory clearing. The consultation closed on July 5, 2022. In relevant part, the proposal would require clearing of the following OIS: (i) EUR €STR OIS for a termination date range of seven days to three years; (ii) GBP SONIA OIS for a termination date range of seven days to 50 years; and (iii) USD SOFR OIS for a termination date range of seven days to three years.

Ordinance of the Federal Financial Market Supervisory Authority on the Financial Market Infrastructure and Market Behavior in Securities and Derivatives Trading, May 9, 2022, available at

https://www.finma.ch/~/media/finma/dokumente/dokumentencenter/anhoerungen/laufende-anhoerungen/20220509-finanzmarktinfrastrukturverordnung/20220509_finfrav_finma_anhoerung_verordnung.pdf?sc_lang=de&hash=17383BC6490B694C7CC2D82354100AFB

(translated from original German).

The publicly available English language documents state that proposed changes to FINMA's clearing mandate “will be adjusted in line with foreign legal developments to the altered market conditions resulting from benchmark reform,” and that, more specifically, FINMA will “align[ ] itself closely with EU law.”

The consultation states that adoption of the revised ordinance is planned for the third quarter of 2022, with an effective date in early 2023.

FINMA, “FINMA Financial Market Infrastructure Ordinance—partial revision,” Key Points, May 9, 2022, available at

https://www.finma.ch/~/media/finma/dokumente/dokumentencenter/anhoerungen/abgeschlossene-anhoerungen/20220509-finanzmarktinfrastrukturverordnung/20220509_finfrav_finma_anhoerung_kernpunkte.pdf?sc_lang=en&hash=39645D542F56C608D72C1A8C4D408580;

FINMA, Press Release, “FINMA to adjust FinMIO-FINMA,” May 9, 2022, available at

https://www.finma.ch/~/media/finma/dokumente/dokumentencenter/8news/medienmitteilungen/2022/05/20220509-mm-anhoerung-finfrav-de.pdf?sc_lang=en&hash=08F6A2BB006408179809E99958977762.

As explained in the NPRM, following the Commission's action in 2016, FINMA did not require clearing of swaps referencing CHF LIBOR, and to date no jurisdiction has implemented mandatory clearing for swaps referencing CHF SARON.

Commission staff updated FINMA regarding the status of IBOR OIS conversion efforts as part of this rulemaking process and identified no major concerns regarding the transition process. Additional discussion of CHF SARON OIS is included below.

NPRM, 87 FR 32914.

7. United Kingdom

On May 20, 2021, Bank of England proposed to (i) effective October 18, 2021, remove contracts referencing EUR EONIA from the OIS class and replace them with contracts referencing EUR €STR with a termination date range of seven days to three years; and (ii) effective December 20, 2021, remove contracts referencing GBP LIBOR from the fixed-to-floating swap, basis swap, and FRA classes, and extend the termination date range for OIS referencing GBP SONIA to include seven days to 50 years.

Additionally, on September 29, 2021, Bank of England proposed to remove contracts referencing JPY LIBOR from the fixed-to-floating and basis swap classes and replace them with OIS referencing JPY TONA with a termination date range of seven days to 40 years, effective December 6, 2021.

On December 3, 2021, Bank of England updated the effective date for its new JPY TONA clearing requirement to be January 31, 2022, rather than December 6, 2021.

These changes went into effect as proposed.

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.

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.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform.

Bank of England, “Derivatives clearing obligation—introduction of contracts referencing TONA: Amendment to BTS 2015/2205,” Dec. 3, 2021, available at

https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-introduction-of-contracts-

referencing-tona-ps.

Bank of England noted that the change was designed to “provide firms with more time to complete their preparations without . . . posing a risk to UK financial stability.”

Id.

There were no changes to the date for removing Bank of England's JPY LIBOR clearing requirement.

On June 9, 2022, Bank of England published a proposal to remove contracts referencing USD LIBOR from the fixed-to-floating swap, basis swap, and FRA classes, that would come into force “around the same time as a number of CCPs contractually convert these contracts and remove them from their list of contracts eligible for clearing,” and add OIS referencing USD SOFR effective October 31, 2022.

Bank of England, Derivatives clearing obligation—modifications to reflect USD interest rate benchmark reform: Amendments to BTS 2015/2205, June 9, 2022 (Bank of England SOFR Proposal), available at

https://www.bankofengland.co.uk/paper/2022/derivatives-clearing-obligation-modifications-reflect-usd-interest-rate-benchmark-reform-amendment.

This proposal, and the proposed implementation approach, are largely aligned with the Commission's proposal.

The proposal for mandatory clearing of USD SOFR OIS is for an identical termination date range of seven days to 50 years. As discussed further below, Bank of England's proposed implementation timing of October 31, 2022, would align with Commission action.

Id.

(“In the light of the changes in market activity observed since [2021], and aligning with the Commodity Futures Trading Commission's (CFTC's) recent announcements, the Bank is now proposing to add OIS contracts referencing SOFR to the clearing obligation and remove contracts referencing USD Libor.”)

III. Overview of Comment Letters Received

The interest rate swap market has made tremendous progress toward completing the transition from reliance on swaps that reference LIBOR and other IBORs to clearing and trading swaps that reference RFRs. In issuing this final rule, the Commission further facilitates this transition by amending its interest rate swap clearing requirement to reflect the cessation or loss of representativeness of certain IBORs and the market adoption of swaps referencing RFRs.

On May 31, 2022, the Commission published an NPRM seeking public input regarding how it should amend the interest rate swap clearing requirement to address the cessation or loss of representativeness of IBORs that have been used as benchmark reference rates and the market adoption of swaps that reference RFRs. The NPRM was preceded by an RFI that the Commission issued on November 23, 2021.

Both these efforts sought input on all aspects of the swap clearing requirement that may be affected by the transition from IBORs to RFRs, including enumerated requests for data and other information related to IBOR and RFR swaps.

RFI, 86 FR 66486-66488. The following 14 entities responded to the RFI: Alternative Investment Management Association (AIMA), American Council of Life Insurers (ACLI), Bloomberg L.P., CCP12, Citadel, CME, Eurex, ISDA, Investment Company Institute (ICI), JSCC, LSEG, Managed Funds Association (MFA), Toronto-Dominion Bank (TD Bank), and Tradeweb Markets LLC (Tradeweb), available at

https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx.

The NPRM proposed amending regulation § 50.4(a) to remove from the clearing requirement interest rate swaps in all classes referencing LIBOR (USD, GBP, CHF, and JPY), EUR EONIA, and SGD SOR-VWAP, as applicable. The NPRM also proposed updating the clearing requirement to include OIS referencing USD SOFR (seven days to 50 years), CHF SARON (seven days to 30 years), JPY TONA (seven days to 30 years), EUR €STR (seven days to three years), and SGD SORA (seven days to 10 years), as well as extending the termination date range of GBP SONIA OIS to include seven days to 50 years. The NPRM proposed an implementation date of 30 days after publication of final rules in the

Federal Register

for nearly all the amendments. The one exception proposed was an implementation date of July 1, 2023, for removing the requirement to clear interest rate swaps referencing USD LIBOR and SGD SOR-VWAP.

The Commission received 12 comments on its NPRM from a variety of market infrastructure providers, market participants, and industry organizations.

All NPRM comment letters, as well as the RFI response letters, are available on the CFTC's Comments Portal. Most commenters largely supported the Commission's proposal and offered specific responses to questions posed in the NPRM. Several commenters asked for clarification regarding certain issues. These matters are addressed in the discussion and analysis below.

Comments were submitted by: AIMA, ACLI, CCP12, Citadel, CME, ISDA, ICI, JSCC, MFA, and SOFR Academy. In addition to these ten responses from institutional entities, two individuals submitted responses to the NPRM. All letters related to this rulemaking are available on the CFTC Comments Portal:

https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx.

A. Scope of Amendments—Coverage of OIS and Removal of Existing Rules

Nearly all of the commenters expressed support for the scope of the OIS covered under the Commission's proposal, and many agreed with the Commission's analysis that an updated swap clearing requirement would enhance financial stability by reducing systemic risk, improving market integrity, and increasing transparency in the interest rate swap market.

Commenters also noted the important role played by the Commission throughout the IBOR transition process.

Comments from AIMA, ACLI, CCP12, Citadel, CME, ISDA, ICI, JSCC, MFA, and one of the individual commenters were largely supportive of the Commission's proposal. Several raised additional issues, questions, and/or requests that will be discussed further below. SOFR Academy and the other individual commenter requested clarification regarding SOFR.

See, e.g.,

comment letters from CCP12, ISDA, ICI, and MFA.

