DCR is providing time-limited relief from the swap clearing requirement and related exceptions and exemptions. This relief is to help facilitate the orderly transition from swaps that reference the London Interbank Of...
FederalAgency guidance
Ask Donna
How this section applies to your facts.
CFTC Staff Letters (2008-present) › DCR is providing time-limited relief from the swap clearing requirement and related exceptions and exemptions. This relief is to help facilitate the orderly transition from swaps that reference the London Interbank Of...
Text
Summary: DCR is providing time-limited relief from the swap clearing requirement and related exceptions and exemptions. This relief is to help facilitate the orderly transition from swaps that reference the London Interbank Offered Rate (LIBOR) and other interbank offered rates to swaps that reference alternative benchmarks.
CFTC LETTER NO. 20-25 NO-ACTION AUGUST 31, 2020
Division of Clearing and Risk
M. Clark Hutchison III
Director
Re:
Revised Staff No-Action Relief from the Swap Clearing Requirement for
Amendments to Legacy Uncleared Swaps to Facilitate an Orderly Transition from
Inter-Bank Offered Rates to Alternative Risk-Free Rates
Ladies and Gentlemen:
This letter responds to a request to revise Letter No. 19-281 issued on December 17,
2019, by the Division of Clearing and Risk (DCR) of the Commodity Futures Trading
Commission (CFTC or Commission). DCR issued Letter No. 19-28 in response to a November
5, 2019 letter from the Alternative Reference Rates Committee (ARRC)2 on behalf of its
members that are subject to certain Commission regulations.3 Among other things, ARRC
requested and Letter No. 19-28 granted no-action relief for failure to comply with certain
provisions of the swap clearing requirement promulgated pursuant to section 2(h)(1)(A) of the
Commodity Exchange Act (CEA)4 and codified in Part 50 of the Commission’s regulations
(Clearing Requirement).5 This letter, like Letter No. 19-28, applies only to uncleared interest
rate swaps (IRS) that were executed prior to an applicable Clearing Requirement compliance
date and for which swap counterparties subsequently amend certain terms solely as part of an
industry-wide initiative to amend swaps that reference the London Interbank Offered Rate
(LIBOR) and other interbank offered rates (collectively with LIBOR, the IBORs)6 to reference
alternative benchmarks, including risk-free rates (RFRs)
executed prior to an applicable Clearing Requirement compliance
date and for which swap counterparties subsequently amend certain terms solely as part of an
industry-wide initiative to amend swaps that reference the London Interbank Offered Rate
(LIBOR) and other interbank offered rates (collectively with LIBOR, the IBORs)6 to reference
alternative benchmarks, including risk-free rates (RFRs).
1 CFTC Letter No. 19-28 (Dec. 17, 2019), available at https://www.cftc.gov/csl/19-28/download.
2 Authorities representing U.S. banking regulators and other financial sector members, including the Commission,
serve as non-voting ex officio members of the ARRC.
3 The November 5, 2019 ARRC letter also requested relief from the Division of Market Oversight (DMO) and the
Division of Swap Dealer and Intermediary Oversight (DSIO). Both divisions provided no-action letters in response
to ARRC’s letter. In formulating this revised letter, DCR considered a new July 20, 2020 letter, the November 5,
2019 letter, along with prior submissions from ARRC, as well as discussions related to ARRC’s requested relief.
4 7 U.S.C. § 2(h).
5 17 CFR part 50.
6 IBORs include, but are not limited to, U.S. dollar (USD) LIBOR, British pound (GBP) LIBOR, Japanese yen
(JYP) LIBOR, the Tokyo Interbank Offered Rate (TIBOR), the Australian Bank Bill Swap Rate (BBSW), the
Singapore Interbank Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro Interbank Offered
Rate (EURIBOR), and the Hong Kong Interbank Offered Rate (HIBOR). The Singapore dollar rate overnight rate,
the SOR-VWAP, also would be considered to be an IBOR in the context of this letter.
U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5000
he Canadian Dollar Offered Rate (CDOR), Euro Interbank Offered
Rate (EURIBOR), and the Hong Kong Interbank Offered Rate (HIBOR). The Singapore dollar rate overnight rate,
the SOR-VWAP, also would be considered to be an IBOR in the context of this letter.
U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5000
Page 2
In a letter dated July 20, 2020, ARRC requests an expansion of the relief provided by
DCR in Letter No. 19-28 such that DCR’s no-action position would cover a broader set of issues
related to the industry-wide initiative to transition from IBORs to RFRs.7 Specifically, ARRC
requests an expansion of the no-action position taken by DCR (1) to include a broader set of
benchmark alternatives for use as fallback and/or replacement rates; (2) to permit ancillary
modifications to certain uncleared IRS to accommodate market conventions; and (3) to add a
number of additional clarifications with regard to the scope of Letter No. 19-28. ARRC also
requested that the DCR no-action position more closely align with the DSIO no-action position.
In addition, ARRC’s July 20, 2020 request seeks a broader no-action position and
clarification with respect to Part 50 regulations related to certain end-users eligible to elect an
exception or exemption from the Clearing Requirement under subpart C of Part 50 of the
Commission’s regulations.
This letter sets forth a revised no-action position with regard to those requests.8 This
letter revises Letter No. 19-28 in its entirety. Letter No. 19-28 is superseded by this letter and no
person may rely on Letter No. 19-28 after the date of this letter.
I.
FACTUAL 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.9 The U.S
er No. 19-28 is superseded by this letter and no
person may rely on Letter No. 19-28 after the date of this letter.
I.
FACTUAL 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.9 The U.S. Financial Stability Oversight
Council (FSOC) has made repeated calls for member agencies to work closely with market
participants to identify and mitigate risks that may arise during an IBOR transition process.10 In
7 CFTC Staff Letters and letters requesting relief are available on the Commission’s website at:
https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm.
8 This letter addresses only those ARRC requests that relate to Part 50 of the Commission’s regulations. Other parts
of the ARRC’s request letters, including new relief requested in the July 20, 2020 letter, are being addressed
separately by DSIO and DMO in letters issued concurrently with this letter.
9 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.”). In addition, the FSB’s July 2014 recommendation to move to
RFRs is available at https://www.fsb.org/wp-content/uploads/r_140722.pdf
erived 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.”). In addition, the FSB’s July 2014 recommendation to move to
RFRs is available at https://www.fsb.org/wp-content/uploads/r_140722.pdf. See also Statement on Communication
and Outreach to Inform Relevant Stakeholders Regarding Benchmarks Transition by the Board of the International
Organization of Securities Commissions (IOSCO), July 31, 2019, available at
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD636.pdf.
10 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.”); FSOC 2013 Annual Report, pages 6, 14-15, 137, 140-142
ties 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.”); FSOC 2013 Annual Report, pages 6, 14-15, 137, 140-142
Page 3
response to ongoing efforts such as these, central banks in various jurisdictions, including the
United States, United Kingdom, Japan, Switzerland, and European Union, have convened
working groups of official sector representatives and market participants.
In 2014, the Federal Reserve Bank of New York convened the 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.11 Similar committees have been established in other jurisdictions, including the
European Union, Japan, Switzerland, and the United Kingdom.
