No-action relief to facilitate an orderly transition of swaps from inter-bank offered rates to alternative benchmarks.

Summary: No-action relief to facilitate an orderly transition of swaps from inter-bank offered rates to alternative benchmarks.

CFTC Letter No. 19-26 No-Action December 17, 2019

Division of Swap Dealer and

Joshua B. Sterling

Intermediary Oversight

Director

Re:

No-Action Positions to Facilitate an Orderly Transition of Swaps from

Inter-Bank Offered Rates to Alternative Benchmarks

Ladies and Gentlemen:

This letter is in response to a request received by the Division of Swap Dealer and

Intermediary Oversight (“DSIO”) of the Commodity Futures Trading Commission

(“CFTC” or “Commission”) from the Alternative Reference Rates Committee

(“ARRC”) on behalf of its members that are swap dealers (“SDs”) registered with the

Commission and ARRC members that are otherwise subject to Commission regulations.

In connection with an industry-wide initiative associated with the transition of swaps

that reference the London Interbank Offered Rate (“LIBOR”) and other interbank

offered rates (collectively with LIBOR, the “IBORs”) to swaps that reference alternative

benchmarks, ARRC requests DSIO to provide no-action relief for failure to comply with

certain Commission regulations in connection with the process of amending certain

uncleared swaps referencing the IBORs.

I.

Introduction and Background

In response to significant concerns regarding the reliability and robustness of the

IBORs, the Financial Stability Board (“FSB”) called for the identification of alternative

benchmarks to the IBORs and transition plans to support implementation.1 The U.S

ion regulations in connection with the process of amending certain

uncleared swaps referencing the IBORs.

I.

Introduction and Background

In response to significant concerns regarding the reliability and robustness of the

IBORs, the Financial Stability Board (“FSB”) called for the identification of alternative

benchmarks to the IBORs and transition plans to support implementation.1 The U.S.

Financial Stability Oversight Council (“FSOC”) has made repeated calls for member

1 See FSB statement, “Interest rate benchmark reform – overnight risk-free rates and term rates” (July 12,

2018), available at: https://www.fsb.org/2018/07/interest-rate-benchmark-reform-overnight-risk-free-

rates-and-term-rates/ (“Because derivatives represent a particularly large exposure to certain IBORs, and

because these prospective [risk-free rate] RFR-derived term rates can only be robustly created if

derivatives markets on the overnight RFRs are actively and predominantly used, the FSB believes that

transition of most derivatives to the more robust overnight RFRs is important to ensuring financial

stability.”). See also FSB Reforming Major Interest Rate Benchmarks (July 22, 2014), available at:

https://www.fsb.org/wp-content/uploads/r_140722.pdf, and IOSCO Principles for Financial

Benchmarks: Final Report (July 2013), available at:

https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

nterest Rate Benchmarks (July 22, 2014), available at:

https://www.fsb.org/wp-content/uploads/r_140722.pdf, and IOSCO Principles for Financial

Benchmarks: Final Report (July 2013), available at:

https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

LIBOR Transition No-Action

Page 2

agencies to work closely with market participants to identify and mitigate risks that may

arise during an IBOR transition process.2 In response to ongoing efforts such as these,

central banks in various jurisdictions, including the United States, the United Kingdom,

Japan, Switzerland, and the European Union, have convened working groups of market

participant and official sector representatives.

In 2014, the Federal Reserve Bank of New York convened ARRC in order to identify best

practices for U.S. alternative reference rates, identify best practices for contract

robustness, develop an adoption plan and create an implementation plan with metrics

of success and a timeline.3

In June 2017, ARRC identified a broad Treasuries repo financing rate, the secured

overnight financing rate (“SOFR”), as the preferred alternative benchmark to U.S.

Dollar LIBOR for certain new U.S. Dollar derivatives and other financial contracts.4 It

also published an updated “Paced Transition Plan” outlining the steps that ARRC,

central counterparties, and other market participants intend to take in order to help

build the liquidity required to support the issuance of, and transition to, contracts

referencing SOFR.5 In accordance with ARRC’s Paced Transition Plan6 and similar

plans in other jurisdictions, trading of SOFR-based derivatives and other financial

2 See, e.g., FSOC 2018 Annual Report, pages 4-5, 8-9, 108-109 (Dec

end to take in order to help

build the liquidity required to support the issuance of, and transition to, contracts

referencing SOFR.5 In accordance with ARRC’s Paced Transition Plan6 and similar

plans in other jurisdictions, trading of SOFR-based derivatives and other financial

2 See, e.g., FSOC 2018 Annual Report, pages 4-5, 8-9, 108-109 (Dec. 19, 2018), available at:

https://home.treasury.gov/system/files/261/FSOC2018AnnualReport.pdf (“The uncertainty surrounding

LIBOR’s sustainability may threaten individual financial institutions and the U.S. financial system more

broadly. Specifically, without advance preparation, a sudden cessation of such a heavily used reference

rate could cause considerable disruptions to, and uncertainties around, the large flows of LIBOR-related

payments. It could also impair the functioning of a variety of markets, including business and consumer

lending …. The Council recommends that member agencies work closely with market participants to

identify and mitigate risks from potential dislocations during the transition process.”); see also FSOC

2013

Annual

Report,

pages

6,

14-15,

137,

140-142

(June

2013)

available

at:

https://www.treasury.gov/initiatives/fsoc/Documents/FSOC%202013%20Annual%20Report.pdf.

3 Similar committees have been established in other jurisdictions, including the United Kingdom, Japan,

Switzerland, and the European Union. In March 2018, ARRC was reconstituted with an expanded

participation by additional financial institutions and trade organizations, and with additional government

agencies added as ex officio members. See ARRC, Press Release, March 7, 2018, available at

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-March-7-2018-press-

release.pdf.

4 See ARRC, Press Release, June 22, 2017, available at

https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-

2017.pdf

nizations, and with additional government

agencies added as ex officio members. See ARRC, Press Release, March 7, 2018, available at

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-March-7-2018-press-

release.pdf.

4 See ARRC, Press Release, June 22, 2017, available at

https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-

2017.pdf.

5

See

ARRC,

Second

Report,

pp.17-24,

March

5,

2018,

available

at

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

6 See ARRC, 2019 Incremental Objectives, available at:

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARRC_2019_Incremental_Objec

tives.pdf.

LIBOR Transition No-Action

Page 3

contracts linked to alternative benchmarks commenced in 2018 and has expanded in

scope in 2019.7

In July 2017, the U.K. Financial Conduct Authority (“FCA”), which regulates ICE

Benchmark Administration Limited, the administrator of ICE LIBOR, announced that it

has sought commitments from LIBOR panel banks to continue to contribute to LIBOR

through the end of 2021, but that the FCA will not use its powers to compel or persuade

contributions beyond such date.

A benchmark rate is a critical term for calculating payments under a swap. Due to the

potential discontinuation of LIBOR at the end of 2021, market participants face

uncertainty about the way their swaps referencing the LIBOR benchmark and other

IBORs will operate after the permanent discontinuation date without a reliable

benchmark rate. In many instances, these firms may decide to amend existing swaps to

replace an IBOR before the IBOR becomes discontinued. Such amendments may also

trigger follow-on amendments8 that the counterparties determine are necessary to

maintain the economics of the swap.

II

e LIBOR benchmark and other

IBORs will operate after the permanent discontinuation date without a reliable

benchmark rate. In many instances, these firms may decide to amend existing swaps to

replace an IBOR before the IBOR becomes discontinued. Such amendments may also

trigger follow-on amendments8 that the counterparties determine are necessary to

maintain the economics of the swap.