1. Importance of Harmonization

Commenters, including CCP12, CME, Citadel, ISDA, JSCC, and MFA supported the Commission's goal of harmonizing its clearing requirement with those of non-U.S. jurisdictions. CCP12 stated such coordination with counterparts would allow the U.S. to align its interest rate swap clearing requirement with other major jurisdictions in a manner that promotes legal certainty, regulatory transparency, and the preservation of liquidity in cleared swaps. CME stated its support for adding the RFR OIS covered by the NPRM to the clearing requirement in light of rapid market adoption of voluntary clearing of RFR OIS and the objective of harmonizing global clearing requirements to the extent possible. CME also noted the Commission's commitment to coordination, transparency, and consistency in engaging with domestic authorities. JSCC stated support for the inclusion of JPY TONA OIS in the modifications to regulation § 50.4(a) because such action would harmonize the Commission's interest rate swap clearing requirement with those of other jurisdictions. JSCC stated that this harmonization, in turn, would lower the operational and compliance burden for market participants active across multiple jurisdictions. Market participants including those represented by ISDA, MFA, and others stated their support for global harmonization efforts as well.

2. DCOs' Ability To Clear OIS

CCP12 highlighted the work done by CCPs to support the transition to RFRs. CCP12 stated that CCPs offered clearing for new RFR swaps, which has encouraged participation, growth, and liquidity in these products, and enabled a smooth conversion of certain cleared

IBOR swaps to RFR OIS at the end of 2021. CCP12 stated that DCOs are required to ensure that they have sufficient resources and liquidity, adequate pricing data, and risk management practices and capabilities in terms of default management with respect to the swaps covered by the NPRM.

This point is consistent with comments submitted by both CME and JSCC, among others. For example, CME stated that with the expected increase in the number of transactions, it is prepared to continue clearing RFR OIS. JSCC stated that requiring JPY TONA OIS to be cleared would not affect the ability of DCOs to comply with the CEA or the relevant legal and regulatory regime of any other jurisdiction.

3. Inclusion of CHF-Denominated OIS Referencing SARON

ISDA recommended that the Commission delay the issuance of a clearing requirement for CHF-denominated interest rate swaps referencing SARON that would take the place of an existing Commission clearing requirement for interest rate swaps referencing LIBOR, until such time as the Swiss authorities adopt a clearing requirement for interest rate swaps referencing CHF SARON.

No other commenter responded to the NPRM's question on this topic.

In the alternative, ISDA suggests that the Commission delay the effective date of its CHF SARON OIS clearing requirement until three months after the effective date of any Swiss clearing mandate.

4. Inclusion of USD SOFR-USD LIBOR Basis Swaps

ACLI stated its support for the Commission's decision not to include USD SOFR-USD LIBOR basis swaps in the interest rate swap clearing requirement. ACLI pointed to the limited and dwindling use cases for these swaps, along with low liquidity and limitations on the ability to electronically execute such basis swaps. No other commenter responded to the NPRM's question on this topic.

5. Effect of Margin Rules for Uncleared Swaps

ACLI stated that because both the cleared swaps framework and uncleared swap margin rules reduce risk, life insurers should be free to weigh the pros and cons of cleared versus uncleared swaps and choose a regime that provides the most flexibility in allocating collateral.

ACLI stated that central clearing provides market participants with numerous advantages over bilateral arrangements, including increased safety, transparency, and customer protection. However, ACLI stated that mandatory clearing elevates concentration of risk in CCPs and futures commission merchants (FCMs).

ACLI also stated that central clearing's risk mitigation benefits are decreased by the Commission's rules that require swap dealers to margin their uncleared swaps with certain counterparties.

The ability to choose not to clear swaps subject to the clearing requirement is reserved for those entities that are eligible to elect an exception or exemption from the swap clearing requirement under subpart C of part 50 of the Commission's regulations. Section 2(h)(7)(C)(i)(VIII) excludes certain financial entities from such eligibility by defining financial entity as “a person predominantly engaged in activities that are in the business of banking, or in activities that are financial in nature,” as defined in section 4(k) of the Bank Holding Company Act of 1956, 12 U.S.C. 1843(k). Section 4(k) of the Bank Holding Company Act defines such activities to include the activities of life insurers and certain related entities. 12 U.S.C. 1843(k)(4)(B), (H)(ii)(II), and (I)(ii)-(iii).

ACLI stated that (1) when large FCMs face financial difficulties, their clients will face elevated credit risk; (2) if an FCM were to default, the FCM's clients may have difficulty porting their swap positions on short notice; (3) the process of negotiating new FCM arrangements, completing operational setup, and porting positions from one FCM to another takes significant time and is operationally burdensome; and (4) some smaller life insurers have difficulty finding FCMs who will take on their business at competitive costs.

ACLI stated that practical solutions to allow end-users to clear directly at CCPs do not currently exist, and there are significant operational and regulatory hurdles to their creation. This issue is beyond the scope of this rulemaking.

No other commenter raised these issues.

ACLI's comment is discussed further in the Cost Benefit Considerations section VII.

6. Clarification Regarding USD SOFR

In its comment letter, SOFR Academy recommended that the Commission clarify the definition of USD SOFR OIS in the final rule to avoid potential confusion in the event a market develops for OIS referencing a new index that combines USD SOFR as administered and published by FRBNY with a credit spread supplement.

Similarly, an individual commenter requested that the Commission clarify which version of USD SOFR is referenced by the swaps to which its USD SOFR OIS clearing requirement would apply.

The individual asked the Commission to confirm that the proposed determination (i) would not apply to swaps using a CME term USD SOFR rate; and (ii) would apply to swaps using both compounded USD SOFR and daily simple USD SOFR.

According to SOFR Academy, such “all-in” benchmark rates combine across-the-curve credit spreads with variations of USD SOFR that are administered and published by FRBNY.

The commenter sought clarification regarding whether such swaps reference term USD SOFR, compounded USD SOFR, or daily simple USD SOFR. This commenter also requested that the Commission clarify whether the Commission intends its USD SOFR OIS clearing requirement to apply retroactively to existing USD SOFR OIS that were executed before implementation but not voluntarily cleared. Consistent with its past clearing requirement determinations, this final clearing requirement determination will not apply retroactively. It will apply to swaps executed on or after the implementation dates discussed below.

In its comment letter, CME referred to the ongoing industry transition of swaps referencing LIBOR to the relevant nominated successor RFRs and noted that market participants have demonstrated a preference for transition to market standard RFR OIS.

B. Implementation, Cross-Border Coordination, and Operational Considerations

Commenters expressed a number of views with regard to the implementation schedule for the RFR OIS clearing requirement and the removal of the existing clearing requirement for LIBOR, EUR EONIA, and SGD SOR-VWAP interest rate swaps.

1. Immediate Implementation of RFR OIS Clearing Requirement

A majority of commenters favored the Commission's proposed approach of implementing the RFR OIS clearing requirement 30 days after publication of this final rulemaking in the

Federal Register

. For example, CCP12 supported this approach because the market has already gravitated toward central clearing of RFR OIS (including USD SOFR OIS) to a significant degree, and 30 days would provide market participants with sufficient time to comply with the new determination. CCP12 stated that the new determination would not lead to a material change in operations for a majority of market participants. Likewise, Citadel and MFA stated that the Commission's proposed 30-day compliance date is appropriate as almost all USD SOFR OIS transactions are cleared voluntarily. AIMA stated that the Commission should expedite its consideration of a final rule, consistent with the NPRM, and update the clearing requirement as quickly as possible. Finally, CME and JSCC agreed with the Commission's proposal to adopt a single compliance date that would be 30 days after the publication of the final rule in the

Federal Register

2. Harmonizing Implementation Timing With International Counterparts

ISDA recommended that the implementation date for the RFR OIS

clearing requirement be October 31, 2022, which would align with Bank of England's proposed effective date for its USD SOFR OIS clearing obligation. According to ISDA, this alignment of implementation dates would reduce operational burdens for clearing members and their clients. ISDA stated that a shorter deadline might require ISDA members to adopt tactical solutions and place unnecessary strain on resources, preventing an efficient implementation.

ISDA noted that compliance with new clearing requirements requires ISDA members to adapt systems, create and run internal trainings, and issue client communications; develop and implement control frameworks and internal governance; and address unique jurisdictional requirements. For example, ISDA noted that in some jurisdictions such as Germany, creation and delivery of job-related training which introduces changes to working practices such as clearing requirements require review with and sign-off by workers' representatives.

No other commenter expressly recommended October 31, 2022, as an implementation date for all RFR OIS. However, despite supporting the Commission's 30-day implementation approach, CCP12 stated that a harmonized approach to timing would reduce the potential operational burden for clearing members and clients of having to comply with the same, or very similar, clearing mandates at different times and in different jurisdictions.