In June 2017, the ARRC identified a broad Treasuries repo financing rate, the secured
overnight financing rate (SOFR), as the preferred alternative benchmark to U.S. dollar (USD)
LIBOR (USD LIBOR) for certain new U.S. dollar derivatives and other financial contracts. It
also published an updated paced transition plan outlining the steps that the ARRC, derivatives
clearing organizations (DCOs), and other market participants intend to take in order to
progressively build the liquidity required to support the issuance of, and transition to, contracts
referencing SOFR.12 In accordance with the ARRC’s plan and similar plans in other
jurisdictions, the clearing and trading of SOFR-based derivatives and other financial contracts
linked to alternative benchmarks commenced in 2018 and has continued to expand.13
In July 2017, the U.K
n order to
progressively build the liquidity required to support the issuance of, and transition to, contracts
referencing SOFR.12 In accordance with the ARRC’s plan and similar plans in other
jurisdictions, the clearing and trading of SOFR-based derivatives and other financial contracts
linked to alternative benchmarks commenced in 2018 and has continued to expand.13
In July 2017, the U.K. Financial Conduct Authority (FCA), which regulates ICE
Benchmark Administration Limited, the administrator of LIBOR,14 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.15 The submissions by panel banks serve as inputs to formulate LIBOR rates in five
currencies, namely, USD LIBOR, EUR LIBOR, GBP LIBOR, CHF LIBOR, and JPY LIBOR.
Non-U.S. jurisdictions also have determined that applicable reference rates are no longer
representative benchmarks due to a significant impairment as determined by authorized
(June 2013) available at
ttps://www.treasury.gov/initiatives/fsoc/Documents/FSOC%202013%20Annual%20Report.pdf.
11 In March 2018, the ARRC was reconstituted with expanded participation by additional financial institutions and
trade organizations, and with additional government agencies added as ex officio members. See Alternative
Reference Rates Committee, Press Release, March 7, 2018, available at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-March-7-2018-press-release.pdf.
12 In 2019, ARRC released an incremental objectives document that compliments the paced transition plan, available
at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARRC_2019_Incremental_Objectives.pdf
Reference Rates Committee, Press Release, March 7, 2018, available at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-March-7-2018-press-release.pdf.
12 In 2019, ARRC released an incremental objectives document that compliments the paced transition plan, available
at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARRC_2019_Incremental_Objectives.pdf.
13 Information regarding the progress of trading SOFR derivatives to date can be found at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/SOFR_Anniversary.pdf and
https://www.isda.org/a/xogME/Benchmarks-Full-Year-2018.pdf. See also section III.C for an update on industry-
led efforts to launch a protocol that will promote the transition from IBORs to RFRs for uncleared swaps and section
III.E for a discussion of efforts by certain clearinghouses to promote the transition from IBORs to RFRs for new and
existing cleared swaps.
14 ICE Benchmark Administration Limited is the administrator for LIBOR rates in five currencies, four of which are
subject to the IRS clearing requirement: USD, British pound (GBP), Swiss franc (CHF), and Japanese yen (JPY).
15 See Speech by Andrew Bailey, Chief Executive of the FCA, at Bloomberg London, UK, July 27, 2017, available
at https://www.fca.org.uk/news/speeches/the-future-of-libor.
Page 4
benchmark administrators or the relevant authority in a particular jurisdiction.16 For example, in
the United Kingdom, the Working Group on Risk-Free Reference Rates recommended the
Sterling Overnight Index Average (SONIA) as the replacement rate for GBP LIBOR.17
Similarly, in Japan, the Cross-Industry Committee on Japanese Yen Interest Rate benchmarks
has identified the Tokyo Overnight Average Rate (TONA) as the preferred replacement rate for
JPY TIBOR, where appropriate
For example, in
the United Kingdom, the Working Group on Risk-Free Reference Rates recommended the
Sterling Overnight Index Average (SONIA) as the replacement rate for GBP LIBOR.17
Similarly, in Japan, the Cross-Industry Committee on Japanese Yen Interest Rate benchmarks
has identified the Tokyo Overnight Average Rate (TONA) as the preferred replacement rate for
JPY TIBOR, where appropriate. In Switzerland, the National Working Group on Swiss Franc
Reference Rates has recommended the CHF Swiss Average Rate Overnight (SARON) as the
alternative reference rate to replace CHF LIBOR. Other jurisdictions have conducted similar
work to identify and recommend appropriate replacement rates for the remaining IBORs.18
II.
APPLICABLE REGULATORY REQUIREMENTS AND PRIOR
DCR STAFF NO-ACTION POSITIONS
A.
IRS Clearing Requirement
The Commission adopted its initial IRS Clearing Requirement under Commission
regulations 50.2 and 50.4(a) in 2012, and compliance with the regulations was phased in over the
course of 2013.19 The initial IRS Clearing Requirement included fixed-to-floating IRS
denominated in four currencies, U.S. dollar (referencing USD LIBOR), Euro (referencing
EURIBOR), British pound (referencing GBP LIBOR), and Japanese yen (referencing JPY
LIBOR). The 2012 Clearing Requirement covered basis swaps and forward rate agreements
denominated in the same currencies and reference rates, as well as overnight index swaps
denominated in U.S
included fixed-to-floating IRS
denominated in four currencies, U.S. dollar (referencing USD LIBOR), Euro (referencing
EURIBOR), British pound (referencing GBP LIBOR), and Japanese yen (referencing JPY
LIBOR). The 2012 Clearing Requirement covered basis swaps and forward rate agreements
denominated in the same currencies and reference rates, as well as overnight index swaps
denominated in U.S. dollars, Euros, and British pounds.20
In 2016, the Commission expanded the IRS Clearing Requirement to include fixed-to-
floating IRS in nine additional major currencies (Australian dollars, Canadian dollars, Hong
16 When making such a determination, benchmark administrators and authorities supervising benchmark
administrators have considered whether the benchmark (and, by extension, its administrator) satisfies the Principles
for Financial Benchmarks published by the Board of IOSCO, July 2013, available at
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf. See also discussion of impaired rates below.
17 The CFTC’s Clearing Requirement applies to overnight index swaps with a SONIA floating rate and a term
between 7 days and 3 years.
18 For further details about jurisdictions’ progress on reforming interest rate benchmarks, see generally the FSB’s
Progress Report on Reforming Major Interest Rate Benchmarks, December 18, 2019, available at
https://www.fsb.org/wp-content/uploads/P181219.pdf. See also FSB’s Report to the G20 on Supervisory issues
associated with benchmark transition, July 9, 2020, available at https://www.fsb.org/2020/07/supervisory-issues-
associated-with-benchmark-transition-report-to-the-g20/.
19 See generally Clearing Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 2012)
(2012 Clearing Requirement). Phased implementation of the 2012 Clearing Requirement took place in three phases
based on type of market participant. See generally subpart B of Part 50 of the Commission’s regulations
ory-issues-
associated-with-benchmark-transition-report-to-the-g20/.
19 See generally Clearing Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 2012)
(2012 Clearing Requirement). Phased implementation of the 2012 Clearing Requirement took place in three phases
based on type of market participant. See generally subpart B of Part 50 of the Commission’s regulations. For ease
of reference, market participants are invited to consult Table 1 in proposed rule 50.26 in the Commission’s recent
notice of proposed rulemaking, Swap Clearing Requirement Exemptions, 85 FR 27955, 27970-72 (May 12, 2020)
(May 2020 NPRM), which sets forth specific compliance dates for each type of swap asset class required to be
cleared.