II.

Consideration of ARRC’s Request

In order to facilitate the transition from IBORs to alternative reference rates, ARRC

requests that DSIO provide the relief discussed below with regard to certain

Commission regulations applicable to uncleared swaps.

A.

Definitions

For purposes of this letter, the IBORs include, but are not limited to, LIBOR, the Tokyo

Interbank Offered Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore

Interbank Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), the Euro

Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered Rate

(HIBOR). However, the IBORs may not be the only reference rates that are phased out

or become impaired. Thus, in addition to the IBORs, the relief described in this letter

also will apply to conversions away from (i) any other interest rate that the parties to a

swap reasonably expect to be discontinued or reasonably determines has lost its

relevance as a reliable benchmark due to a significant impairment; or (ii) any other

reference rate that succeeds any of the foregoing (the IBORs and any other rate meeting

7 See ARRC, SOFR: A Year in Review (Apr. 2019), available at:

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/SOFR_Anniversary.pdf, and

ISDA, Interest Rate Benchmarks Review: Full Year 2018 and the Fourth Quarter of 2018 (Jan. 2019),

available at: https://www.isda.org/a/xogME/Benchmarks-Full-Year-2018.pdf

y other rate meeting

7 See ARRC, SOFR: A Year in Review (Apr. 2019), available at:

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/SOFR_Anniversary.pdf, and

ISDA, Interest Rate Benchmarks Review: Full Year 2018 and the Fourth Quarter of 2018 (Jan. 2019),

available at: https://www.isda.org/a/xogME/Benchmarks-Full-Year-2018.pdf.

8 Follow-on amendments may include a variety of spread adjustments resulting from the move from a

term rate to an overnight rate, from unsecured to secured, or could result from a change in tenor, among

others.

LIBOR Transition No-Action

Page 4

either of the foregoing criterion are hereinafter collectively referred to as “Impaired

Reference Rates” or “IRRs”).

DSIO recognizes that by defining IRRs in this manner, market participants will be

permitted to make more than one amendment to the same swap or portfolio of swaps

before settling on an alternative benchmark that adequately meets the counterparties’

commercial needs. To that end, this letter is intended to address situations in which an

alternative benchmark may become an IRR at some point in the future if the parties to a

swap reasonably expect the alternative benchmark to be discontinued or reasonably

determine it has lost its relevance as a reliable benchmark due to a significant

impairment. But it is also intended to permit further amendment or replacement of

such an alternative benchmark even if such rate is not impaired but simply does not

meet the counterparties’ commercial needs, so long as the original reference rate for the

swap was an IBOR or met the other criterion above.9 DSIO intends to provide this

degree of flexibility for the public policy reasons discussed herein. DSIO expects that

any replacement rate would be negotiated between the parties after assessing its

complexity, safety and soundness, and taking into consideration appropriate risk

management practices.

B

the original reference rate for the

swap was an IBOR or met the other criterion above.9 DSIO intends to provide this

degree of flexibility for the public policy reasons discussed herein. DSIO expects that

any replacement rate would be negotiated between the parties after assessing its

complexity, safety and soundness, and taking into consideration appropriate risk

management practices.

B.

Anticipated Amendments and Conversion Models

To prepare for the possible permanent cessation of certain IRRs, and in order to

facilitate the adoption of alternative reference rates, ARRC represents that market

participants will take the following actions:



Amendment of Uncleared Swaps to Include IRR Fallback Provisions.

In order to protect against any permanent cessation of IRR publication, market

participants are expected to amend IRR-linked uncleared swaps to include new

fallbacks to alternative reference rates that are triggered when an IRR is

permanently discontinued or is determined to be non-representative by the

benchmark administrator or the relevant authority in a jurisdiction. An

amendment to a swap solely for the purpose of including such fallbacks triggered

only by permanent discontinuation of an IRR or determination that an IRR is

non-representative by the benchmark administrator or the relevant authority in a

jurisdiction is hereinafter referred to as a “Fallback Amendment”.

9 This flexibility is also intended to harmonize the relief provided by this letter with certain proposed

amendments to the uncleared swap margin rules of the Prudential Regulators related to LIBOR cessation.

See Margin and Capital Requirements for Covered Swap Entities, 84 FR 59970 (Nov. 7, 2019)

(“Prudential Regulators’ Proposed Amendments”)

9 This flexibility is also intended to harmonize the relief provided by this letter with certain proposed

amendments to the uncleared swap margin rules of the Prudential Regulators related to LIBOR cessation.

See Margin and Capital Requirements for Covered Swap Entities, 84 FR 59970 (Nov. 7, 2019)

(“Prudential Regulators’ Proposed Amendments”). For example, as proposed, § 45.1(h)(3)(i)(C)

of the OCC’s uncleared swap margin rules would permit an SD subject to the OCC’s rules to replace an

IBOR with a temporary interest rate and later replace the temporary interest rate with a permanent

interest rate.

LIBOR Transition No-Action

Page 5



Amendment of Uncleared Swaps to Replace IRRs with Alternate

Reference Rates. Some market participants may choose to voluntarily convert

IRR-linked uncleared swaps to alternative reference rates prior to any permanent

cessation of the applicable IRR or determination that an IRR is non-

representative by the benchmark administrator or the relevant authority in a

jurisdiction (“Replacement Rate Amendment”).

DSIO understands that a universal protocol is currently being developed by the

International Swaps and Derivatives Association (“ISDA”) with respect to Fallback

Amendments. The protocol will be based on numerous consultations and commentary

from the industry.10 ISDA expects to finalize its protocol and its associated templates by

the end of 2019 or in early 2020.11 It is expected that, by adhering to the ISDA protocol,

the parties to an uncleared swap would be able to make a Fallback Amendment for

multiple swaps without extensive, bilateral negotiations.

To accomplish a large volume of Replacement Rate Amendments, ARRC identified

certain methods of conversion considered likely to be used by market participants when

effecting a Replacement Rate Amendment, including, but not limited to, the following:

1

col,

the parties to an uncleared swap would be able to make a Fallback Amendment for

multiple swaps without extensive, bilateral negotiations.

To accomplish a large volume of Replacement Rate Amendments, ARRC identified

certain methods of conversion considered likely to be used by market participants when

effecting a Replacement Rate Amendment, including, but not limited to, the following:

1.

Single trade conversion for equivalent risk: Converting an IRR referenced

in an uncleared swap to an applicable alternative reference rate with a revised

spread, an additional spread, or a change to the fixed rate, to achieve equivalent

risk.

2.

Single trade conversion with payment: Converting an IRR referenced in an

uncleared swap to an alternative reference rate plus a payment to achieve

equivalent risk rather than a change to the ongoing spread or fixed rate.

3.

Single trade conversion (with or without payment) for non-equivalent

risk: Converting an IRR referenced in an uncleared swap to an alternative

reference rate, with a change in risk of a hedge (e.g., cash position) for all, or part,

of difference.

4.

Bilateral one-for-one swap portfolio conversion: Converting multiple

uncleared swaps referencing an IRR on a one-for-one basis to swaps referencing

an alternative reference rate using similar variations on resulting swaps as

described in Conversion Models 1 – 3 above, which would not be the same across

the swap portfolio (e.g., spread may only need to be changed on one trade).

10 See ISDA publications related to Benchmark Fallbacks, available at

https://www.isda.org/tag/benchmark-fallbacks/.

11 See ISDA Timeline for Implementation of IBOR Fallbacks, available at:

https://www.isda.org/2019/02/28/timeline-for-implementation-of-ibor-fallbacks/.

the swap portfolio (e.g., spread may only need to be changed on one trade).