3. Delay Implementation Until June 30, 2023

ACLI stated that the Commission should postpone the inclusion of USD SOFR OIS in the clearing requirement until June 30, 2023, which would coincide with the date USD LIBOR swaps are removed from the clearing requirement and create an incentive for market participants concerned about clearing trades to move from USD LIBOR to USD SOFR swaps. ACLI stated that the Commission and other regulators have offered significant relief to smooth the transition from USD LIBOR to USD SOFR, and that postponing implementation of the USD SOFR OIS clearing requirement would be consistent with that approach. No other commenter supported this view.

4. Removal of Existing USD LIBOR Clearing Requirement

AIMA supported the Commission's proposal, particularly the proposal to require USD SOFR OIS clearing out to 50 years, and to maintain the USD LIBOR clearing requirement until July 1, 2023. Likewise, Citadel agreed with the Commission's proposal to maintain the current clearing requirement for USD LIBOR swaps until July 1, 2023, in light of continued significant trading activity in USD LIBOR swaps. Citadel stated that this would provide the Commission with flexibility to continue evaluating market developments for specific tenors and adjust requirements as necessary.

CME supported the Commission's proposal to retain its USD LIBOR swap clearing requirement because USD LIBOR is widely expected to continue until June 30, 2023, and clearing services are expected to continue to be offered up to or shortly before that date. CME stated that retaining the USD LIBOR swap clearing requirement until CCPs cease to provide clearing services and/or convert swaps would provide clarity and certainty for market participants.

ISDA proposed March 6, 2023, as the implementation date for removing rules requiring clearing interest rate swaps referencing USD LIBOR. ISDA stated that the removal date for USD LIBOR swaps should be no earlier than any CCP conversion date because a later removal date would be inconsistent with Commission objectives. ISDA stated that because CCPs are unlikely to convert simultaneously, there will be confusion when one converts and others do not.

In the alternative, ISDA suggested the removal date be the earlier of July 1, 2023, or the first conversion date at any registered or exempt DCO clearing USD LIBOR swaps. However, as ISDA noted, this could result in uncertainty if a clearinghouse were to change its proposed conversion date on short notice.

ISDA raised the possibility that market participants could be required to establish new clearing relationships to comply with a USD LIBOR swap clearing requirement that may be months or days away from ceasing to be effective or opt to continue unhedged until the expiration of the clearing requirement if the IBOR clearing requirement remains in place beyond the initiation of a conversion at any one CCP.

MFA stated that the Commission's proposal to maintain its USD LIBOR interest rate swap clearing requirement until July 1, 2023, is appropriate, as liquidity in swaps denominated in USD that reference LIBOR in the fixed-to-floating swap, basis swap, and FRA classes is sufficient to continue to support required clearing.

Other commenters, including Citadel and CME, generally supported this view.

MFA also suggested that if before July 1, 2023, concerns arise regarding the sufficiency of outstanding notional, liquidity, or pricing data to support required clearing, the Commission could take appropriate action that expires on June 30, 2023, to facilitate the IBOR transition.

C. Issues Beyond the Scope of the Rulemaking

Commenters raised the following two issues that are related to the IBOR transition. They are presented for the sake of a complete consideration of comments submitted, but the Commission observes that, as discussed below, they are beyond the scope of this rulemaking.

1. Trade Execution Requirement

ICI supported the proposed modifications to the interest rate swap clearing requirement, but urged the Commission to recognize the separate nature of the trade execution requirement. ICI commented that the Commission should not approve or allow certification of a subsequent made-available-to-trade (MAT) determination solely on the basis of the swap being subject to a clearing requirement. ICI stated that the MAT process is especially important with respect to longer-dated swaps proposed to be cleared, which are less liquid. ISDA also stated that a corresponding MAT determination alongside or closely following a clearing mandate could challenge a smooth and orderly IBOR transition, and ISDA requested that the Commission consider changes to its MAT determination process to ensure that any MAT determination in new RFRs occur at the appropriate time and in line with overall policy objectives.

Pursuant to section 2(h)(8) of the CEA and Commission regulations §§ 37.10 and 38.12, a trade execution requirement could, in the future, apply to some or all of the interest rate swaps covered by this rulemaking. The process for determining which swaps are subject to the trade execution requirement is separate from the clearing requirement determination process. Therefore, it is beyond the scope of this rulemaking for the Commission to address the suitability of particular swaps for a trade execution requirement or to address issues related to the MAT process.

2. Post-Trade Risk Reduction

ISDA stated that currently swap dealers are able to book OIS into their cleared or uncleared portfolios to match changes in risk as part of portfolio compression exercises. According to ISDA, a clearing requirement for RFR OIS would impair swap dealers' ability to manage their uncleared portfolios. ISDA requested that the Commission consider an exemptive order or staff no-action from the clearing requirement for RFR swaps where the trades result from post-trade risk reduction (PTRR) exercises.

By contrast, Citadel stated that the Commission should continue to reject requests for additional exemptions, including for PTRR services, when updating the clearing requirement.

Citadel stated that existing no-action relief for multilateral portfolio compression exercises provides market participants with adequate flexibility to reduce exposures in uncleared portfolios while ensuring swaps subject to the clearing requirement are cleared. Citadel also stated that a broader exemption risks circumventing the clearing requirement, increasing trading activity in uncleared OTC derivatives, and increasing systemic risk.

No other commenters raised this issue.

In 2013, Commission staff issued a no-action letter regarding PTRR services.

This letter explained that compression is an important tool to facilitate post-trade risk reduction. Prior Commissions have declined to codify this no-action letter, and this matter is beyond the scope of this rulemaking.

Staff No-Action Letter Re: Relief from Required Clearing for Swaps Resulting from Multilateral Portfolio Compression Exercises, CFTC Letter No. 13-01, Mar. 18, 2013, available at

https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm.

IV. Final Amendments to Regulation § 50.4(a)

The Commission is finalizing amendments to regulation § 50.4(a) to remove certain IBORs and EUR EONIA interest rate swap clearing requirements and add requirements to clear corresponding RFR OIS. The IBOR swaps for which clearing requirements are being removed span all four classes of swaps currently required to be cleared—fixed-to-floating swaps, basis swaps, FRAs, and (in the case of EUR EONIA) OIS.

The RFR swaps that the Commission is adding to the clearing requirement are all OIS.

OIS are swaps where one leg is calculated based on a fixed rate and the other is calculated based on a daily overnight floating rate (

i.e.,

the RFR).

Beyond the IBOR swaps that will be removed from regulation § 50.4 and replaced with RFR swaps pursuant to this determination, regulation § 50.4 contains requirements to clear a number of swaps referencing IBORs that have not yet been discontinued. In the future the Commission may consider further modifications to the interest rate swap clearing requirement in regulation § 50.4 to address the cessation of additional IBORs and market adoption of corresponding RFRs. But no further modifications are necessary at this time.

GBP SONIA OIS are already required to be cleared. Regulation § 50.4(a) Table 2.

A. Scope of Amendments—Coverage of OIS and Removal of Existing Rules

These amendments to the interest rate swap clearing requirement are the first rule changes that the Commission has issued to facilitate the transition from IBORs to RFRs. The amendments update the existing clearing requirement. In effect, the amendments replace the requirement to clear certain IBOR swaps in a number of different classes with a requirement to clear RFR OIS because the IBOR swaps have become unavailable and liquidity has shifted into RFR OIS. Accordingly, pursuant to this final rulemaking, the following swaps will no longer be required to be cleared:

• Swaps denominated in USD, GBP, CHF, and JPY that reference LIBOR as a floating rate index in each of the fixed-to-floating swap, basis swap, and FRA classes, as applicable.

• Swaps denominated in EUR that reference EONIA as a floating rate index in the OIS class.

• Swaps denominated in SGD that reference SOR-VWAP as a floating rate index in the fixed-to-floating swap class.

The Commission is amending the OIS class of interest rate swaps under regulation § 50.4(a) that are required to be cleared to include the following:

• Swaps denominated in USD that reference SOFR as a floating rate index with a stated termination date range of seven days to 50 years,

• Swaps denominated in EUR that reference €STR as a floating rate index with a stated termination date range of seven days to three years,

• Swaps denominated in CHF that reference SARON as a floating rate index with a stated termination date range of seven days to 30 years,

• Swaps denominated in JPY that reference TONA as a floating rate index with a stated termination date range of seven days to 30 years, and

• Swaps denominated in SGD that reference SORA as a floating rate index with a stated termination date range of seven days to 10 years.

• Swaps denominated in GBP that reference SONIA as a floating rate index with a stated termination date range of seven days to 50 years.

For GBP SONIA OIS, these amendments expand the existing maximum termination date range to 50 years, for a new termination date range of seven days to 50 years.

While these amendments are legally effective 30 days after publication of the final rule in the

Federal Register

, they will be implemented according to a schedule discussed in detail below.