20 The 2012 Clearing Requirement also included two classes of credit default swaps, which were subject to separate
phased implementation based on type of market participant and availability of clearing at specific derivatives
clearing organizations.
Page 5
Kong dollars, Mexican pesos, Norwegian krone, Polish zloty, Singapore dollars, Swedish krone,
and Swiss franc), as well as other modifications to the scope of the 2012 Clearing Requirement.21
In the 2012 Clearing Requirement adopting release, the Commission clarified that the
Clearing Requirement applies to all new swaps, as well as changes in the ownership of a swap,
including by assignment, novation, exchange, transfer, or conveyance.22 Notably, the
Commission did not address amendments, material or otherwise, to existing swaps.23
In response to questions from comments about whether the new IRS Clearing
Requirement applied to swaptions, the Commission explained, “The Commission is thus
clarifying that the clearing requirement only applies to swaps resulting from the exercise of a
swaption . . . if the clearing requirement would have been applicable to the underlying swap . .
rial or otherwise, to existing swaps.23
In response to questions from comments about whether the new IRS Clearing
Requirement applied to swaptions, the Commission explained, “The Commission is thus
clarifying that the clearing requirement only applies to swaps resulting from the exercise of a
swaption . . . if the clearing requirement would have been applicable to the underlying swap . . .
at the time the counterparties executed the swaption.”24 In other words, for those swaptions
executed after an applicable compliance date under subpart B of Part 50, the IRS resulting from
the exercise of a swaption may be subject to the IRS Clearing Requirement.
B.
Existing DCR No-Action Relief for Compression Exercises
In March 2013, during the implementation of the 2012 Clearing Requirement, DCR staff
issued Letter 13-01 providing no-action relief from Part 50 when counterparties amend and
replace swaps resulting from multilateral compression exercises consisting only of swaps entered
into prior to the compliance date for the Commission’s Clearing Requirement, provided that
certain conditions are met.25 Under Letter 13-01, legacy swaps executed prior to any applicable
compliance date would not become subject to Part 50 when included in a multilateral
compression exercise. DCR staff took this no-action position at that time in order to “promote
the benefits of compression for uncleared swaps.” DCR recognized that amending swaps entered
into prior to a relevant compliance date for the Clearing Requirement was warranted in light of
the public policy objectives of reducing outstanding notional exposures and reducing operational
and counterparty credit risk.
In Letter No. 13-01, DCR set forth five conditions under which legacy swaps could be
amended and a replacement swap generated
DCR recognized that amending swaps entered
into prior to a relevant compliance date for the Clearing Requirement was warranted in light of
the public policy objectives of reducing outstanding notional exposures and reducing operational
and counterparty credit risk.
In Letter No. 13-01, DCR set forth five conditions under which legacy swaps could be
amended and a replacement swap generated. The portfolio compression exercise must: (1) meet
the definition set forth in Commission regulation 23.500(h) and must involve more than two
participants; (2) the exercise may not include cleared swaps; (3) the exercise may include only
21 See generally Clearing Requirement Determination Under Section 2(h) of the Commodity Exchange Act for
Interest Rate Swaps, 81 FR 71202 (Oct. 14, 2016) (2016 Clearing Requirement) (expanding all four classes of IRS
under regulation 50.4(a)).
22 2012 Clearing Requirement, 77 FR at 74316.
23 In its 2012 Clearing Requirement adopting release, the Commission discussed certain negotiated swap provisions
that counterparties may undertake based on the goal of reducing counterparty credit risk. The Commission stated
that these changes to a swap would be viewed as “legitimate business considerations . . . on a case-by-case basis in
conjunction with all other relevant facts and circumstances” and would be an affirmative defense to any charges of
evasion of the clearing requirement. See id. at 74319. DCR believes that this preamble discussion of public policy
considerations by the Commission offers additional support for the no-action position taken by staff in this letter.
24 2012 Clearing Requirement, 77 FR at 74316.
25 DCR No-Action Relief from Required Clearing of Swaps Resulting from Multilateral Compression Exercises,
CFTC Letter No. 13-01 (Mar. 18, 2013), available at https://www.cftc.gov/csl/13-01/download.
discussion of public policy
considerations by the Commission offers additional support for the no-action position taken by staff in this letter.
24 2012 Clearing Requirement, 77 FR at 74316.
25 DCR No-Action Relief from Required Clearing of Swaps Resulting from Multilateral Compression Exercises,
CFTC Letter No. 13-01 (Mar. 18, 2013), available at https://www.cftc.gov/csl/13-01/download.
Page 6
swaps executed prior to an applicable clearing requirement compliance date; (4) the compression
exercise must have established rules, the original counterparties to the swaps cannot be altered,
the material terms of the swap, including the maximum maturity of the swap and average
weighted maturity of the swap cannot change, and the sole purpose of the exercise must be
reducing operational or counterparty credit risk; and (5) the compression exercise methodology
cannot allow participants to specify which swaps will be amended or replaced.
The no-action position taken by DCR in Letter 13-01 is consistent with Commission rules
promoting the use of multilateral compression as a means of operational and risk management.26
More recently, citing DCR’s Letter 13-01, DSIO issued a similar no-action letter related to
uncleared margin requirements to allow compression exercises.27
C.
Existing DCR No-Action Relief for Partial Novations and Terminations
In March 2013, DCR staff subsequently issued Letter 13-02 that provided no-action relief
from Part 50 when swap counterparties partially novate or partially terminate swaps that were
executed prior to the date on which counterparties were required to begin complying with the
clearing requirement, i.e., uncleared legacy swaps.28
Letter No. 13-02 clarified that any change in the ownership of a swap would result in a
new swap that may be subject to the Clearing Requirement
relief
from Part 50 when swap counterparties partially novate or partially terminate swaps that were
executed prior to the date on which counterparties were required to begin complying with the
clearing requirement, i.e., uncleared legacy swaps.28
Letter No. 13-02 clarified that any change in the ownership of a swap would result in a
new swap that may be subject to the Clearing Requirement. As explained in the letter, “All new
swaps, including those that offset the risk of original swaps, are subject to required clearing,
unless an exception or exemption under part 50 of the Commission’s regulations applies.”29
Letter 13-02 explained that fully novated swaps entered into after the compliance date for
the Clearing Requirement would be subject to required clearing because they are new swaps.
Likewise, partial novations, meaning a transfer of the ownership of a stated portion of the
notional amount of an original swap from one of the original counterparties to a third party,
result in a new swap that is required to be cleared. However, DCR took a position of no-action
for partial terminations and partial novations of uncleared legacy swaps so long as records
related to the partially terminated or novated swaps reflect that the action is undertaken solely to
reduce the notional amount of the original swap and all other terms of the original swap remain
the same. Stub swaps, as defined in Letter 13-02, and novated swaps resulting from partial
novations must be submitted for clearing pursuant to section 2(h)(1)(A) of the CEA and Part 50.
D.
Size of Legacy IRS Uncleared Swaps Portfolios
DCR estimates that the number of swaps in uncleared legacy IRS portfolios is relatively
small given that a significant number of IRS referencing LIBOR rates were moved into clearing
by the end of 2013 (in accordance with the 2012 Clearing Requirement) and by the end of 2018
(in accordance with the 2016 Clearing Requirement)
A and Part 50.
D.