10 See ISDA publications related to Benchmark Fallbacks, available at

https://www.isda.org/tag/benchmark-fallbacks/.

11 See ISDA Timeline for Implementation of IBOR Fallbacks, available at:

https://www.isda.org/2019/02/28/timeline-for-implementation-of-ibor-fallbacks/.

LIBOR Transition No-Action

Page 6

5.

Bilateral swap portfolio conversion with compression: Converting

multiple uncleared swaps referencing an IRR to a portfolio of uncleared swaps

with equivalent risk referencing an alternative reference rate plus a spread (or to

an alternative reference rate plus a payment for the basis) resulting in fewer

outstanding swaps between the two counterparties.

6.

Bilateral conversion of a swap portfolio involving multiple SDs:

Converting multiple uncleared swaps referencing an IRR with more than one SD

to uncleared swaps referencing an alternative reference rate with a single SD

(with or without foregoing adjustments).

Based on discussions with ARRC, DSIO understands that a Fallback Amendment or

Replacement Rate Amendment accomplished pursuant to one or more of these

conversion methods may require a number of ancillary changes to existing trade terms

to conform to different market conventions, resulting, for example, in different reset

dates, fixed/floating leg payment dates, business day conventions, and day count

fractions. However, to ensure that this letter is consistent with no-action letters

previously issued by staff12 and that counterparties are not using the relief provided in

this letter as an opportunity to renegotiate economic terms or otherwise engage in price-

forming activity, the relief provided by this letter is subject to a limitation on

amendments that (i) extend the maximum maturity of a swap or a portfolio of swaps, or

his letter is consistent with no-action letters

previously issued by staff12 and that counterparties are not using the relief provided in

this letter as an opportunity to renegotiate economic terms or otherwise engage in price-

forming activity, the relief provided by this letter is subject to a limitation on

amendments that (i) extend the maximum maturity of a swap or a portfolio of swaps, or

(ii) increase the total effective notional amount of a swap or the aggregate total effective

notional amount of a portfolio of swaps.13

DSIO recognizes that counterparties employing any of the foregoing conversion

methods to effectuate Replacement Rate Amendments may complete the necessary

amendments by adherence to an ISDA-led protocol, by contractual amendment of an

agreement or confirmation, or by execution of new contract(s) in replacement of and

immediately upon termination of existing contract(s) (i.e., “tear-ups”).

In addition, DSIO understands that some market participants may seek to transition

swap portfolios referencing IRRs to an alternative reference rate by means of one or

more new basis swaps that would swap the entire IRR basis of a portfolio with an

alternative reference rate basis without amending any of the swaps referencing IRRs

(such transition method, the “Basis Swap Method”). On behalf of SDs that may

participate in the Basis Swap Method with a counterparty with respect to a portfolio of

Legacy Swaps (as defined below), ARRC is seeking relief that would permit such SDs to

12 See, e.g., DSIO Staff No-Action Letter 19-13 (no-action relief limited to conducting compression

exercises in which the maximum maturity of the swap portfolios is not increased, among other

conditions).

13 These limitations are intended to harmonize the relief provided by this letter with certain proposed

amendments to the uncleared swap margin rules of the Prudential Regulators related to LIBOR cessation

SIO Staff No-Action Letter 19-13 (no-action relief limited to conducting compression

exercises in which the maximum maturity of the swap portfolios is not increased, among other

conditions).

13 These limitations are intended to harmonize the relief provided by this letter with certain proposed

amendments to the uncleared swap margin rules of the Prudential Regulators related to LIBOR cessation.

See Prudential Regulators’ Proposed Amendments, 84 FR at 59984.

LIBOR Transition No-Action

Page 7

treat the resulting basis swaps as Legacy Swaps for purposes of compliance with the

Commission’s uncleared swap margin requirements.

C.

Legacy and Pre-Transition Uncleared Swaps

In order to facilitate the actions described above in support of the IRR regulatory reform

agenda, ARRC requests clarity regarding the regulatory treatment of:

(A)

Legacy Swaps: Uncleared swaps referencing IRRs that were entered into prior

to the compliance date of a particular regulatory requirement, with the result that

such requirement did not apply to those swaps (“Legacy Swaps”). For example,

an uncleared swap entered into prior to the applicable compliance date of the

CFTC uncleared margin rules would be a Legacy Swap for purposes of the

uncleared margin rules;14 and

(B)

Pre-Transition Swaps: Uncleared swaps, including, where relevant, Legacy

Swaps, referencing IRRs that were entered into prior to the effective date of a

Fallback Amendment or Replacement Rate Amendment (“Pre-Transition

Swaps”).

As detailed below, to facilitate an efficient transition of Legacy Swaps and Pre-

Transition Swaps from referencing an IRR to referencing an alternative reference rate,

ARRC requests that DSIO provide a no-action position with respect to:

(1)

SD registration threshold requirements;

(2)

SD uncleared swap margin requirements;

(3)

SD business conduct requirements;

(4)

SD confirmation, documentation and reconciliation requirements; and

ransition of Legacy Swaps and Pre-

Transition Swaps from referencing an IRR to referencing an alternative reference rate,

ARRC requests that DSIO provide a no-action position with respect to:

(1)

SD registration threshold requirements;

(2)

SD uncleared swap margin requirements;

(3)

SD business conduct requirements;

(4)

SD confirmation, documentation and reconciliation requirements; and

(5)

Certain regulatory requirements applicable to certain end-users.

ARRC argues that Fallback Amendments and Replacement Rate Amendments to Legacy

Swaps required as part of a global reform agenda do not reflect market participants

14 The Commission’s Office of the Chief Economist (“OCE”) recently published an analysis to estimate,

among other things, the population of uncleared swap positions that constitute Legacy Swaps. See Legacy

Swaps under the CFTC’s Uncleared Margin and Clearing Rules (May 22, 2019), available at:

https://www.cftc.gov/node/216426. In particular, OCE analyzed the notional of uncleared swaps

outstanding as of December 2018. Focusing strictly on the entity pairs covered in phases 1 through 3 of

the uncleared margin rule, the three phases implemented as of the December 2018 reference date, OCE

estimated that approximately 41% of credit default swaps (“CDS”), 5% of forex products, and 40% of

interest rate swaps (“IRS”) were Legacy Swaps. OCE notes that many of these Legacy Swaps will be

terminated prior to maturity for a variety of reasons. Swaps executed by SDs with counterparties not yet

subject to the initial margin requirements (i.e., phases 4 and 5) may become Legacy Swaps as defined

above to the extent such are still in effect on the compliance dates for those phases.

of

interest rate swaps (“IRS”) were Legacy Swaps. OCE notes that many of these Legacy Swaps will be

terminated prior to maturity for a variety of reasons. Swaps executed by SDs with counterparties not yet

subject to the initial margin requirements (i.e., phases 4 and 5) may become Legacy Swaps as defined

above to the extent such are still in effect on the compliance dates for those phases.

LIBOR Transition No-Action

Page 8

voluntarily assuming risk or exercising independent discretion. With respect to both

Legacy Swaps and Pre-Transition Swaps, as detailed below, ARRC concludes that relief

from certain Commission regulations would eliminate significant impediments to the

efficient processing of large volumes of swaps and would facilitate the orderly transition

away from the use of IRRs, which is an action encouraged by authorities around the

world.

DSIO supports such transition and has concluded that amendments to swaps necessary

to accomplish it should (i) not cause a loss of legacy status resulting in a swap becoming

subject to regulatory requirements to which it was previously not subject; and (ii)

receive relief appropriate to facilitate an orderly market-wide transition consistent with

regulatory expectations.