Specific implementation timing is set forth in section VI.

B. Clarification Regarding OIS Product Specifications

SOFR Academy and one of the individual commenters requested clarification regarding the product specifications subject to this rulemaking. These commenters asked which interest rates apply to the USD-denominated OIS referencing SOFR.

The final rules apply to the USD SOFR OIS that are offered for clearing at registered and exempt DCOs. These DCOs' product specifications provide that the USD SOFR OIS that they clear reference USD-SOFR-COMPOUND under the 2006 ISDA Definitions and USD-SOFR-OIS Compound under the 2021 ISDA Definitions. Similarly, GBP SONIA, CHF SARON, JPY TONA, SGD SORA, and EUR €STR OIS clearing requirements refer to the GBP SONIA, CHF SARON, JPY TONA, SGD SORA, and EUR €STR OIS that are offered for clearing at registered and exempt DCOs. Each of these rates reference compound RFR indexes as defined in ISDA Definitions.

See generally

CME, Product Scope, available at

https://www.cmegroup.com/trading/interest-rates/cleared-otc.html;

LCH, Product Specific Contract Terms and Eligibility Criteria Manual, June 20, 2022, at 36-44, available at

https://www.lch.com/system/files/media_root/220620%20-%20Product%20Specific%20Contract%20Terms%20-%20SGD%20SORA.pdf;

Eurex, EurexOTC Clear Product List, available at

https://www.eurex.com/ec-en/clear/eurex-otc-clear/interest-rate-swaps;

JSCC, List of Clearing Products, available at

https://www.jpx.co.jp/jscc/en/cash/irs/product.html;

HKEX, Interest Rate Swaps, available at

https://www.hkex.com.hk/Products/OTC-Derivatives/Interest-Rate-Swaps?sc_lang=en.

Some DCOs' product specifications reference both the 2021 and 2006 ISDA Definitions whereas other DCOs' product specifications refer only to the 2021 ISDA Definitions (or reference both only with respect to certain swaps).

C. Swaps Referencing CHF SARON and SGD SORA

The Commission is the only authority to require CHF LIBOR swaps be submitted for clearing. In 2016, FINMA considered adopting a clearing mandate for swaps referencing CHF LIBOR, but after the Commission's final rules that included CHF LIBOR swaps went into effect, FINMA did not adopt a similar mandate.

To date, FINMA has not adopted a clearing mandate for CHF SARON OIS. However, as explained above, FINMA may adjust its clearing obligation in line with international authorities and altered market conditions resulting from benchmark reform.

The Commission provided an opportunity for comment prior to adopting its requirement to clear CHF-denominated interest rate swaps. Clearing Requirement Determination Under Section 2(h) of the CEA for Interest Rate Swaps, 81 FR 39506 at 39508 (June 16, 2016);

see also

Second Determination, 81 FR 71205.

Likewise, while MAS did not require clearing of SGD SOR-VWAP swaps with a termination date range of 28 days to 10 years until October 2018, the Commission was aware of this expected action, and took it into account when adopting a clearing requirement for SGD

SOR-VWAP swaps in 2016.

100

At this time, MAS has not yet implemented mandatory clearing for SGD SORA OIS.

100

Second Determination, 81 FR 71205; MAS, MAS Requires OTC Derivatives to be Centrally Cleared to Mitigate Systemic Risk, May 2, 2018, available at

https://www.mas.gov.sg/news/media-releases/2018/mas-requires-otc-derivatives-to-be-centrally-cleared-to-mitigate-systemic-risk;

MAS, Response to Feedback Received: Draft Regulations for Mandatory Clearing of Derivatives Contracts, May 2, 2018, at 4, available at

https://www.mas.gov.sg/-/media/MAS/News-and-Publications/Consultation-Papers/2018-May-02-Response-to-consultation-on-draft-regs-on-mandatory-clearing-of-derivatives/Response-to-Feedback-on-Draft-Regulations-for-Mandatory-Clearing-of-Derivatives-Contracts.pdf.

1. Data Analysis

Against this regulatory backdrop, clearing rates for CHF SARON OIS and SGD SORA OIS are already high. The Commission estimates that more than 97% of notional transacted in these rates each month between November 2021 and April 2022 was cleared.

101

The data referenced is from Commission's weekly swaps report data. In the NPRM, the Commission estimated that more than 98% of notional transacted in these rates in each of November 2021, December 2021, and January 2022 was cleared. NPRM, 87 FR 32914-32915.

Furthermore, the Commission estimates that, as of April 29, 2022, there was $1,497 billion in outstanding notional in CHF SARON OIS, whereas there was $282 billion in outstanding notional in CHF LIBOR fixed-to-floating swaps.

102

Similarly, the Commission estimates that, as of April 29, 2022, there was $558 billion in outstanding notional in SGD SORA OIS, and $248 billion in outstanding notional in SGD SOR-VWAP fixed-to-floating swaps.

103

In comparison, as of January 28, 2022, there was $1,730 billion in outstanding notional in CHF SARON OIS and $686 billion in outstanding notional in CHF LIBOR fixed-to-floating swaps.

104

Further, estimates as of the same date indicate there was $449 billion in outstanding notional in SGD SORA OIS and $307 billion in outstanding notional in SGD SOR-VWAP fixed-to-floating swaps.

105

102

These outstanding notional figures are based on data for swaps that have been cleared at CME, LCH, or Eurex and reported to the CFTC under part 39 of the Commission's regulations. Commission staff compiled, processed, and reviewed the data presented in this rulemaking.

103

Id.

104

NPRM, 87 FR 32915.

105

Id.

Comparing the January and April 2022 month-end estimates, there is a slight decline in outstanding notional in CHF SARON OIS, but a steep decline in outstanding notional for CHF LIBOR fixed-to-floating swaps. With respect to the SGD rates, there is a decline in outstanding notional for SGD SOR-VWAP fixed-to-floating swaps roughly proportional to the increase in outstanding notional for SGD SORA OIS. The Commission believes these numbers demonstrate that CHF LIBOR and SGD SOR-VWAP are steadily being replaced by their corresponding RFRs.

Based on this data, it would appear that, since the time the Commission issued its NPRM, the CHF interest rate swap market has moved from comprising roughly one-half LIBOR swaps to only approximately one-fifth LIBOR swaps. Additionally, while SGD SOR-VWAP is anticipated to continue until June 30, 2023, the transition to SGD SORA is well underway. Data presented in tables 2 and 3 below further illustrate that the CHF LIBOR and SGD SOR-VWAP swap markets have rapidly diminished as markets shift to swaps referencing RFRs. The Commission estimates that, in April 2022, there were no CHF LIBOR fixed-to-floating swap transactions, and 39 SGD SOR-VWAP fixed-to-floating swap transactions (comprising $2 billion notional). The Commission also estimates that, in April 2022, there were 1,913 CHF SARON OIS transactions (comprising $91 billion notional) and 3,277 SGD SORA OIS transactions (comprising $124 billion notional).

2. Consideration of Comments

In response to the NPRM, ISDA commented that the Commission should delay the update of the CHF-denominated interest rate swap clearing requirement until such time as the Swiss authorities issue a clearing mandate. The requirement to clear interest rate swaps denominated in Swiss francs has been in place under U.S. law since 2016.

With regard to SGD-denominated interest rate swaps, the Commission did not receive any comments. Nor is the Commission aware of any concerns on the part of its fellow authorities with regard to update the clearing requirement to include SGD SORA OIS. The requirement to clear interest rate swaps denominated in SGD has been in place under U.S. law since 2016.

3. Inclusion of CHF SARON OIS and SGD SORA OIS

The Commission is unaware of any risk-related or operational concerns that have arisen with regard to this requirement. In addition, to delay updating the Commission's existing interest rate swap clearing requirement for swaps denominated in these two currencies would limit the scope of the Commission's existing clearing requirement. It also would risk introducing unnecessary market confusion by unexpectedly changing the scope of the interest rate swap market that is required to be cleared.

Swiss and European authorities generally have indicated that they are reviewing this matter and may act to require clearing of CHF SARON OIS under the laws of their respective jurisdictions at some point in the future. The Commission proceeded in 2016 under the Second Determination and now updates those regulations to further the extensive work pursuant to a public-private partnership that has taken place to prepare the interest rate swap markets for IBOR conversions. While Singaporean authorities have not yet amended their regulations, a similar justification exists with regard to updating the SGD-denominated interest rate swap clearing requirement.

D. RFR-IBOR Basis Swaps

Based on responses to the RFI, as well as ACLI's comment, the Commission is not adding any new requirements to clear RFR-linked basis swaps at this time. These swaps are used primarily to move out of IBOR swap positions and into RFR swap positions.