Size of Legacy IRS Uncleared Swaps Portfolios
DCR estimates that the number of swaps in uncleared legacy IRS portfolios is relatively
small given that a significant number of IRS referencing LIBOR rates were moved into clearing
by the end of 2013 (in accordance with the 2012 Clearing Requirement) and by the end of 2018
(in accordance with the 2016 Clearing Requirement). In addition, presumably some number of
26 See, e.g., Commission regulations 23.503 and 39.13(h)(4).
27 DSIO No-Action Letter No. 19-13 (June 6, 2019).
28 DCR No-Action Relief from Required Clearing for Partial Novation and Partial Termination of Swaps, CFTC
Letter No. 13-02 (Mar. 20, 2013), available at https://www.cftc.gov/csl/13-02/download.
29 Id., at page 4-5 (citing the Commission’s 2012 Clearing Requirement).
Page 7
uncleared IRS referencing LIBOR rates have been terminated or expired given the passage of
time.
In May 2019, the CFTC’s Office of the Chief Economist (OCE) published an analysis
estimating, among other things, the population of uncleared swap positions that constitute legacy
swaps.30 In this report, OCE noted that “legacy swaps with respect to the clearing requirement
constitute a trivial portion of swaps markets.”31
DCR worked with OCE to review the data presented in the May 2019 report, and DCR’s
own analysis regarding the number of swaps in uncleared legacy IRS portfolios supports OCE’s
conclusions. After reviewing swap transaction data reported to swap data repositories, DCR
found that the total number of swaps expected to be eligible for the relief under the terms of this
letter is small. Most swap counterparties have a discrete and manageable portfolio of
outstanding uncleared swaps that qualify as IRS legacy swaps for the purposes of the 2012
Clearing Requirement. DCR calculated the number of swaps in these legacy portfolios
ted to swap data repositories, DCR
found that the total number of swaps expected to be eligible for the relief under the terms of this
letter is small. Most swap counterparties have a discrete and manageable portfolio of
outstanding uncleared swaps that qualify as IRS legacy swaps for the purposes of the 2012
Clearing Requirement. DCR calculated the number of swaps in these legacy portfolios. In an
overwhelming majority of cases, including for CFTC-registered swap dealers, an entity’s
uncleared legacy IRS portfolio contains fewer than 1,000 swaps. Nonetheless, DCR understands
the importance of providing legal and operational certainty in the context of global IBOR reform
efforts.
Being able to track this type of data through swap data repository information has been
tremendously helpful to DCR in formulating policy recommendations for the Commission and
responding to requests for relief from market participants.
III.
ARRC’S REQUESTS FOR RELIEF FROM THE CLEARING
REQUIREMENT
ARRC’s requests focus primarily on (1) swaps that were executed prior to the relevant
compliance date on which swap counterparties were required to comply with the CFTC’s IRS
Clearing Requirement and thus have not been cleared (Uncleared Legacy IRS); and (2) uncleared
swaptions that, upon exercise, would result in an IRS of a type subject to the CFTC’s IRS
Clearing Requirement, but where the swaption was executed prior to the relevant compliance
date on which swap counterparties would have been required to comply with the IRS Clearing
Requirement applicable to such IRS (Uncleared Legacy Swaptions).
ARRC members seek to amend their portfolios of Uncleared Legacy IRS and Uncleared
Legacy Swaptions without such amended swaps, or swaps resulting from exercise of an
Uncleared Legacy Swaption, becoming subject to the IRS Clearing Requirement under section
2(h)(1)(A) of the CEA and CFTC regulations 50.2 and 50.4(a)
S Clearing
Requirement applicable to such IRS (Uncleared Legacy Swaptions).
ARRC members seek to amend their portfolios of Uncleared Legacy IRS and Uncleared
Legacy Swaptions without such amended swaps, or swaps resulting from exercise of an
Uncleared Legacy Swaption, becoming subject to the IRS Clearing Requirement under section
2(h)(1)(A) of the CEA and CFTC regulations 50.2 and 50.4(a).
In recognition of the public policy importance of facilitating a transition away from the
use of certain IBORs, as set forth below, DCR is providing a revised position of no-action for
failure to comply with the CFTC’s IRS Clearing Requirement when counterparties amend certain
30 Legacy Swaps under the CFTC’s Uncleared Margin and Clearing Rules (May 22, 2019), available at
https://www.cftc.gov/node/216426.
31 Id. at 2 (presenting conclusions drawn from regulatory data collected on open uncleared swap positions to identify
and analyze swaps that hold legacy status under the CFTC’s uncleared margin and clearing requirement rules).
Page 8
terms of an Uncleared Legacy IRS or an Uncleared Legacy Swaption, solely as part of a
transition away from IBORs to alternative reference rates, subject to certain conditions outlined
below.
This letter applies to Uncleared Legacy IRS and Uncleared Legacy Swaptions
referencing (i) IBORs; (ii) any other interest rate that the parties to a swap reasonably expect to
be discontinued or reasonably determine has lost its relevance as a reliable benchmark due to a
significant impairment; or (iii) any other reference rate that succeeds any of the foregoing (the
IBORs and any other rate meeting either of the foregoing criterion in (ii) or (iii) are hereinafter
collectively referred to as Impaired Reference Rates or IRRs)
e parties to a swap reasonably expect to
be discontinued or reasonably determine has lost its relevance as a reliable benchmark due to a
significant impairment; or (iii) any other reference rate that succeeds any of the foregoing (the
IBORs and any other rate meeting either of the foregoing criterion in (ii) or (iii) are hereinafter
collectively referred to as Impaired Reference Rates or IRRs).
DCR recognizes that by defining IRRs in this manner, market participants will be
permitted to make more than one amendment to the same Uncleared Legacy IRS or Uncleared
Legacy Swaptions before settling on an alternative benchmark that adequately meets the
counterparties’ needs. That is, this revised no-action letter is meant to anticipate 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, so long as the
original reference rate for the swap was an IBOR or met the other criterion above and the
amendment satisfies the conditions set forth in this letter.32
A.
ARRC’s Initial Request for Relief
In order to facilitate the transition from IBORs – or other reference rates that may be
phased out or become impaired – to RFRs and protect against any permanent cessation of IBOR
publication, ARRC requested that DCR provide relief from certain regulations under Subparts A
and C of Part 50 in its November 5, 2019 letter.33 ARRC asked that relief from the Clearing
Requirement be granted when swap counterparties amend any term of a swap that refers to, or is
based upon a reference rate, where such amendment to the term is done solely as part of an
IBOR transition. AARC also asked for relief for certain commercial end-users and co-operatives
under regulations 50.50 and 50.51
t 50 in its November 5, 2019 letter.33 ARRC asked that relief from the Clearing
Requirement be granted when swap counterparties amend any term of a swap that refers to, or is
based upon a reference rate, where such amendment to the term is done solely as part of an
IBOR transition. AARC also asked for relief for certain commercial end-users and co-operatives
under regulations 50.50 and 50.51.
Based on representation made by ARRC in its November 5, 2019 letter and discussions
with ARRC representatives, DCR issued Letter No. 19-28.
B.
ARRC’s New Request for Relief
In its July 20, 2020 letter, ARRC requests that the relief granted under Letter No. 19-28
be broadened to allow swap counterparties more discretion in amending the fallback provisions
in Uncleared Legacy IRS and Uncleared Legacy Swaptions. ARRC states that certain market
participants might be hesitant to move forward with the transition from IBORs to alternative
reference rates if all rates contemplated as possible alternative reference rates are not covered by
DCR’s no-action position.