III.

DSIO No-Action Positions

For purposes of the DSIO no-action positions below, the amendment of an uncleared

swap that references an IRR solely to: (i) include new fallbacks to alternative reference

rates triggered only by permanent discontinuation of an IRR or determination that an

IRR is non-representative by the benchmark administrator or the relevant authority in a

jurisdiction; or (ii) accommodate the replacement of an IRR, is referred to as a

“Qualifying Amendment.” As discussed above, a Qualifying Amendment may

include ancillary changes to existing trade terms to conform to different market

conventions, resulting, for example, in different reset dates, fixed/floating leg payment

dates, business day conventions, and day count fractions

authority in a

jurisdiction; or (ii) accommodate the replacement of an IRR, is referred to as a

“Qualifying Amendment.” As discussed above, a Qualifying Amendment may

include ancillary changes to existing trade terms to conform to different market

conventions, resulting, for example, in different reset dates, fixed/floating leg payment

dates, business day conventions, and day count fractions. However, a Qualifying

Amendment will not include any amendment that (i) extends the maximum maturity of

a swap or a portfolio of swaps beyond what is necessary to accommodate the differences

between market conventions for an IRR and its replacement, or (ii) increases the total

effective notional amount of a swap or the aggregate total effective notional amount of a

portfolio of swaps beyond what is necessary to accommodate the differences between

market conventions for an IRR and its replacement.15

15 ARRC recommended that any relief permit changes in maturity or total effective notional amount that

are directly related to a transition from an IRR to an alternative rate. ARRC argued that the liquidity for

alternative rates may develop differently at different ends of the maturity spectrum (as compared to IBOR

swaps), such that constructing an amended or replacement position that is economically equivalent to an

existing IBOR portfolio may necessitate a shift in the total effective notional amount or maturity. As a

further example, ARRC explained that an IBOR conversion may also impact the total effective notional

amount as a result of differing day count fraction conventions. If, for example, a fixed-for-floating IBOR

swap uses a 30/360 day count fraction convention, but the market standard for an equivalent alternative

rate uses an actual/360 day count fraction convention, the notional amount would need to be adjusted to

ensure that the payment amounts on the fixed leg of the alternative rate swap are the same compared to

the IBOR swap

count fraction conventions. If, for example, a fixed-for-floating IBOR

swap uses a 30/360 day count fraction convention, but the market standard for an equivalent alternative

rate uses an actual/360 day count fraction convention, the notional amount would need to be adjusted to

ensure that the payment amounts on the fixed leg of the alternative rate swap are the same compared to

the IBOR swap. See Comment Letter on Proposed Rulemaking Regarding Margin and Capital

Requirements for Covered Swap Entities at 6-7, available at:

LIBOR Transition No-Action

Page 9

A.

De Minimis Exception to the Swap Dealer Definition

In accordance with the definition of “swap dealer” in section 1a(49)(D) of the CEA,16 the

Commission has excepted from designation as an SD any entity that engages in only a de

minimis quantity of swap dealing with or on behalf of its customers.17 Specifically,

subparagraph (4) of the definition of “swap dealer” in Commission regulation 1.3

provides that a person shall not be deemed to be an SD until its aggregate gross notional

amount of swaps connected with swap dealing activity, during the preceding 12 months,

exceeds the de minimis threshold.18 Such Commission regulation further requires that,

in determining whether its swap dealing activity exceeds the de minimis threshold, a

person must include the aggregate notional value of the swaps connected with the

dealing activities of its affiliates under common control.19

ARRC is concerned that entities that actively monitor and manage their swap dealing

activities to stay below the de minimis threshold may be reluctant to transition from

IRRs voluntarily and early if they must count swaps modified to accommodate either a

Fallback Amendment or Replacement Rate Amendment toward such threshold.

In order to support an expeditious and orderly transition away from IRRs, DSIO

believes that a position of no-action is warranted

e their swap dealing

activities to stay below the de minimis threshold may be reluctant to transition from

IRRs voluntarily and early if they must count swaps modified to accommodate either a

Fallback Amendment or Replacement Rate Amendment toward such threshold.

In order to support an expeditious and orderly transition away from IRRs, DSIO

believes that a position of no-action is warranted. Accordingly, DSIO will not

recommend that the Commission take an enforcement action against any person if, for

purposes of determining whether it is deemed to be an SD pursuant to the criteria set

forth in the Commission’s definition of “swap dealer,”20 it does not include a swap that

https://www.federalreserve.gov/SECRS/2019/December/20191210/R-1682/R-

1682_120919_137107_439606911591_1.pdf.

To permit changes in maturity or total effective notional amount that are directly related to a transition

from and IRR to an alternative rate, DSIO intends that its no-action relief will be available for Qualifying

Amendments that make adjustments to maturities and notional amounts, but only to the extent necessary

to accommodate the operational differences between an IRR and an alternative rate. SDs relying on such

relief for Qualifying Amendments should be prepared to justify any extension of maturity or increase in

notional amount of the relevant swaps or portfolios of swaps.

16 7 USC § 1 et seq.

17 See 7 U.S.C. 1a(49)(D) (directing the Commission to establish a de minimis exception from the SD

definition). See also paragraph (4) of the definition of “swap dealer” in 17 CFR § 1.3; Further Definition of

“Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap

Participant,” and “Eligible Contract Participant,” 77 FR 30596, 30626-35 (May 23, 2012) (hereinafter

“Entity Definitions Rulemaking”)

ission to establish a de minimis exception from the SD

definition). See also paragraph (4) of the definition of “swap dealer” in 17 CFR § 1.3; Further Definition of

“Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap

Participant,” and “Eligible Contract Participant,” 77 FR 30596, 30626-35 (May 23, 2012) (hereinafter

“Entity Definitions Rulemaking”).

18 See subparagraph (4)(i)(A) of the definition of “swap dealer” in 17 CFR § 1.3. See also subparagraph (6)

of the definition of “swap dealer” in 17 CFR § 1.3 (identifying swaps that are not considered in determining

whether a person is a swap dealer).

19 See subparagraph (4)(i)(A) of the definition of “swap dealer” in 17 CFR § 1.3.

20 See subparagraph (4) of the definition of “swap dealer” in 17 CFR § 1.3. See also Entity Definitions

Rulemaking, 77 FR at 30626-35.

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references an IRR solely to the extent such swap would be required to be included as a

consequence of a Qualifying Amendment to such swap.

B.

CFTC Uncleared Swap Margin Requirements

1.

Legacy Swaps

Pursuant to section 4s(e) of the CEA,21 the Commission is required to promulgate

margin requirements for uncleared swaps applicable to each SD for which there is no

Prudential Regulator, and thus the no-action position provided in this letter with

respect to compliance with the Commission’s uncleared swap margin requirements is

applicable only to such SDs.22 The Commission published final margin requirements for

such SDs in January 2016 (the “CFTC Margin Rule”).23

The CFTC Margin Rule applies only to uncleared swaps of SDs executed after the

applicable compliance date set forth in Commission regulation 23.161.24 Pursuant to

Commission regulation 23.161, compliance dates for the CFTC Margin Rule are

staggered such that SDs must come into compliance in a series of phases over four years

with counterparties depending on the aggregate outstanding notional amounts of

uncleared swaps and certain oth

red swaps of SDs executed after the

applicable compliance date set forth in Commission regulation 23.161.24 Pursuant to

Commission regulation 23.161, compliance dates for the CFTC Margin Rule are

staggered such that SDs must come into compliance in a series of phases over four years

with counterparties depending on the aggregate outstanding notional amounts of

uncleared swaps and certain other financial products. The first phase began on

September 1, 2016, and required SDs to comply with both the initial and variation

margin requirements with counterparties that have the largest aggregate outstanding

notional amounts. The second phase began on March 1, 2017, and required SDs to

comply with the variation margin requirements of Commission regulation 23.153 with

all relevant counterparties not covered in the first phase. On each September 1

thereafter ending with September 1, 2020, SDs began/will begin to comply with the

initial margin requirements with counterparties with successively lesser outstanding

21 7 U.S.C. § 1 et. seq.