106

The Commission recognizes the added flexibility RFR-linked basis swaps offer market participants, but will continue to monitor their use as the IBOR transition process reaches its conclusion. Such monitoring will focus on volumes of RFR-linked basis swaps after the date on which IBOR rates cease publication.

106

RFR-linked basis swaps offered for clearing are generally RFR-IBOR basis swaps.

See

ACLI's RFI response letter (“We also do not believe that SOFR-LIBOR basis swaps should be added to the clearing requirement due to low liquidity and limitations on electronic execution. We expect SOFR-LIBOR basis swaps to require bilateral OTC treatment for their limited and dwindling use cases.”); ISDA's RFI response letter (“Due to low liquidity, we think SOFR-LIBOR basis swaps should not be subject to mandatory clearing.”). RFI response letters are available at

https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx.

V. Determination Analysis for RFR OIS

The Commission is amending its interest rate swap clearing requirement to include OIS referencing RFRs by adopting a new clearing requirement determination. The Commission has completed a review of the current RFR OIS offered for clearing and has considered the specific statutory factors required to make a new clearing requirement determination.

A. General Description of Information Considered

CME, LCH, and Eurex provided the Commission with regulation § 39.5(b)

submissions relating to RFR OIS.

107

In addition to the DCOs' submissions, the Commission looks to the ability of each DCO to clear RFR OIS, DCO swap data, swap data repository (SDR) data, publicly available data, the rule frameworks and risk management policies of each DCO, and information provided through public comment.

107

Regulation § 39.5(b) submissions from DCOs are available on the Commission's website,

www.cftc.gov,

under DCO Swaps Submissions.

This clearing requirement determination is distinguishable from prior determinations insofar as it responds to a public and private sector, consensus-driven market event that has resulted, or will result, in liquidity shifting to new benchmark rates from rates that have become, or will soon become, unavailable. In that sense, central clearing in the RFR OIS markets, which rely on benchmark rates that are less susceptible to manipulation, may offer unique benefits that prior interest rate swap market clearing did not.

108

As a result, and in light of the quick pace of market adoption and DCOs' willingness to provide clearing for a wide variety of RFR swaps, the RFR interest rate swap markets are prepared for this clearing requirement determination.

108

A discussion of the costs and benefits of this rulemaking appears in section VII below.

B. Consistency With DCO Core Principles Under Section 2(h) of the CEA

Section 2(h)(2)(D)(i) of the CEA requires the Commission to determine whether a clearing requirement determination is consistent with core principles for DCOs set forth in section 5b(c)(2) of the CEA.

109

CME, LCH, and Eurex are registered DCOs, and currently clear the RFR OIS subject to this rulemaking. CME, LCH, and Eurex are required to comply with the DCO core principles (and applicable Commission regulations) with respect to the RFR OIS subject to this determination. These DCOs also are subject to the Commission's examination and risk surveillance programs.

109

7 U.S.C. 2(h)(2)(D)(i). The core principles address numerous issues, including financial resources, participant and product eligibility, risk management, settlement procedures, default management, system safeguards, reporting, recordkeeping, public information, and legal risk, among other subjects. 7 U.S.C. 7a-1(c)(2). The Commission implemented the core principles through regulations that are applicable to registered DCOs. 17 CFR part 39.

The Commission believes that CME, LCH, and Eurex will be able to maintain compliance with the DCO core principles and applicable Commission regulations following adoption of this clearing requirement determination. For the reasons discussed below, the Commission has determined that subjecting any of the RFR OIS to required clearing is unlikely to impair CME's, LCH's, or Eurex's ability to comply with the DCO core principles, along with applicable Commission regulations.

110

In their public comments, each DCO stated that requiring clearing of USD SOFR and other RFR OIS would not negatively affect their ability to comply with the DCO core principles and applicable Commission regulations.

See

RFI response letters from CME, LSEG, and Eurex, and NPRM comment letter from CME.

While exempt DCOs are not subject to the DCO core principles

per se,

the Commission determined that each was subject to comparable, comprehensive supervision and regulation by its home country regulator before granting such DCOs an exemption from registration, as required by the CEA.

111

With regard to the two exempt DCOs that offer RFR OIS for clearing, namely, JSCC and HKEX, the Commission expects that both DCOs will continue to comply with their home country law and regulations for purposes of this clearing requirement determination for RFR OIS.

111

The Commission may exempt a DCO from registration if it determines that the DCO is subject to comparable, comprehensive supervision by appropriate government authorities in its home country. The Commission determined that JSCC demonstrated compliance with the requirements of the CEA with which it must comply in order to be eligible for an exemption from registration as a DCO. JSCC Order of Exemption from Registration, Oct. 26, 2015, at 1, available at

http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf;

JSCC Amended Order of Exemption from Registration, May 15, 2017, at 1, available at

https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf.

Likewise, HKEX is an exempt DCO that the Commission determined has demonstrated compliance with the requirements of the CEA. OTC Clearing Hong Kong Limited Order of Exemption from Registration, Dec. 21, 2015, at 1, available at

https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/otccleardcoexemptorder12-21-15.pdf.

As outlined in the summary of comments, the Commission's conclusions regarding the DCOs' ability to remain in compliance with applicable regulations, as well as sound risk management practices, is supported by commenters.

112

No commenter raised any concern regarding a registered or an exempt DCO maintaining its ability to clear the interest rate swaps that it offers for clearing. The Commission also notes the importance of its ongoing examination and risk surveillance programs for all registered DCOs, as well as its ability to work with fellow authorities to ensure DCOs located outside the United States remain in compliance with the highest standards. In 2016, the Commission explained the rigor of the DCO registration and exemption processes, along with subsequent examination and risk surveillance scrutiny that DCOs receive. These processes remain in place and have been enhanced over the intervening years.

113

112

See, e.g.,

comment letters from CME, CCP12, Citadel, ISDA, JSCC, and MFA.

113

Second Determination, 81 FR 71207-71208. In particular, Commission staff monitors the risks posed to and by DCOs, clearing members, and market participants, including market risk, liquidity risk, credit risk, and concentration risk with the objective (1) to identify positions in cleared products subject to the Commission's jurisdiction that pose significant financial risk; and (2) to confirm that these risks are being appropriately managed.

Clearing the RFR OIS swaps subject to this determination does not pose financial or legal risks that are materially distinguishable from those posed by the IBOR interest rate swaps that the Commission required to be cleared in 2012 and 2016 and that DCOs have been offering for clearing for over a decade. For additional information regarding the ability of DCOs and exempt DCOs to clear these swaps, see the discussion of Factor II in the Commission's determination analysis below.

C. Conclusions Regarding Consideration of Section 2(h)'s Five Statutory Factors

Set forth below is the Commission's consideration of the five factors set forth in section 2(h)(2)(D)(ii) of the CEA as they relate to all OIS being added to the interest rate swap clearing requirement, which includes OIS (i) denominated in USD and referencing SOFR; (ii) denominated in GBP and referencing SONIA; (iii) denominated in CHF and referencing SARON; (iv) denominated in JPY and referencing TONA; (v) denominated in EUR and referencing €STR; and (vi) denominated in SGD and referencing SORA.

114

The Commission is conducting this analysis only with respect to the swaps that are being added to the clearing requirement under this determination. Removing swaps that are no longer offered for clearing from Commission regulation § 50.4 is not considered in this analysis.

1. Factor (I)—Outstanding Notional Exposures and Trading Liquidity

Liquidity has shifted, and continues to shift, from swaps referencing IBORs to swaps referencing RFRs. The first of the five factors under section 2(h)(2)(D)(ii) of the CEA requires the Commission to consider “the existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data” related to “a submission made [by a DCO].”

115

The Commission reviewed data from multiple sources, including but not limited to data from SDRs, data from DCOs, and other, publicly available data (

e.g.,

data published by ISDA). For purposes of this rulemaking, the Commission principally considered notional exposures and trading liquidity based on the Commission's own collected data.

115

7 U.S.C. 2(h)(2)(D)(ii).

a. Outstanding Notional Exposures and Trading Liquidity

The Commission reviewed data to determine whether there is an active market for the swap, including whether there is a measurable amount of notional exposure and whether the swap is traded regularly as reflected by trade count. The data presented in the NPRM and below indicates that there is sufficient outstanding notional exposure and trading liquidity in RFR OIS to support a clearing requirement determination.

116

Specifically, the data generally demonstrates that there is significant activity in new USD SOFR, GBP SONIA, EUR €STR, CHF SARON, JPY TONA, and SGD SORA OIS trading. The Commission compiled the data used in tables 2-5 below from transaction data collected under part 45 of the Commission's regulations.

117

This analysis also supports a DCO's ability to adequately risk manage the swap.

116

Data considered includes all material presented in the NPRM along with updated information presented in this final rule.