32 This flexibility is intended to harmonize with terms of the original and revised DSIO staff letters providing relief
related to the IBOR transition under Part 23 of the Commission’s regulations.
33 All relevant letters requesting relief, along with staff responses, are available on the Commission’s website at:
https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm
32 This flexibility is intended to harmonize with terms of the original and revised DSIO staff letters providing relief
related to the IBOR transition under Part 23 of the Commission’s regulations.
33 All relevant letters requesting relief, along with staff responses, are available on the Commission’s website at:
https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm
Page 9
Second, in addition to expanding the relief specific to amendments made to change
fallback provisions, ARRC requests that relief should be granted for amendments made to
Uncleared Legacy IRS to replace IRRs with an alternative reference rate. Third, ARRC requests
new relief for amendments to the terms of Uncleared Legacy Swaptions based on expected
changes to applicable discount rates that are used to value the swaptions.34
Fourth, ARRC seeks clarification from DCR that the relief provided in this letter will
apply to ancillary modifications and follow-on amendments to Uncleared Legacy IRS and
Uncleared Legacy Swaptions. Specifically, ARRC requests that the revised no-action letter
should permit (i) extensions of maturity of a swap or a portfolio of swaps necessary to
accommodate the differences between market conventions for an IRR and its replacement; and
(ii) increases in the total effective notional amount of a swap or the aggregate total effective
notional amount of a portfolio of swaps necessary to accommodate the differences between
market conventions for an IRR and its replacement.
Finally, ARRC requests an expansion of the relief provided to entities relying on the end-
user exception and the exemption for co-operatives under Part 50 of the Commission’s
regulations.
Each of these requests is discussed and addressed below.35
C
notional amount of a portfolio of swaps necessary to accommodate the differences between
market conventions for an IRR and its replacement.
Finally, ARRC requests an expansion of the relief provided to entities relying on the end-
user exception and the exemption for co-operatives under Part 50 of the Commission’s
regulations.
Each of these requests is discussed and addressed below.35
C.
Qualifying IRR Amendments - Fallback Amendments
In existing ISDA Master Agreement documentation between swap counterparties,
including ISDA definitions incorporated by reference, there are fallback provisions that become
relevant only if the floating rate term is not available or becomes impaired (including because the
rate is permanently discontinued or is determined to be non-representative by the benchmark
administrator or the relevant authority in a particular jurisdiction).36 As part of the transition
from IRRs to alternative reference rates, specified reference rates will be introduced into fallback
provisions to the underlying ISDA Master Agreement documentation. For purposes of this
letter, the amendment of such fallback provisions (or addition of contractual terms)37 to modify
the process for selecting a new reference rate of an IRS that is not available because the rate is
34 As discussed in more detail below, ARRC is requesting relief for amendments to the terms of interest rate
swaptions based on expected changes to applicable discount rates that are used to value the swaptions.
35 This letter is intended to be a comprehensive overview of the relief provided by DCR. It is not an attempt to
address every item included in the evolving list of issues raised by ARRC’s membership.
36 Existing ISDA Master Agreement documentation between swap counterparties generally contains fallback
provisions to determine a floating rate term of an IRS if the rate becomes impaired or is unavailable
er is intended to be a comprehensive overview of the relief provided by DCR. It is not an attempt to
address every item included in the evolving list of issues raised by ARRC’s membership.
36 Existing ISDA Master Agreement documentation between swap counterparties generally contains fallback
provisions to determine a floating rate term of an IRS if the rate becomes impaired or is unavailable. According to
the 2006 ISDA Definitions, the current fallback provisions for LIBOR and other key IBORs require a poll of four
major banks in a relevant interbank market to determine the rate. If fewer than two major banks in the interbank
market respond, the fallback provision may require the calculation agent to poll major banks in the relevant city.
Finally, if rates are unavailable, the fallback provision may require the calculation agent to determine the rate. All
of these fallback instructions may vary or may be difficult to implement in practice. See also Development of
Fallbacks for LIBOR and Other Key IBORs – FAQs, available at https://www.isda.org/2017/11/28/development-
fallbacks-libor-key-ibors-faqs/.
37 The addition of new contract terms would be applicable only in situations where the underlying documentation is
not based on the ISDA definitions, which contain specific fallback provisions. This letter is intended to apply
regardless of the underlying master agreement documentation chosen by the counterparties.
ps://www.isda.org/2017/11/28/development-
fallbacks-libor-key-ibors-faqs/.
37 The addition of new contract terms would be applicable only in situations where the underlying documentation is
not based on the ISDA definitions, which contain specific fallback provisions. This letter is intended to apply
regardless of the underlying master agreement documentation chosen by the counterparties.
Page 10
unavailable, permanently discontinued, or determined to be non-representative by the benchmark
administrator or the relevant authority in a particular jurisdiction, will be referred to as the
Fallback Amendment.38
In its July 20, 2020 letter and discussions with staff, ARRC states that greater certainty
about the application of CFTC regulations to Uncleared Legacy IRS will eliminate significant
impediments to the efficient amendment of large volumes of swaps and facilitate the orderly
transition away from the use of IRRs, which is a goal supported by public sector authorities
around the world. Importantly, the Fallback Amendment process for Uncleared Legacy IRS is
one piece of a global reform agenda and does not reflect market participants voluntarily
assuming risk or exercising independent discretion.
ISDA is currently developing an industry protocol, the ISDA 2020 IBOR Fallbacks
Protocol, with respect to Fallback Amendments (ISDA Protocol). The ISDA Protocol is based
on consultations with and commentary from the industry. At the time of publication of this
revised letter, ISDA has not yet finalized the ISDA Protocol and its associated templates;
however, DCR understands that ISDA expects to publish the final ISDA Protocol in August
2020. It is anticipated that, by adhering to the ISDA Protocol, the counterparties would be able
to add a Fallback Amendment to an Uncleared Legacy IRS or Uncleared Legacy Swaption
without extensive, bilateral negotiations
d letter, ISDA has not yet finalized the ISDA Protocol and its associated templates;
however, DCR understands that ISDA expects to publish the final ISDA Protocol in August
2020. It is anticipated that, by adhering to the ISDA Protocol, the counterparties would be able
to add a Fallback Amendment to an Uncleared Legacy IRS or Uncleared Legacy Swaption
without extensive, bilateral negotiations.
Once the ISDA Protocol is in place, counterparties relying on ISDA documentation with
outstanding IRS will be able to adopt Fallback Amendments voluntarily. ARRC represents that
most counterparties will adhere to the ISDA benchmark rate fallback supplement because it
reduces uncertainty by specifying which alternative reference rate will replace which IRR, as
well as how any new swap rate will be determined if such a rate becomes unavailable.
ARRC requested that DCR confirm that a Fallback Amendment would not cause a swap
that is currently not required to be cleared pursuant to section 2(h)(1) of the CEA, as
implemented in Part 50 of the Commission’s regulations, to become subject to the Commission’s
IRS Clearing Requirement. DCR has concluded that adding a Fallback Amendment to an
Uncleared Legacy IRS or Uncleared Legacy Swaption39 should not cause the loss of legacy
status resulting in the swap becoming subject to the IRS Clearing Requirement.
When adding a Fallback Amendment to an Uncleared Legacy IRS or Uncleared Legacy
Swaption, the swap counterparties would be permitted to select any alternative reference rate as
the fallback that the parties believe appropriate after assessing its complexity, safety, and
soundness, and taking into consideration appropriate risk management practices.