22 The Commission’s margin requirements for uncleared swaps apply only to SDs and major swap

participants for which there is not a prudential regulator. See 7 U.S.C. 6s(e)(1)(B). SDs and major swap

participants for which there is a prudential regulator must meet the margin requirements for uncleared

swaps established by the applicable prudential regulator. 7 U.S.C. 6s(e)(1)(A). See also 7 U.S.C. 1a(39)

(defining the term “Prudential Regulator” to include the Board of Governors of the Federal Reserve

System; the Office of the Comptroller of the Currency; the Federal Deposit Insurance Corporation; the

Farm Credit Administration; and the Federal Housing Finance Agency). The Prudential Regulators

published final margin requirements in November 2015. See Margin and Capital Requirements for

Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015)

nclude the Board of Governors of the Federal Reserve

System; the Office of the Comptroller of the Currency; the Federal Deposit Insurance Corporation; the

Farm Credit Administration; and the Federal Housing Finance Agency). The Prudential Regulators

published final margin requirements in November 2015. See Margin and Capital Requirements for

Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015). DSIO notes that there are no major swap

participants registered with the CFTC at this time. This letter does not address major swap participants

explicitly, but DSIO confirms that the no-action positions taken with respect to SDs in this letter would

apply to major swap participants.

23 See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR

636 (Jan. 6, 2016). The CFTC Margin Rule, which became effective April 1, 2016, is codified in part 23 of

the Commission’s regulations. See §§ 23.150-159, 161.

24 See Commission regulation 23.150(a), 17 CFR § 23.150(a).

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notional amounts.25 As discussed above, uncleared swaps entered into prior to the

relevant compliance date are not subject to the applicable provisions of the CFTC

Margin Rule (“CFTC Margin Rule Legacy Swaps”).

Generally, pursuant to the CFTC Margin Rule, amendments to CFTC Margin Rule

Legacy Swaps following the compliance date applicable to an SD and its counterparty

would cause such swaps to be brought into scope and require compliance with the CFTC

Margin Rule.26 Margining in accordance with such rule is a material consideration in

determining the terms of a swap, including price. Because CFTC Margin Rule Legacy

Swaps were entered into with the assumption that such swaps would not be subject to

margining in accordance with the CFTC Margin Rule, bringing such swaps into scope for

the rule would likely have a materially adverse effect on the economic obligations of the

parties and potentially frustrate the purpose of the swaps

mining the terms of a swap, including price. Because CFTC Margin Rule Legacy

Swaps were entered into with the assumption that such swaps would not be subject to

margining in accordance with the CFTC Margin Rule, bringing such swaps into scope for

the rule would likely have a materially adverse effect on the economic obligations of the

parties and potentially frustrate the purpose of the swaps.

Because SDs and their counterparties are amending CFTC Margin Rule Legacy Swaps

pursuant to a global reform agenda, DSIO is of the view that entering into a Fallback

Amendment or a Replacement Rate Amendment should not cause a loss of legacy status

resulting in the swap becoming subject to the CFTC Margin Rule. A Fallback

Amendment to include a fallback provision is an effort to retain the existing swap

following an IRR discontinuation or determination that the IRR is non-representative

by the benchmark administrator or the relevant authority in a jurisdiction, rather than a

substitute for entering into a new swap. Similarly, entering into voluntary Replacement

Rate Amendments prior to permanent discontinuation of an IRR or determination that

the IRR is non-representative is an effort to mitigate risks associated with the

discontinuation of IRRs as opposed to a decision to enter into a new swap with different

economics. Finally, DSIO observes that SDs, as well as their financial end-user

counterparties, will be entering into Fallback Amendments and Replacement Rate

Amendments in order to advance an important public policy objective and not for the

purposes of evading the CFTC’s Margin Rule.

Given the foregoing, DSIO believes that a no-action position is warranted with respect to

amendments to CFTC Margin Rule Legacy Swaps

observes that SDs, as well as their financial end-user

counterparties, will be entering into Fallback Amendments and Replacement Rate

Amendments in order to advance an important public policy objective and not for the

purposes of evading the CFTC’s Margin Rule.

Given the foregoing, DSIO believes that a no-action position is warranted with respect to

amendments to CFTC Margin Rule Legacy Swaps. Accordingly, DSIO will not

recommend that the Commission take an enforcement action against an SD for a failure

to comply with the CFTC Margin Rule solely to the extent such compliance would be

required as a consequence of a Qualifying Amendment to a CFTC Margin Rule Legacy

Swap.

25 See Commission regulation 23.161, 17 CFR § 23.161.

26 See CFTC Margin Rule, 81 FR at 675.

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2.

Basis Swap Method Relief

In addition, DSIO recognizes that counterparties may find it more appropriate to their

circumstances to accomplish the necessary transition using the Basis Swap Method

rather than amendments to individual swaps. DSIO therefore believes that a no-action

position is warranted with respect to transition arrangements using the Basis Swap

Method, but solely for purpose of the CFTC Margin Rule. Because the Basis Swap

Method consists of entering into one or more new swaps, rather than amendments of

existing swaps, DSIO does not believe that the other relief provided by this letter is

necessary or appropriate.27 Accordingly, DSIO will not recommend that the

Commission take an enforcement action against an SD for failure to comply with the

CFTC Margin Rule with respect to a basis swap that meets the following conditions:

1.

The basis swap references only one or more CFTC Margin Rule Legacy Swaps;

2.

The basis swap is entered into solely to achieve substantially the same effect as

would be obtained by an amendment to the referenced CFTC Margin Rule Legacy

Swap(s) to accommodate the replacement of an IRR; and

3

comply with the

CFTC Margin Rule with respect to a basis swap that meets the following conditions:

1.

The basis swap references only one or more CFTC Margin Rule Legacy Swaps;

2.

The basis swap is entered into solely to achieve substantially the same effect as

would be obtained by an amendment to the referenced CFTC Margin Rule Legacy

Swap(s) to accommodate the replacement of an IRR; and

3.

The basis swap does not have the effect of extending the maximum maturity or

increasing the aggregate total effective notional amount of the referenced CFTC

Margin Rule Legacy Swap(s).28

C.

SD Business Conduct Requirements

The Commission’s business conduct requirements for SDs under subpart H to part 23 of

the Commission’s regulations, which sets forth business conduct standards for SDs in

their dealings with counterparties (the “Counterparty BCS”),29 require SDs to provide

or obtain specific information from their counterparties, to obtain specific

representations in writing from their counterparties, and to perform certain due

diligence inquiries with respect to their counterparties prior to entering into (or in some

cases, offering to enter into) a swap with such counterparties.30 Certain safe harbors

27 DSIO recognizes however that an amendment to a basis swap referencing an IRR, including one entered

into for purposes of the Basis Swap Method that is subsequently amended, would qualify for all applicable

relief provided by this letter.

28 DSIO intends that a basis swap entered into in compliance with these conditions would retain its relief

from the CFTC Margin Rule in the event that it is subsequently amended solely to accommodate the

replacement of an IRR and such subsequent amendment is entered into in compliance with these

conditions.