117

The data presented in these tables is the same as the data used to create the Commission's weekly swaps report. This data represents only those swaps that are reported to the CFTC's registered SDRs by swap market participants. The Commission's weekly swaps report currently incorporates data from three SDRs (CME Group SDR, DTCC Data Repository, and ICE Trade Vault). The raw SDR data has been filtered to represent, as accurately as possible, the market-facing trades that occur and excludes certain inter-affiliate transactions. For more information about the data components in the weekly swaps report, please visit the CFTC's web page available at:

https://www.cftc.gov/MarketReports/SwapsReports/index.htm.

In Table 2 below, the Commission provides estimates of notional transacted by month for various categories of RFR OIS, and IBOR fixed-to-floating and basis swaps, for the period beginning November 1, 2021, and ending April 30, 2022. The data in Table 2 generally indicates significant, and relatively steady or increasing, amounts of notional transacted in RFR OIS from November 2021 through April 2022. The data also illustrates that there was comparatively little notional transacted during the same time period in fixed-to-floating swaps referencing IBORs that ceased publication or became nonrepresentative in December 2021 and January 2022.

Significant amounts of notional were transacted in USD LIBOR fixed-to-floating swaps. In the NPRM, the Commission observed that while notional traded per month in USD SOFR OIS nearly doubled between December 2021 and January 2022, the amount of such notional transacted in January 2022 was still less than half that of the amount of notional transacted during the same month in USD LIBOR fixed-to-floating swaps. However, as shown below, in April 2022, notional transacted in USD SOFR OIS outpaced notional transacted in USD LIBOR fixed-to-floating swaps. Thus, while the transition of liquidity from USD LIBOR fixed-to-floating swaps to USD SOFR OIS is not yet complete, it is well underway.

Table 2—Estimated Notional Transacted

[USD billions]

118

Product

November

2021

December

2021

January

2022

February

2022

March

2022

April

2022

USD SOFR OIS

$2,384

$2,011

$3,918

$5,008

$6,439

$4,807

USD LIBOR Fixed-to-Floating Swaps

6,674

4,409

9,598

6,708

6,480

4,470

USD LIBOR-LIBOR Basis Swaps

1,049

602

292

476

626

490

EUR €STR OIS

3,394

2,022

3,488

7,716

7,706

7,371

EUR EONIA OIS

CHF SARON OIS

208

108

130

152

164

CHF LIBOR Fixed-to-Floating Swaps

GBP SONIA OIS

5,852

3,151

4,149

4,956

4,458

2,629

GBP LIBOR Fixed-to-Floating Swaps

340

205

JPY TONA OIS

425

360

377

434

576

1,372

JPY LIBOR Fixed-to-Floating Swaps

SGD SORA OIS

119

156

124

SGD SOR Fixed-to-Floating Swaps

Table 3 that follows this paragraph provides estimates of trade counts for the same categories of RFR and IBOR swaps during the same six-month period. The data in Table 3 indicates that, with regard to RFR OIS, monthly trade count generally increased or was relatively steady between November 2021 and April 2022, with an especially pronounced increase in the number of USD SOFR OIS transactions. Conversely, trade counts for swaps referencing IBORs that ceased or became nonrepresentative in December 2021 and January 2022 dropped off precipitously by January 2022. While there were still a significant number of USD LIBOR fixed-to-floating swap transactions during the six-month period that Table 3 measures, the monthly trade count for such transactions declined significantly during that period. Similarly, the monthly trade count for SGD SOR-VWAP fixed-to-floating swaps declined significantly between November 2021 and April 2022.

118

The data in Table 2 is based on the Commission's weekly swaps report data. In this table, a notional figure of $0 billion indicates that the notional transacted during a given time period was less than $1 billion.

Table 3—Estimated Trade Count

119

Product

November

2021

December

2021

January

2022

February

2022

March

2022

April

2022

USD SOFR OIS

18,484

19,110

41,728

45,696

66,644

54,439

USD LIBOR Fixed-to-Floating Swaps

48,245

29,309

30,749

25,061

27,284

20,184

USD LIBOR-LIBOR Basis Swaps

1,025

831

329

384

690

477

EUR €STR OIS

8,415

5,420

8,962

14,222

16,957

12,341

EUR EONIA OIS

CHF SARON OIS

2,698

1,574

2,283

2,775

3,380

1,913

CHF LIBOR Fixed-to-Floating Swaps

390

GBP SONIA OIS

24,275

12,913

17,654

21,139

21,396

14,656

GBP LIBOR Fixed-to-Floating Swaps

2,061

1,286

JPY TONA OIS

5,311

4,639

5,141

6,227

7,859

6,692

JPY LIBOR Fixed-to-Floating Swaps

577

SGD SORA OIS

2,422

1,846

3,794

3,715

4,652

3,277

SGD SOR Fixed-to-Floating Swaps

197

143

Table 4 that

follows this paragraph presents estimates of the percentage of notional cleared for the RFR OIS subject to this determination, based on notional transacted by month during the period beginning November 1, 2021, and ending April 30, 2022. The data in Table 4 illustrates that, with respect to the RFR OIS, significant amounts of notional are already being cleared voluntarily. The proportion of notional transacted each month from November 2021 through April 2022 that was cleared was consistently high—approaching 100%—with regard to OIS referencing each of USD SOFR, GBP SONIA, EUR €STR, CHF SARON, JPY TONA, and SGD SORA.

119

The data in Table 3 is based on the Commission's weekly swaps report data.

120

The data in Table 4 is based on the Commission's weekly swaps report data.

Table 4—Estimated Percentage of Notional Cleared

[Based on notional transacted by month]

120

OIS

November

2021

(%)

December

2021

(%)

January

2022

(%)

February

2022

(%)

March

2022

(%)

April

2022

(%)

USD SOFR

96.3

94.9

95.1

96.0

95.3

96.2

GBP SONIA

98.8

98.7

97.8

98.1

98.2

97.6

EUR €STR

99.0

99.2

97.6

99.0

98.4

98.9

CHF SARON

99.6

98.1

99.2

98.9

99.7

98.4

JPY TONA

96.6

98.7

98.0

98.1

98.5

99.3

SGD SORA

98.2

98.6

98.7

97.9

98.0

98.9

Table 5 that follows this paragraph presents a breakdown of notional transacted and trade count for the period beginning April 1, 2022 and ending April 30, 2022, by tenor, for the relevant RFR OIS. Table 5 illustrates that RFR OIS are being cleared across a wide range of maturities. By notional and trade count, most clearing activity occurs in RFR OIS dated between three months and 15 years. However, with respect to USD SOFR and GBP SONIA OIS in particular, there is also significant clearing activity in swaps dated 15 years or greater.

121

The data in Table 5 is based on the Commission's weekly swaps report data. Tenor length is approximate. In Table 5, a notional figure of $0 billion USD indicates that the notional transacted during a given time period was less than $1 billion.

Table 5—Estimated Cleared Notional and Trade Count by Tenor

[April 2022 transaction data]

121

OIS

Tenor

Notional cleared

(USD billions)

Trade count

USD SOFR

7 days-3 months

$282

384

3-6 months

230

463

6 months-1 year

211

853

1-5 years

1,900

13,507

5-15 years

1,736

27,698

>15 years

264

8,752

GBP SONIA

7 days-3 months

548

351

3-6 months

624

391

6 months-1 year

509

364

1-5 years

407

3,101

5-15 years

410

7,508

>15 years

2,600

EUR €STR

7 days-3 months

735

364

3-6 months

3,128

1,491

6 months-1 year

2,300

1,318

1-5 years

831

4,440

5-15 years

260

3,652

>15 years

817

CHF SARON

7 days-3 months

3-6 months

6 months-1 year

1-5 years

417

5-15 years

1,298

>15 year

146

JPY TONA

7 days-3 months

3-6 months

6 months-1 year

1-5 years

121

944

5-15 years

1,182

3,646

>15 years

1,887

SGD SORA

7 days-3 months

3-6 months

6 months-1 year

1-5 years

1,383

5-15 years

1,720

>15 years

In addition to this transaction-level data, Table 6 that follows this paragraph presents open swaps data illustrating outstanding notional in the RFR OIS subject to this determination.

122

The data in Table 6 represents swaps that have been cleared at CME, LCH, or Eurex and reported to the CFTC under part 39 of the Commission's regulations.