38 In swaps that have no reference rate fallback provision currently, a Fallback Amendment would consist of new
provisions in the master agreement or other appropriate swap documentation
at the parties believe appropriate after assessing its complexity, safety, and
soundness, and taking into consideration appropriate risk management practices.
38 In swaps that have no reference rate fallback provision currently, a Fallback Amendment would consist of new
provisions in the master agreement or other appropriate swap documentation. Whether adopting a new Fallback
Amendment provision or updating a current fallback provision through a Fallback Amendment, this letter refers to
that process as “adding a Fallback Amendment.”
39 The term “Uncleared Legacy IRS” in this letter is used to refer to interest rate swaps that otherwise would be
required to be cleared pursuant to section 2(h)(1)(A) of the CEA and regulations 50.2 and 50.4(a), but for the fact
that such swaps were entered into prior to an applicable compliance date. The term “Uncleared Legacy Swaption”
in this letter is used to refer to a swaption that, upon exercise, would result in an IRS of a type subject to the CFTC’s
IRS Clearing Requirement, but where the swaption was executed prior to the relevant compliance date on which
such an IRS would have been required to be cleared, but amended after an applicable compliance date.
Page 11
DCR is taking this no-action position based on representations from ARRC that “a
significant portion of the Fallback Amendments will be effected by the multilateral ISDA
Protocol, although some counterparties may enter into Fallback Amendments bilaterally.” DCR
is not specifying that swap counterparties must rely upon an industry protocol. Bilateral
negotiation and addition of Fallback Amendments to Uncleared Legacy IRS or Uncleared
Legacy Swaptions also would be permissible under the terms of this letter
Amendments will be effected by the multilateral ISDA
Protocol, although some counterparties may enter into Fallback Amendments bilaterally.” DCR
is not specifying that swap counterparties must rely upon an industry protocol. Bilateral
negotiation and addition of Fallback Amendments to Uncleared Legacy IRS or Uncleared
Legacy Swaptions also would be permissible under the terms of this letter.
For the avoidance of doubt, DCR notes that swap counterparties are not required to add
Fallback Amendments to Uncleared Legacy IRS or Uncleared Legacy Swaptions and could
instead choose to: (1) clear the swap, or (2) terminate the swap.
D.
Replacement Rate Amendments
Some market participants may choose voluntarily to convert Uncleared Legacy IRS or
Uncleared Legacy Swaption referencing an IRR to instead reference an alternative reference rate
prior to any permanent cessation of the applicable IRR or determination that the IRR is non-
representative by the benchmark administrator or the relevant authority in a jurisdiction
(Replacement Rate Amendment).
DCR recognizes that counterparties may use a number of methods to effectuate
Replacement Rate Amendments.40 These methods may include completing the necessary
amendments by adherence to a future ISDA-led protocol, by bilateral contractual amendment of
an agreement or confirmation, or by execution of a new swap(s) in replacement of and
immediately upon termination of an existing swap(s) (i.e., “tear-ups”). Counterparties engaging
in a Replacement Rate Amendment also may find it necessary to make additional follow-on
amendments to maintain the economics of the swap
dherence to a future ISDA-led protocol, by bilateral contractual amendment of
an agreement or confirmation, or by execution of a new swap(s) in replacement of and
immediately upon termination of an existing swap(s) (i.e., “tear-ups”). Counterparties engaging
in a Replacement Rate Amendment also may find it necessary to make additional follow-on
amendments to maintain the economics of the swap. These follow-on amendments, so long as
they are necessary for the successful completion of a Replacement Rate Amendment, will be
permitted under the terms of relief included in this letter.41
DCR is taking this no-action position based on representations from ARRC that “[t]he
absence of relief for Replacement Rate Amendments creates precisely the hurdles to a transition
that the relief is meant to avoid. For example, it could deter market participants from taking
early, voluntary steps to transition such legacy swaps.”42 Given this representation and in an
effort to be consistent with relief provided by DSIO, DCR is expanding its previous no-action
position to permit Uncleared Legacy IRS and Uncleared Legacy Swaptions to maintain their
legacy status after a Replacement Rate Amendment if the alternative reference rate selected as
the replacement rate would otherwise subject the swap to the IRS Clearing Requirement.43
40 These methods are discussed in more detail in DSIO no-action letter issued concurrently with this letter.
41 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.
42 Attachment to ARRC request letter dated July 20, 2020, at page 4
40 These methods are discussed in more detail in DSIO no-action letter issued concurrently with this letter.
41 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.
42 Attachment to ARRC request letter dated July 20, 2020, at page 4.
43 For example, Uncleared Legacy IRS that are amended into new overnight index swaps that reference SONIA may
otherwise be subject to the IRS Clearing Requirement, but under the terms of this letter such swaps would continue
to be treated as Uncleared Legacy IRS.
Page 12
For the avoidance of doubt, swap counterparties are not required to amend their
Uncleared Legacy IRS or Uncleared Legacy Swaptions as part of the IBOR transition and could
instead choose to: (1) clear the swap, or (2) terminate the swap.
For purposes of this letter, the amendment of an Uncleared Legacy IRS or Uncleared
Legacy Swaption 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 IRR
Amendment.
E.
Qualifying Swaption Amendment
Certain CFTC-registered DCOs, including the Chicago Mercantile Exchange, Inc.
(CME), LCH Ltd
d 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 IRR
Amendment.
E.
Qualifying Swaption Amendment
Certain CFTC-registered DCOs, including the Chicago Mercantile Exchange, Inc.
(CME), LCH Ltd. (LCH), and Eurex Clearing AG (Eurex) have announced that they intend to
change the discount rate that they use for purposes of valuing cleared swaps and the rate
(commonly referred to as the Price Alignment Interest rate or the Price Alignment Amount rate,
depending on the context) applied to collateral or settlement amounts relating to certain cleared
swaps.44 Specifically, CME and LCH have announced a plan to transition from using the daily
effective federal funds rate (EFFR) to SOFR as of October 2020 with respect to USD discounted
swaps. LCH and Eurex have transitioned from using the Euro OverNight Index Average
(EONIA) to the Euro Short Term Rate (€STR) as of July 2020 with respect to EUR discounted
swaps.45
These DCO discount rate changes will affect both existing and new cleared swaps. With
respect to the switch from EFFR to SOFR, both CME and LCH will provide a mechanism to
compensate clearing members and customers for the change in the value of the existing cleared
swaps as a result of the switch and will create and register various EFFR and SOFR basis swaps
to hedge clearing members’ and customers’ change in discounting risk profile as a result of such
44 See, e.g., CME Group, SOFR & €STR Discounting & Price Alignment Transition Process for Cleared Swaps, Q2
2020, available at:https://www.cmegroup.com/trading/interest-rates/files/discounting-transition-proposal-mar-
2020.pdf; LCH, Letter to All SwapClear Users re: Proposed Next Steps for Transition to USD SOFR Discounting in
SwapClear, July 26, 2019, available at:
https://www.cftc.gov/med
44 See, e.g., CME Group, SOFR & €STR Discounting & Price Alignment Transition Process for Cleared Swaps, Q2
2020, available at:https://www.cmegroup.com/trading/interest-rates/files/discounting-transition-proposal-mar-
2020.pdf; LCH, Letter to All SwapClear Users re: Proposed Next Steps for Transition to USD SOFR Discounting in
SwapClear, July 26, 2019, available at:
https://www.cftc.gov/media/3221/MRAC_LCH_SOFRDiscountingLetter121119/download (transition from EFFR
to SOFR as of October 2020); LCH, Ltd Member Updates, Transition to €STR Discounting in SwapClear,
September 27, 2019, available at https://www.lch.com/membership/ltd-membership/ltd-member-updates/transition-
eustr-discounting-swapclear (transition from EONIA to €STR, originally as of June 2020); LCH, Ltd Member
Updates, Transition to €STR Discounting: Updated Timing, April 17, 2020, available at
https://www.lch.com/membership/ltd-membership/ltd-member-updates/transition-to-%E2%82%ACSTR-
Discounting-Updated-Timing (moving date of transition from EONIA to €STR to July 2020); Eurex Clearing,
Circular 096/19, EurexOTC Clear Service: Discounting Switch from EONIA to €STR for Cleared OTC EUR
Derivatives, October 23, 2019, available at https://www.eurexclearing.com/clearing-en/resources/circulars/clearing-
circular-1653578 (transition from EONIA to €STR, originally as of June 2020); Eurex Clearing, Circular 032/20,
EurexOTC Clear: Postponement of EurexOTC Clear Release 10.1, April 17, 2020, available at
https://www.eurexclearing.com/clearing-en/resources/circulars/clearing-circular-1942440 (moving date of transition
from EONIA to €STR to July 2020).