29 See 17 CFR §§ 23.400 through 23.451, § 23.701. See also Business Conduct Standards for Swap Dealers

and Major Swap Participants with Counterparties, 77 FR 9734 (Feb. 17, 2012)

ain its relief

from the CFTC Margin Rule in the event that it is subsequently amended solely to accommodate the

replacement of an IRR and such subsequent amendment is entered into in compliance with these

conditions.

29 See 17 CFR §§ 23.400 through 23.451, § 23.701. See also Business Conduct Standards for Swap Dealers

and Major Swap Participants with Counterparties, 77 FR 9734 (Feb. 17, 2012).

30 See Commission regulation 23.402(b) (requiring SDs to obtain essential facts about their counterparty

prior to execution of a transaction); § 23.430(a) (requiring SDs to verify that a counterparty meets the

eligibility standards for an eligible contract participant before offering to enter into or entering into a

swap with such counterparty); § 23.431(a) (requiring SDs to provide material information concerning the

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under the Counterparty BCS permit SDs to rely on written representations from their

counterparties and standardized disclosures, each of which may require amendments or

supplements to an SD’s relationship documentation with such counterparties prior to

entering into a swap with such counterparties.31

In the preamble to the Counterparty BCS final rule adopting release, the Commission

noted that the Counterparty BCS will not apply to swaps executed before the effective

date of the Counterparty BCS final rules if the requirement does not impose an ongoing

duty on the swap dealer (such swaps, “Counterparty BCS Legacy Swaps”).32

However, the Commission also stated that if Counterparty BCS Legacy Swaps were

materially amended, such swaps would be subject to the requirements of the

Counterparty BCS as if they were new swaps.33

ARRC requests a no-action position from SD compliance with the Counterparty BCS

when entering into a Fallback Amendment or Replacement Rate Amendment to a

Counterparty BCS Legacy Swap, arguing that such swaps are being amended pursuant

to a global reform agenda rather than as a substitute for entering into a new swap

ect to the requirements of the

Counterparty BCS as if they were new swaps.33

ARRC requests a no-action position from SD compliance with the Counterparty BCS

when entering into a Fallback Amendment or Replacement Rate Amendment to a

Counterparty BCS Legacy Swap, arguing that such swaps are being amended pursuant

to a global reform agenda rather than as a substitute for entering into a new swap.

With respect to Pre-Transition Swaps, ARRC further argues that certain of such swaps

are already subject to the Counterparty BCS, and SDs should not be required to re-

perform obligations to counterparties under such rules in order to address the

regulatory-driven reform agenda.34 ARRC states that re-performance of certain of these

obligations may result in terminations of swaps with counterparties that cannot make

the necessary representations due to a change in circumstances since originally entering

into the swap. For example, an SD may be unable to obtain or re-verify a counterparty’s

risks and characteristics of a swap to its counterparty at a reasonably sufficient time prior to entering into

the swap); § 23.431(b) (requiring SDs to provide notice to counterparties that they can request and

consult on the design of a scenario analysis); § 23.431(d) (requiring SDs to provide notice to

counterparties of the right to receive the daily mark from a derivatives clearing organization for cleared

swaps); § 23.432 (requiring SDs to provide notice to counterparties of the right to select clearing and the

derivatives clearing organization on which a swap is to be cleared); § 23.434 (requiring SDs that

recommend a swap to have a reasonable basis to believe that the swap is suitable for the counterparty);

§ 23.440 (requiring SDs that act as an advisor to a Special Entity to act in such entity’s best interest);

§ 23.450 (requiring SDs to inquire into the

es of the right to select clearing and the

derivatives clearing organization on which a swap is to be cleared); § 23.434 (requiring SDs that

recommend a swap to have a reasonable basis to believe that the swap is suitable for the counterparty);

§ 23.440 (requiring SDs that act as an advisor to a Special Entity to act in such entity’s best interest);

§ 23.450 (requiring SDs to inquire into the knowledge and status of a representative of a counterparty

that is a Special Entity); § 23.451 (prohibiting SDs from entering into swaps with certain governmental

entities if it has made political contributions to an official of such entity); and § 23.701 (requiring SDs to

provide counterparties with notice of the right to require any initial margin provided to the SD be

segregated with a custodian).

31 See Commission regulations 23.402(d), (e), and (f), 17 CFR § 23.402(d), (e), and (f).

32 See Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties, 77

Fed. Reg. 9734, 9741 (Feb. 17, 2012).

33 See id.

34 ARRC states that at least with respect to the pre-trade disclosure requirements of Commission

regulation 23.431, SDs have already begun taking steps to revise the risk disclosures for Pre-Transition

Swaps as appropriate in the context of the transition to RFRs.

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ECP status, including because the counterparty may no longer be an ECP.35 Similarly,

for the external business conduct requirement related to suitability,36 a counterparty

may not be able to provide the representation an SD needs to rely on the applicable safe

harbor and the SD may not be able to reasonably determine that the counterparty is

capable of independently evaluating investment risks with regard to the amendment. In

such cases, the swap may have to be terminated rather than continue

business conduct requirement related to suitability,36 a counterparty

may not be able to provide the representation an SD needs to rely on the applicable safe

harbor and the SD may not be able to reasonably determine that the counterparty is

capable of independently evaluating investment risks with regard to the amendment. In

such cases, the swap may have to be terminated rather than continue.

Because SDs and their counterparties are amending Counterparty BCS Legacy Swaps

and Pre-Transition Swaps pursuant to a global reform agenda, DSIO is of the view that

entering into a Fallback Amendment or a Replacement Rate Amendment should not

cause a loss of legacy status or require re-performance of the full complement of

Counterparty BCS. However, DSIO does not believe that relief is appropriate for an SD’s

obligation under Commission regulation § 23.431(a) to provide material information

concerning the risks and characteristics of a swap to its counterparty at a reasonably

sufficient time prior to entering into the swap. Pursuant to the IRR transition,

counterparties to SDs will often be moving from familiar reference rates to newly

created rates. DSIO therefore believes SDs should be required to provide material

information about such new rates in order for counterparties to better understand what

they are stepping into.37

DSIO agrees that a Fallback Amendment to include a fallback provision is an effort to

retain the existing swap following an IRR discontinuation or determination that the IRR

is non-representative by the benchmark administrator or the relevant authority in a

jurisdiction, rather than a substitute for entering into a new swap. Similarly, entering

into voluntary Replacement Rate Amendments prior to permanent discontinuation of

an IRR or determination that the IRR is non-representative is an effort to mitigate risks

associated with such changes to an IRR as opposed to a decision to enter into a new

swap with different economics

evant authority in a

jurisdiction, rather than a substitute for entering into a new swap. Similarly, entering

into voluntary Replacement Rate Amendments prior to permanent discontinuation of

an IRR or determination that the IRR is non-representative is an effort to mitigate risks

associated with such changes to an IRR as opposed to a decision to enter into a new

swap with different economics. Finally, DSIO observes that SDs, as well as their

financial end-user counterparties, will be entering into Fallback Amendments and

Replacement Rate Amendments in order to advance an important public policy

objective and not for the purposes of evading the CFTC’s Counterparty BCS.

35 The requirement that swap counterparties be ECPs, and that a swap dealer verify ECP status, in

Commission Regulation 23.430 applies prior to offering to enter into or entering into a swap with a

counterparty. It is not a continuous obligation that applies throughout the duration of the swap.