Table 6—Outstanding Notional as of April 29, 2022

122

OIS

Outstanding notional

(USD billions)

USD SOFR

$16,104

GBP SONIA

21,885

EUR €STR

16,099

CHF SARON

1,497

JPY TONA

4,035

SGD SORA

558

Finally, to demonstrate that clearing has expanded beyond the short-dated maturities for USD SOFR fixed-to-floating swaps, in particular, the data in Table 7 that follows this paragraph reflects the total volumes of cleared outstanding notional by tenor for USD LIBOR fixed-to-floating swaps and USD SOFR OIS. The Commission has determined that the data collectively indicates sufficient outstanding notional exposures and regular trading activity in RFR OIS for purposes of demonstrating the liquidity necessary for DCOs to risk manage these products and to support a clearing requirement. The Commission anticipates that RFR OIS notional exposures and trading activity will increase over time as markets continue to adopt RFR OIS in place of swaps referencing IBORs that have, or will by mid-2023, become unavailable. In addition to the extensive data presented and analyzed in this rulemaking, and as discussed in detail below, the Commission is basing this determination on its ongoing supervision of DCOs and its monitoring of the cleared interest rate swap market for purposes of risk surveillance.

123

The data in Table 7 represents swaps that have been cleared at CME, LCH, or Eurex and reported to the CFTC under part 39 of the Commission's regulations.

Table 7—Outstanding Notional as of April 26, 2022

123

Swap class

Tenor

Notional cleared

(USD billions)

USD LIBOR Fixed-to-Floating Swaps

0-1 months

$67

>1 month to 3 months

247

>3 months to 1 year

901

>1-3 years

1,674

>3-5 years

703

>5-7 years

439

>7-10 years

379

>10-15 years

233

>15-25 years

276

>25-35 years

124

>35 years

USD SOFR OIS

0-1 months

>1 month to 3 months

121

>3 months to 1 year

807

>1-3 years

1,274

>3-5 years

282

>5-7 years

123

>7-10 years

149

>10-15 years

>15-25 years

>25-35 years

>35 years

b. Pricing Data

The Commission regularly reviews pricing data for the RFR OIS subject to this determination and has found that these OIS are capable of being priced off of deep and liquid markets. Commission staff regularly receives and reviews margin model information from DCOs that includes particular procedures that they follow to ensure that market liquidity exists in order to close out a position in a stressed market, including the time required to determine a price.

124

Because of the stability of access to pricing data from these markets, the pricing data for the OIS that are the subject of this determination is generally viewed as being reliable. Based on this information, the Commission has determined that there is adequate pricing data to support required clearing of RFR OIS.

124

As discussed further below, Commission staff receives and reviews margin model information from the registered DCOs that clear these swaps, including information regarding how those DCOs would ensure that liquidity exists in order to exit a position in a stressed market. For purposes of the first statutory factor, the Commission considers possible periods of market stress, particularly when assessing whether there is sufficient liquidity and pricing data. Second Determination, 81 FR 71210 (noting that the Commission considered “the effect a new clearing mandate will have on a DCO's ability to withstand stressed market conditions” as part of its analysis in connection with the Second Determination).

In addition, as part of their regulation § 39.5(b) submissions, the registered DCOs that clear the RFR OIS subject to this determination provided information to support the Commission's conclusion that there exists adequate pricing data to justify a clearing requirement determination. In its regulation § 39.5(b) submissions, CME provided data regarding transaction volumes and market participation, and LCH provided information on daily volumes, and noted that pricing data for each of the RFR OIS that it clears is available from brokers. LCH also noted the range of maturities for which quotes can be obtained from brokers. In its submissions to the Commission, Eurex provided relevant language from its FCM Regulations and Clearing Conditions regarding determination of daily pricing. Eurex stated that it believes its reliance on Reuters for pricing data is accurate because it is a readily available and conventional source. Eurex noted that it also can receive pricing data from Bloomberg and has multiple backup sources.

c. Comments Received Regarding Factor (I)

Commenters provided support for the conclusion that sufficient liquidity and pricing data exists in RFR OIS markets to withstand stressed market conditions. Commenters also supported the DCOs' representations that adequate pricing data exists for DCO risk and default management of swaps referencing RFRs. CCP12 noted that SOFR liquidity improved materially in the past 12 months as a function of SOFR First and subsequent restrictions on new USD LIBOR activity that began on January 1, 2022. Citadel agreed that the data in the NPRM clearly demonstrates that there are significant outstanding notional amounts in USD SOFR OIS, and that trading in USD SOFR OIS continues to increase. Citadel also cited more recent data demonstrating that trading in USD SOFR OIS has steadily increase since January 2022, noting that over half of the USD interest rate derivatives market references SOFR as of May 2022. Citadel stated that this data demonstrates that significant outstanding notional exposures, trading liquidity, and adequate pricing data are present in the USD SOFR OIS market to support a clearing requirement determination.

CME stated that adequate pricing data for risk and default management purposes is available across all stated termination date ranges, and stated that CME is capable of offering uninterrupted clearing services for all instruments it clears even during times of market stress.

JSCC likewise noted that the JPY swaps market has now fully transitioned away from JPY LIBOR interest rate swaps and that as of the end of April 2022, JPY TONA OIS accounted for 97% of DV01 traded in the under two-year tenor category, in the interest rate derivatives market. Additionally, JSCC stated that, because the JPY swaps market has fully migrated from JPY LIBOR interest rate swaps to JPY TONA OIS, JSCC believes there is adequate pricing data in a liquid market across different tenors for DCO risk and default management of JPY TONA OIS. JSCC also regularly holds default management fire drills to verify that its default management process is robust and would be capable of managing a default in stressed market conditions.

Based on the data presented and analyzed above, and in light of the comments received, the Commission has determined that there are sufficient outstanding notional exposures, trading liquidity, and pricing information for the RFR OIS subject to this rulemaking to support a clearing requirement determination.

2. Factor (II)—Availability of Rule Framework, Capacity, Operational Expertise and Resources, and Credit Support Infrastructure

Section 2(h)(2)(D)(ii)(II) of the CEA requires the Commission to consider the availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the classes of swaps on terms that are consistent with current material terms and trading conventions. Based on their regulation § 39.5(b) submissions, as well as ongoing oversight, the Commission has determined that each of the registered DCOs has developed rule frameworks, capacity, operational expertise and resources, and credit support infrastructure to clear the interest rate swaps they currently clear, including the RFR OIS subject to this rulemaking, on terms that are consistent with the material terms and trading conventions on which those swaps are being traded. The Commission subjects each of the registered DCOs to ongoing review, risk surveillance, and examination to ensure compliance with the CEA's core principles and Commission regulations, including with respect to the submitted swaps.

125

In order to be registered with the Commission, a DCO must comply with the DCO core principles under section 5b of the CEA and applicable Commission regulations. Once a DCO is registered with the Commission, Commission staff periodically examine each DCO to determine whether the DCO is maintaining compliance with the CEA and Commission regulations. In addition, Commission staff monitors the risks posed to and by DCOs, clearing members, and market participants, and conducts independent stress testing.

Each of the registered DCOs has procedures pursuant to which they regularly review their RFR OIS clearing in order to confirm or adjust margin and other risk management tools. When reviewing each of the registered DCOs' risk management tools, the Commission considers whether the DCO is able to manage risk during stressed market conditions to be one of the most significant considerations. Each of the registered DCOs has developed detailed risk management practices, including a description of risk factors considered when establishing margin levels.

126

The Commission reviews and oversees each of the registered DCOs' risk management practices and development of margin models. Margin models are further refined by stress testing and daily back testing. The Commission also considers stress testing and back testing when assessing whether each of the registered DCOs can clear swaps safely during stressed market conditions.

126

E.g.,

historical volatility, intraday volatility, seasonal volatility, liquidity, open interest, market concentration, and potential moves to default. For additional information, each of CME, LCH, and Eurex has published a document outlining its compliance with the Principles for Financial Market Infrastructures (PFMI) published by the Committee on Payments and Market Infrastructures (CPMI; formerly, CPSS) and IOSCO. CPSS-IOSCO Principles for Financial Market Infrastructure (PFMI), Apr. 16, 2012, available at

https://www.bis.org/cpmi/publ/d101.htm. See

CME, CME Clearing: PFMI Disclosure, Nov. 30, 2021, available at

https://www.cmegroup.com/clearing/risk-management/files/cme-clearing-principles-for-financial-market-infrastructures-disclosure.pdf;

LCH PFMI Self-Assessment 2020, available at

https://www.lch.com/system/files/media_root/CPMI%20IOSCO%20Self%20Qualitative%20Assessment%20of%20LCH%20LTD_1.pdf;

and Eurex Clearing AG, Assessment of Eurex Clearing AG's compliance against the PFMI and disclosure framework associated to the PFMI, Feb. 16, 2021, available at

https://www.eurex.com/resource/blob/2446522/22f4869a8649f15b54a1e86bf635c63c/data/cpss-iosco-pfmi_assessment_2020_en.pdf.

The registered DCOs clearing the RFR OIS subject to this determination design and conduct stress tests, and Commission staff monitors development of these stress tests. Each of the registered DCOs also conducts reverse stress tests to ensure that their default funds are sized appropriately and to ascertain whether any changes to their financial resources or margin models are necessary.