45 See generally LCH announcement at https://www.lch.com/membership/ltd-membership/ltd-member-
updates/euro-short-term-rate-eustr-rate-change-notice and Eurex announcement at
https://www.eurexclearing.com/clearing-en/find/production-newsboard/Update-on-EONIA-STR-Transition-
EurexOTC-Clear-Production-2128458.
earing-circular-1942440 (moving date of transition
from EONIA to €STR to July 2020).
45 See generally LCH announcement at https://www.lch.com/membership/ltd-membership/ltd-member-
updates/euro-short-term-rate-eustr-rate-change-notice and Eurex announcement at
https://www.eurexclearing.com/clearing-en/find/production-newsboard/Update-on-EONIA-STR-Transition-
EurexOTC-Clear-Production-2128458.
Page 13
switch. With respect to the switch from EONIA to €STR, both Eurex and LCH will provide a
mechanism to compensate clearing members and customers for the change in the value of the
cleared swaps as a result of the switch.
Based on ARRC representations,46 DCR understands that changes by DCOs to the
discount rate that they use for purposes of valuing cleared swaps and the rate applied to collateral
or settlement amounts relating to certain cleared swaps, could, in certain cases, affect the value
of uncleared USD- and EUR-denominated swaptions that exercise into uncleared swaps after the
date on which the change in discounting rate occurs. Some of these swaptions may be Uncleared
Legacy Swaptions that would require amendments or modifications to accommodate the
exchange of compensation or a discount rate modification because of an agreement regarding the
discount rate at the applicable DCO, and not because of a change in the reference rate of the
swap itself. To the extent that such an amendment to an uncleared USD- or EUR-denominated
swaption could exercise into a swap subject to the IRS Clearing Requirement, DCR is addressing
the matter in this letter
ange of compensation or a discount rate modification because of an agreement regarding the
discount rate at the applicable DCO, and not because of a change in the reference rate of the
swap itself. To the extent that such an amendment to an uncleared USD- or EUR-denominated
swaption could exercise into a swap subject to the IRS Clearing Requirement, DCR is addressing
the matter in this letter.
For purposes of this letter, if, solely as a result of a public announcement by a DCO of an
impending change the discount rate used for purposes of valuing cleared swaps and the rate
applied to collateral or settlement amounts relating to certain cleared swaps, the counterparties to
a swaption either: (1) voluntarily exchange compensation for a swaption; or (2) amend a
swaption’s terms solely to reflect an agreement regarding the discount rate used by a central
counterparty (CCP), then such actions under (1) or (2) shall be referred to as a Qualifying
Swaption Amendment.
F.
Qualifying Credit Support Annexes (CSA) Amendments
ARRC has explained that market participants also may choose to align the interest rates
paid on posted collateral for uncleared swaps with the discount rate change implemented by the
DCOs for cleared swaps described above. For example, a swap dealer may offset the risk of an
uncleared swap with a third party by entering into a cleared swap. In such cases, the swap dealer
customarily will seek to align the interest rate used in an existing CSA, which may be a non-
impaired rate, with the discount rate used by the DCO to avoid basis risk.
Under ARRC’s Recommended Best Practices, swap dealers are encouraged to amend
their interdealer CSAs to use SOFR for USD collateral by December 31, 2020,47 and, because
EONIA will be discontinued in January 2022, market participants will need to amend CSAs
referencing EONIA
ed in an existing CSA, which may be a non-
impaired rate, with the discount rate used by the DCO to avoid basis risk.
Under ARRC’s Recommended Best Practices, swap dealers are encouraged to amend
their interdealer CSAs to use SOFR for USD collateral by December 31, 2020,47 and, because
EONIA will be discontinued in January 2022, market participants will need to amend CSAs
referencing EONIA. ARRC states that amending credit support documents will not only
eliminate the potential basis risk that would otherwise exist between the cleared and uncleared
swap markets, but also will provide greater liquidity for market participants across both markets.
46 ARRC letter to DSIO, dated June 16, 2020, at page 4, note 14 (“It is the ARRC’s view that so long as the rate
being transitioned into represents an RFR, and the purpose of the transition is to facilitate the IBOR transition an
enhance market stability, similar relief from the DSIO and applicable other CFTC divisions should apply.”)
(emphasis added). In formulating this letter, DCR staff discussed the need for Part 50 relief related to uncleared
swaptions that exercise into swaps that may be subject to the IRS Clearing Requirement with ARRC representatives.
47 See Alternative Reference Rates Committee, ARRC Recommended Best Practices for Completing the Transition
from LIBOR, May 27, 2020, available at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Best-Practices.pdf.
for Part 50 relief related to uncleared
swaptions that exercise into swaps that may be subject to the IRS Clearing Requirement with ARRC representatives.
47 See Alternative Reference Rates Committee, ARRC Recommended Best Practices for Completing the Transition
from LIBOR, May 27, 2020, available at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Best-Practices.pdf.
Page 14
ARRC believes that market participants would greatly benefit from clarity regarding the status of
such CSA amendments in order to ensure a smooth and orderly transition from IBORs.
For purposes of this letter, an amendment to a CSA solely to (1) align the interest rate
paid on posted collateral for uncleared swaps under a CSA with the discount rate used by a CCP;
or (2) replace an IRR that is an interest rate paid on posted collateral for uncleared swaps, is
referred to as a Qualifying CSA Amendment.
IV.
GRANT OF NO-ACTION RELIEF AND APPLICABLE
CONDITIONS
For purposes of the DCR no-action positions set forth below, the amendment of an
Uncleared Legacy IRS or Uncleared Legacy Swaption that solely consists of (1) a Qualifying
IRR Amendment; (2) a Qualifying Swaption Amendment; (3) a Qualifying CSA Amendment; or
(4) any combination of the foregoing is referred to as a Qualifying Amendment.