36 See Commission regulation 23.434. 17 CFR 23.434.

37 DSIO notes the Commission’s view when adopting Commission regulation 23.431(a) that “the

disclosure rules are intended to level the information playing field by requiring swap dealers and major

swap participants to provide sufficient information about a swap to enable counterparties to make their

own informed decisions about the appropriateness of entering into the swap.” See Business Conduct

Standards for Swap Dealers and Major Swap Participants with Counterparties, 77 FR 9734, 9758-59 (Feb.

17, 2012).

nded to level the information playing field by requiring swap dealers and major

swap participants to provide sufficient information about a swap to enable counterparties to make their

own informed decisions about the appropriateness of entering into the swap.” See Business Conduct

Standards for Swap Dealers and Major Swap Participants with Counterparties, 77 FR 9734, 9758-59 (Feb.

17, 2012).

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Given the foregoing, DSIO believes that a no-action position is warranted. Accordingly,

DSIO will not recommend that the Commission take an enforcement action against an

SD for a failure to comply with the Counterparty BCS (other than Commission

regulation 23.431(a)) solely to the extent such compliance would be required as a

consequence of a Qualifying Amendment to an uncleared swap.

D.

CFTC Documentation and Swap Processing

Requirements

1.

Confirmation

The Commission’s swap confirmation rules require SDs to confirm amendments to

swaps within certain time frames.38

The Commission’s swap trading relationship documentation (“STRD”) rules require

SDs to enter into STRD with each counterparty prior to entering in to an uncleared swap

transaction with such counterparty.39 However, SDs are not required to enter into

STRD with respect to uncleared swaps entered into prior to the date an SD was required

to be in compliance with the STRD rule (such uncleared swaps, “STRD Legacy

Swaps”).40

As discussed above, ARRC expects that the Fallback Amendments will be accomplished

by means of one or more multilateral protocols that are currently being developed by

ISDA. ARRC contemplates that many Replacement Rate Amendments could also be

accomplished by the protocol methodology. By adhering to an ISDA protocol, the

counterparties could relatively easily amend multiple swaps without extensive, bilateral

negotiations

s that the Fallback Amendments will be accomplished

by means of one or more multilateral protocols that are currently being developed by

ISDA. ARRC contemplates that many Replacement Rate Amendments could also be

accomplished by the protocol methodology. By adhering to an ISDA protocol, the

counterparties could relatively easily amend multiple swaps without extensive, bilateral

negotiations. Given that through adherence to a protocol, multiple swaps could be

legally amended, and confirmed, simultaneously, ARRC seeks confirmation that SDs

will not be required to issue new confirmations for STRD Legacy Swaps and Pre-

Transition Swaps that are amended via a multilateral protocol.

Given the foregoing, DSIO believes that a no-action position is warranted. Accordingly,

provided that the amendment is accomplished pursuant to a multilateral protocol, DSIO

will not recommend that the Commission take an enforcement action against an SD for

a failure to comply with the confirmation requirement of Commission regulation 23.501

solely to the extent such compliance would be required as a consequence of a Qualifying

Amendment to an uncleared swap.

38 See Commission regulation 23.500 (defining a “swap transaction” to include amendments to swaps)

and Commission regulation 23.501 requiring SDs to issue a confirmation for any swap transaction.

39 See Commission regulation 23.504(a)(2).

40 See Commission regulation 23.504(a)(1)(i).

nsequence of a Qualifying

Amendment to an uncleared swap.

38 See Commission regulation 23.500 (defining a “swap transaction” to include amendments to swaps)

and Commission regulation 23.501 requiring SDs to issue a confirmation for any swap transaction.

39 See Commission regulation 23.504(a)(2).

40 See Commission regulation 23.504(a)(1)(i).

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2.

Swap Trading Relationship Documentation

With respect to STRD requirements, as noted above, Commission regulation

§ 23.504(a)(2) requires SDs to enter into swap trading relationship documentation prior

to entering into any “swap transaction.” Commission regulation 23.500(l) defines

“swap transaction” as “any event that results in a new swap or in a change to the terms

of a swap, including execution, termination, assignment, novation, exchange, transfer,

amendment, conveyance, or extinguishing of rights or obligations of a swap.” Thus, an

amendment of a STRD Legacy Swap would be a new “swap transaction” causing the

swap to lose its status as an STRD Legacy Swap and an SD would be required to enter

into documentation conforming to the rule.

For the same reasons recognized above with respect to the confirmation requirement of

Commission regulation 23.501, DSIO believes that a no-action position is warranted.

Accordingly, DSIO will not recommend that the Commission take an enforcement action

against an SD for a failure to comply with the STRD requirement of Commission

regulation 23.504 solely to the extent such compliance would be required as a

consequence of a Qualifying Amendment to an STRD Legacy Swap.

3

nt of

Commission regulation 23.501, DSIO believes that a no-action position is warranted.

Accordingly, DSIO will not recommend that the Commission take an enforcement action

against an SD for a failure to comply with the STRD requirement of Commission

regulation 23.504 solely to the extent such compliance would be required as a

consequence of a Qualifying Amendment to an STRD Legacy Swap.

3.

Reconciliation

The Commission’s portfolio reconciliation rules require SDs to resolve discrepancies in

“material terms” of their swaps with other SDs “immediately,”41 and discrepancies with

other counterparties “in a timely fashion.”42 ARRC states that it expects that in certain

circumstances, SDs and market participants may book Fallback Amendments or

Replacement Rate Amendments to their Pre-Transition Swaps differently and at

different times, creating potential discrepancies across counterparties’ books that will

appear in the counterparties’ reconciliation processes. Given the potential volume of

such discrepancies, ARRC requests clarification that SDs may engage in good faith

compliance efforts to resolve any such discrepancies during a transitionary phase.

Given the foregoing, DSIO believes that a no-action position is warranted. Accordingly,

DSIO will not recommend that the Commission take an enforcement action against an

SD for a failure to comply with the discrepancy resolution timing requirements of

Commission regulation 23.502(a)(4) and (b)(4) solely to the extent such compliance

would be required as a consequence of a Qualifying Amendment to an uncleared swap.

41 See Commission regulation 23.502(a)(4).

42 See id. at (b)(4).

n enforcement action against an

SD for a failure to comply with the discrepancy resolution timing requirements of

Commission regulation 23.502(a)(4) and (b)(4) solely to the extent such compliance

would be required as a consequence of a Qualifying Amendment to an uncleared swap.

41 See Commission regulation 23.502(a)(4).

42 See id. at (b)(4).

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E.

Relief Requested Related to End-Users

1.

Exceptions and Exemptions from Compliance

with the CFTC Margin Rule

Commission regulations 50.50(c) and 50.51(b)(2) provide the basis for an exception for

non-financial entities (i.e., commercial end-users eligible to elect an exception under

Commission regulation 50.50(c)) and an exemption for cooperatives from the

Commission’s clearing requirement, as well as the CFTC Margin Rule pursuant to

Commission regulation 23.150(b), provided that certain conditions are satisfied,

including the requirement that the swap is used to “hedge or mitigate commercial risk.”

ARRC states that, as the market transitions to alternatives to the IBORS, there are likely

to be situations where commercial end-users and cooperatives will have to amend their

swaps that reference IRRs that are subject to the CFTC’s swap clearing requirement or

CFTC Margin Rule to include Fallback Amendments or Replacement Rate Amendments,

but have not yet amended their IRR-linked loan agreements, debt instruments, and

other agreements or transactions to include new fallbacks or alternative reference rates.

The reverse may also be true (i.e., amendments to such financial agreements may be

completed before the related swaps are amended)

quirement or

CFTC Margin Rule to include Fallback Amendments or Replacement Rate Amendments,

but have not yet amended their IRR-linked loan agreements, debt instruments, and

other agreements or transactions to include new fallbacks or alternative reference rates.