127

Commission staff monitors markets in real-time and also performs stress tests against the DCOs' margin models and may recommend changes to a margin model. The registered DCOs conduct back testing on a daily basis to ensure that the margin models capture market movements for member portfolios.

128

127

Reverse stress testing uses plausible market movements that could deplete guaranty funds and cause large losses for top clearing members. For example, CME, LCH, and Eurex may use scenarios for stress testing and reverse stress testing that capture, among other things, historical price volatilities, shifts in price determinants and yield curves, multiple defaults over various time horizons, and simultaneous pressures in funding and asset markets.

128

Back testing tests margin models to determine whether they are performing as intended, and checks whether margin models produce margin coverage levels that meet the DCO's established standards. Back testing helps CME, LCH, and Eurex determine whether their clearing members satisfy the required margin coverage levels and liquidation timeframe.

Before offering a new product for clearing, each of the DCOs considers stress tests and back testing results in determining whether it has sufficient financial resources to offer new clearing services. The Commission also reviews initial margin models and default resources to ensure that the DCOs can risk manage their portfolio of products offered for clearing. This combination of stress testing and back testing in anticipation of offering swaps for clearing provides the registered DCOs with greater certainty that their offerings will be risk-managed appropriately. The process of stress testing and back testing also gives DCOs practice incorporating new swaps into their models. In addition to the Commission's surveillance and oversight, each of the registered DCOs continues to monitor and test their margin models over time so that they can operate effectively in stressed and non-stressed market environments. Registered DCOs review and validate their margin models regularly.

129

Exempt DCOs, such as JSCC and HKEX, are subject to oversight by their home country regulators, along with regulations regarding risk management. For instance, JSCC is subject to the supervision of JFSA. JSCC, Principles for Financial Market Infrastructures Disclosure, Mar. 31, 2021, at 19, available at

https://www.jpx.co.jp/jscc/en/company/cimhll0000000osu-att/JSCC_PFMI_Disclosure_20210331_EN.pdf.

In granting JSCC's order of exemption, the Commission determined that JSCC is subject to comparable, comprehensive supervision and regulation by its home country regulator.

See

JSCC Order of Exemption from Registration, Oct. 26, 2015, at 1, available at

http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf;

JSCC Amended Order of Exemption from Registration, May 15, 2017, at 1, available at

https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf.

Among other requirements, JSCC must provide the Commission with an annual certification that it continues to observe the PFMI in all material respects, and the Commission must receive annually, at JSCC's request, a certification from JFSA that JSCC is in good regulatory standing. Likewise, HKEX is overseen by HKMA, which provides ongoing supervision, and must meet the same requirements for an exempt DCO as JSCC.

See

HKFE Clearing Corporation Limited, Principles for Financial Market Infrastructures Disclosure, Feb. 2021, available at

https://www.hkex.com.hk/-/media/HKEX-Market/Services/Clearing/Listed-Derivatives/PFMI/HKCC_PFMI_Disclosure_Feb2021.pdf?la=en.

Each DCO monitors and manages credit risk exposure by asset class, clearing member, account, or individual customer. They manage credit risk by establishing position and concentration limits based on product type or counterparty. These limits reduce potential market risks so that DCOs are better able to withstand stressed market conditions. Each of the DCOs monitors exposure concentrations and may require additional margin deposits for clearing members with weak credit scores, with large or concentrated positions, with positions that are illiquid or exhibit correlation with the member itself, and/or where the member has particularly large exposures under stress scenarios. DCOs also can call for additional margin, on top of collecting initial and variation margin, to meet the current DCO exposure and protect against stressed market conditions.

130

As a general matter, any DCO offering RFR OIS for clearing, including exempt DCOs, would follow

this risk management approach with regard to offering these swaps for clearing.

In support of its ability to clear RFR OIS subject to this determination, CME's regulation § 39.5(b) submissions cite to its rulebook to demonstrate the availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear interest rate swap contracts on terms that are consistent with the material terms and trading conventions on which the contracts are traded. LCH's submissions state that it has a well-developed rule framework and support infrastructure for clearing interest rate swaps, which it leverages to offer clearing services for RFR OIS. Eurex's submissions state that Eurex has a well-developed rule framework and support infrastructure for clearing RFR OIS. Eurex further states that it has the appropriate risk management, operations, and technology capabilities to ensure that it is able to liquidate positions in such swaps in an orderly manner in the event of a clearing member default, and that the RFR OIS are subject to margin and clearing fund requirements set forth in Eurex's FCM Regulations and Clearing Conditions.

Commenters supported these positions. In particular, Citadel commented that it is clear that market participants, including FCMs, have the operational and technological infrastructure in place to support the clearing of USD SOFR OIS, pointing out that almost all USD SOFR OIS transactions are cleared. Citadel stated that this significant voluntary clearing activity demonstrates that market participants are confident in current DCO offerings.

For all of these reasons, the Commission has determined that there are available rule frameworks, capacity, operational expertise and resources, and credit support infrastructures, consistent with material terms and trading conventions, to support the required clearing of the RFR OIS subject to this clearing requirement determination. The application of DCO risk management practices to the RFR OIS subject to this clearing requirement determination should ensure that the swaps subject to this rulemaking can be cleared safely, even during times of market stress.

131

For additional information related to this factor, please see the public disclosures made by CME, Eurex and LCH. CME, CME Clearing: Principles for Financial Market Infrastructures Disclosure, Nov. 30, 2021, available at

https://www.cmegroup.com/clearing/risk-management/files/cme-clearing-principles-for-financial-market-infrastructures-disclosure.pdf;

LCH Ltd., CPMI—IOSCO Self-Assessment 2020, Mar. 31, 2020, available at

https://www.lch.com/system/files/media_root/CPMI%20IOSCO%20Self%20Qualitative%20Assessment%20of%20LCH%20LTD_1.pdf;

Eurex, “Assessment of Eurex Clearing AG's compliance against the CPMI-IOSCO Principles for financial market infrastructures (PFMI) and the disclosure framework associated to the PFMIs,” Feb. 28, 2022, available at

https://www.eurex.com/resource/blob/2973806/422b675a412d96e3c8cf97a570b899a2/data/cpss-iosco-pfmi_assessment_2021_en.pdf.

As explained above, similar disclosures are available for JSCC and HKEX.

3. Factor (III)—Effect on the Mitigation of Systemic Risk

Section 2(h)(2)(D)(ii)(III) of the CEA requires the Commission to consider the effect of the clearing requirement on the mitigation of systemic risk in light of the size of the market for such contract and the resources of the DCO available to clear the contract. As presented in the data and discussion above, the Commission has concluded that the market for each RFR OIS subject to this determination is significant, and mitigating counterparty credit risk through clearing likely will reduce systemic risk in the interest rate swap market generally. While not every individual RFR OIS market has large outstanding notional exposures, each such market is important, and as liquidity shifts from IBOR swaps to RFR OIS, continuity of clearing for RFR OIS serves to reduce systemic risk.

In its regulation § 39.5(b) submissions, CME explains the benefits of centralized clearing, including freer counterparty credit lines, enhanced risk management, operational efficiencies, and ease of offsetting risk exposures. LCH's submissions note that clearing avoids complex bilateral relationships, provides for default management, and enhances transparency into the risks posed by swap positions. Eurex's submissions highlight the benefits of reduction of counterparty risk, margin and collateral efficiencies, protections for customer assets, and legal certainty. Each DCO's submissions indicate that they maintain adequate resources to clear the swaps that are the subject of this rulemaking. Additionally, JSCC noted that it has been clearing JPY TONA OIS since 2014 “without facing any challenge from a governance, rule framework, operational, resourcing, or credit support infrastructure perspective.”

132

JSCC Comment Letter.

CME commented on the RFI that mitigation of systemic risk is one of the key advantages of centralized clearing over bilateral arrangements.

133

Similarly, LSEG stated that “a clearing requirement will mitigate systemic risk, making sure that USD SOFR risk moves from the bilateral space to the cleared market to the necessary extent.”

134

In its RFI response, Citadel noted that “[a]pplying a clearing requirement to OTC derivatives referencing SOFR will ensure these markets develop as centrally-cleared markets,” and further noted that “central clearing provides greater systemic risk mitigation than bilateral margining for uncleared swaps.”

135

TD Bank agreed that a clearing requirement for USD SOFR swaps “might increase the clearing rate and therefore mitigate[] systemic risk even more,” but TD Bank also noted that the “bulk” of USD SOFR swaps are already voluntarily cleared.

136

133

CME RFI Letter.

134

LSEG RFI Letter.

135

Citadel RFI Letter.

136

TD Bank RFI Letter.