The reverse may also be true (i.e., amendments to such financial agreements may be

completed before the related swaps are amended). Therefore, ARRC requests that DSIO

provide relief for a transitional period to allow commercial end-users and cooperatives

to maintain the status of swaps that are “used to hedge or mitigate commercial risk”

pursuant to Commission regulations 50.50(c) and 50.51(b)(2) respectively, even if

amended to include a Fallback Amendment or Replacement Rate Amendment.43 Where

such swaps of these end-users and cooperatives have been entered into with SDs, the

SDs are also relying on the status of the swaps as being “used to hedge or mitigate [the]

commercial risk” of such end-users and cooperatives for an exception/exemption from

the clearing requirement.

With respect to Fallback Amendments and Replacement Rate Amendments, DSIO

recognizes that a temporary mismatch in the interest rates referenced in commercial

arrangements and the swaps used to hedge the risk of such arrangements may lead

certain end-users, cooperatives, and their SD counterparties to question whether one or

more swaps still qualify as instruments used to hedge or mitigate commercial risk as

prescribed by Commission regulations 50.50(c) and 50.51(b)(2).

To alleviate any question in this regard, DSIO believes that a no-action position is

warranted

the swaps used to hedge the risk of such arrangements may lead

certain end-users, cooperatives, and their SD counterparties to question whether one or

more swaps still qualify as instruments used to hedge or mitigate commercial risk as

prescribed by Commission regulations 50.50(c) and 50.51(b)(2).

To alleviate any question in this regard, DSIO believes that a no-action position is

warranted. Accordingly, DSIO will not recommend the Commission commence an

enforcement action against an SD for failure to comply with the CFTC Margin Rule with

43 In addition to the ARRC letter requesting the relief discussed in this letter, Commission staff also

received a letter from the National Association of Corporate Treasurers, which among other things, set

forth certain requests for staff action on behalf of the end-user community.

LIBOR Transition No-Action

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respect to a swap entered into with an entity electing an exception or exemption

pursuant to the requirements of Commission regulations 50.50(c) or 50.51(b)(2), if:

1.

Such swap is an uncleared swap referencing an IRR that qualified as a swap used

to hedge or mitigate commercial risk pursuant to Commission regulation

50.50(c) or 50.51(b)(2) at the time of execution;

2.

Compliance with the CFTC Margin Rule would be required solely as a

consequence of a Qualifying Amendment to such swap, or, with respect to the

commercial arrangement for which such swap qualified as a swap used to hedge

or mitigate commercial risk pursuant to Commission regulation 50.50(c) or

50.51(b)(2), solely as a consequence of an amendment to such commercial

arrangement solely for the purpose of: (a) including new fallbacks to alternative

reference rates triggered only by permanent discontinuation of an IRR or

determination that an IRR is non-representative by the benchmark administrator

or the relevant authority in a jurisdiction; or (b) accommodating the replacement

of an IRR;44 and

3

solely as a consequence of an amendment to such commercial

arrangement solely for the purpose of: (a) including new fallbacks to alternative

reference rates triggered only by permanent discontinuation of an IRR or

determination that an IRR is non-representative by the benchmark administrator

or the relevant authority in a jurisdiction; or (b) accommodating the replacement

of an IRR;44 and

3.

Such swap or the commercial arrangement which the swap served to hedge or

mitigate commercial risk pursuant to Commission regulation 50.50(c) or

50.51(b)(2) is amended prior to December 31, 2021, such that the swap again

qualifies as a swap used to hedge or mitigate commercial risk pursuant to

Commission regulation 50.50(c) or 50.51(b)(2).45

44 To parallel the definition of a “Qualifying Amendment” discussed above, DSIO recognizes that any such

amendment to a commercial arrangement referencing an IRR may include ancillary changes to existing

terms to conform to different market conventions for an IRR and any alternative rate.

45 DSIO notes that comparable relief for end-user counterparties to SDs is provided by the Commission’s

Division of Clearing and Risk pursuant to a letter issued contemporaneously with this letter.

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2.

Status as Eligible Contract Participants

(“ECPs”)

Related to the foregoing, some end-users identify themselves as ECPs based on a swap’s

purpose “to manage the risk associated with an asset or liability owned or incurred or

reasonably likely to be owned or incurred” by the end-user in the conduct/operation of

the end-user’s business.46 ARRC argues that a swap with such purpose should maintain

its status as such despite a Fallback Amendment or Replacement Rate Amendment for

the purpose of the eligible contract participant representations given to SDs pursuant to

Commission regulation 23.430(a)

ned or incurred or

reasonably likely to be owned or incurred” by the end-user in the conduct/operation of

the end-user’s business.46 ARRC argues that a swap with such purpose should maintain

its status as such despite a Fallback Amendment or Replacement Rate Amendment for

the purpose of the eligible contract participant representations given to SDs pursuant to

Commission regulation 23.430(a). A temporary mismatch in the interest rates

referenced in an “asset or liability owned or incurred” and the swaps used to hedge the

risk of such asset or liability may lead end-users to question whether they continue to

qualify as an eligible contract participant.

To alleviate any question in this regard, DSIO will not recommend that the Commission

commence an enforcement action against any person for failure to qualify as an eligible

contract participant pursuant to section 1a(18)(A)(xi) of the CEA solely to the extent

such status is relevant as a consequence of a Qualifying Amendment to an uncleared

swap.

3.

End-User Documentation Requirements

Finally, DSIO recognizes that an SD entering into swaps with an end-user or cooperative

that uses swaps to hedge or mitigate commercial risk pursuant to Commission

regulations 50.50(b) or 50.51(c) may be required to obtain documentation from the

entity pursuant to Commission regulation 23.505(a)(4) that provides the SD with a

reasonable basis to believe that the counterparty is hedging or mitigating commercial

risk.

In light of the foregoing, DSIO believes that a no-action position is warranted.

Accordingly, DSIO will not recommend that the Commission commence an enforcement

action against an SD for failure to obtain documentation meeting the requirements of

Commission regulation 23.505(a)(4) from an entity for which it has previously obtained

such documentation solely to the extent such would be required as a consequence of a

Qualifying Amendment to an uncleared swap.

IV

arranted.

Accordingly, DSIO will not recommend that the Commission commence an enforcement

action against an SD for failure to obtain documentation meeting the requirements of

Commission regulation 23.505(a)(4) from an entity for which it has previously obtained

such documentation solely to the extent such would be required as a consequence of a

Qualifying Amendment to an uncleared swap.

IV.

Conclusion

This letter, and the positions taken herein, represent the views of DSIO only, and does

not necessarily represent the position or view of the Commission or of any other office

or division of the Commission. The relief issued by this letter does not excuse persons

relying on it from compliance with any other applicable requirements contained in the

46 See Section 1a(18)(A)(xi) of the CEA, 17 U.S.C 1a(18)(A)(xi).

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CEA or in Commission regulations. Further, this letter, and the positions taken herein,

are based upon the facts and circumstances presented to DSIO. Any different, changed,

or omitted material facts or circumstances might render the relief provided by this letter

void.

Finally, as with all staff letters, the DSIO retains the authority to condition further,

modify, suspend, terminate, or otherwise restrict the terms of relief provided herein, in

its discretion.

If you have any questions concerning this correspondence, please contact Frank

Fisanich, Chief Counsel, DSIO, at (202) 418-5949 or ffisanich@cftc.gov.

Very truly yours,

___________________________________

Joshua B. Sterling

Director

Division of Swap Dealer and Intermediary Oversight

cc:

Regina Thoele, Compliance

National Futures Association, Chicago