Consistent with the approach taken by DSIO in its no-action letter issued concurrently
with this letter, a Qualifying Amendment to an Uncleared Legacy IRS or Uncleared Legacy
Swaption 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.48
However, a Qualifying Amendment may not include any amendment that (i) changes the
counterparties to the original Uncleared Legacy IRS or Uncleared Legacy Swaption, (ii) extends
the maximum maturity of a Uncleared Legacy IRS or Uncleared Legacy Swaption or a portfolio
of such s
in different reset dates, fixed/floating leg payment dates,
business day conventions, and day count fractions.48
However, a Qualifying Amendment may not include any amendment that (i) changes the
counterparties to the original Uncleared Legacy IRS or Uncleared Legacy Swaption, (ii) extends
the maximum maturity of a Uncleared Legacy IRS or Uncleared Legacy Swaption or a portfolio
of such swaps beyond what is necessary to accommodate the differences between market
conventions for an IRR or discount rate used by a CCP and its replacement, or (iii) increases the
total effective notional amount of a Uncleared Legacy IRS or Uncleared Legacy Swaption or the
aggregate total effective notional amount of a portfolio of such swaps beyond what will
accommodate the differences between market conventions for an IRR or a discount rate used by
a CCP and its replacement.
In issuing this letter, DCR reminds interested market participants that swap counterparties
retain responsibility for determining which of their swaps qualify as Uncleared Legacy IRS or
Uncleared Legacy Swaptions. This letter does not apply to swaps that have been submitted to
clearing voluntarily.
48 ARRC requested 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 contends 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 also may impact the total effective notional amount as a result of differing day count fraction
conventions
m (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 also may 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. See Comment Letter on Proposed Rulemaking Regarding Margin and
Capital Requirements for Covered Swap Entities at 6-7, available at:
https://www.federalreserve.gov/SECRS/2019/December/20191210/R-1682/R-
1682_120919_137107_439606911591_1.pdf.
Page 15
The terms and conditions used in this letter are generally consistent with relief provided
by DSIO and the prudential regulators with regard to margin for uncleared swaps.49 DCR is
taking the no-action position set forth in this letter to help facilitate an orderly market-wide
transition away from the use of IBOR floating rates to RFRs selected by ARRC and similar
working groups convened in other jurisdictions.
As set forth in detail above, the relief described in this letter is consistent with statements
made by the Commission in the 2012 Clearing Requirement and with prior no-action letters
issued by DCR related to the Clearing Requirement. Nevertheless, counterparties should not
view this letter as an opportunity to renegotiate economic terms or otherwise engage in price-
forming activity. For all of these reasons, certain conditions are appropriate.
Given the foregoing, DCR believes that a no-action position with respect to Qualifying
Amendments is warranted
ction letters
issued by DCR related to the Clearing Requirement. Nevertheless, counterparties should not
view this letter as an opportunity to renegotiate economic terms or otherwise engage in price-
forming activity. For all of these reasons, certain conditions are appropriate.
Given the foregoing, DCR believes that a no-action position with respect to Qualifying
Amendments is warranted. Accordingly, until December 31, 2021, DCR will not recommend
that the Commission take an enforcement action against any person for a failure to comply with
the IRS Clearing Requirement under section 2(h)(1)(A) of the CEA and Commission regulations
50.2 and 50.4(a) when such person makes a Qualifying Amendment to an Uncleared Legacy IRS
or Uncleared Legacy Swaption, provided that such an amendment is made for the sole purpose of
transitioning from an IRR to an alternative reference rate.
DCR recognizes the challenges associated with an industry-wide transition from IRRs to
alternative reference rates, especially in the context of amending both swap documentation and
other commercial documentation referencing IBORs. Nonetheless, DCR continues to believe
that retaining an expiration date for this portion of its no-action position aligns with the deadline
set by global authorities and serves as an incentive to meet that deadline. In addition, this
expiration date affords DCR the opportunity to ensure that its no-action position remains tailored
and appropriate to the needs of the industry.50
This relief does not apply to the Commission’s trade execution requirement, implemented
via the “made available to trade” determination process in 2013, which took effect in 2014 and
currently applies to fixed-to-floating IRS contracts with benchmark tenors denominated in U.S
opportunity to ensure that its no-action position remains tailored
and appropriate to the needs of the industry.50
This relief does not apply to the Commission’s trade execution requirement, implemented
via the “made available to trade” determination process in 2013, which took effect in 2014 and
currently applies to fixed-to-floating IRS contracts with benchmark tenors denominated in U.S.
dollars, euros, and British pound sterling.51
49 The term “prudential regulators” refers to 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 are responsible for implementing margin rules for
uncleared swaps entered into by swap dealers subject to prudential regulation for purposes of margin and capital.
50 See, e.g., Exemption From the Swap Clearing Requirement for Certain Affiliated Entities – Alternative
Compliance Frameworks for Anti-Evasionary Measures, 85 FR 44170, 44171-72 (July 22, 2020)(codifying
expanded and revised staff no-action positions taken over the course of six years with regard to regulation 50.52)).
Similarly, DCR recognizes that an eventual amendment to regulation 50.4(a) will be necessary to reflect the
cessation of particular IBORs.
51 See Commission regulation 37.10 and Commission regulation 38.12; see also CFTC, Industry Filings – Swaps
Made Available to Trade, available at
https://www.cftc.gov/idc/groups/public/@otherif/documents/file/swapsmadeavailablechart.pdf. See also CFTC
Letter 19-27 (granting relief from the trade execution requirement) and DMO’s revised no-action letter issued
concurrently with this letter.
51 See Commission regulation 37.10 and Commission regulation 38.12; see also CFTC, Industry Filings – Swaps
Made Available to Trade, available at
https://www.cftc.gov/idc/groups/public/@otherif/documents/file/swapsmadeavailablechart.pdf. See also CFTC
Letter 19-27 (granting relief from the trade execution requirement) and DMO’s revised no-action letter issued
concurrently with this letter.
Page 16
This relief also does not alter any independent obligations that swap dealers may have
under Part 23 of the Commission’s regulations,52 including requirements to know their
counterparties, keep records of their swaps, and report such swaps to swap data repositories.
Similarly, this relief does not alter any independent obligations that swap counterparties may
have under Part 45 of the Commission’s regulations53 to report their swaps to a swap data
repository.
V.
RELIEF REQUESTED BY CERTAIN END-USERS
A.
Factual Background
Commission regulation 50.50 sets forth an exception from the Clearing Requirement for
non-financial entities (i.e., commercial end-users eligible to elect an exception under section
2(h)(7)(A) of the CEA and Commission regulation 50.50(a)) using swaps to hedge or mitigate
commercial risk, as defined under regulation 50.50(c). Similarly, Commission regulation 50.51
sets forth an exemption from the Clearing Requirement for cooperatives that (1) meet the
definition of “exempt cooperative” under regulation 50.51(a); and (2) are using swaps to hedge
or mitigate commercial risk, in accordance with regulation 50.50(c), related to loans to members
to hedge or mitigate
commercial risk, as defined under regulation 50.50(c). Similarly, Commission regulation 50.51
sets forth an exemption from the Clearing Requirement for cooperatives that (1) meet the
definition of “exempt cooperative” under regulation 50.51(a); and (2) are using swaps to hedge
or mitigate commercial risk, in accordance with regulation 50.50(c), related to loans to members.
The same definition of hedging and mitigating commercial risk thus applies to both non-financial
entities and cooperatives electing not to clear swaps that would otherwise be subject to the
Clearing Requirement.54
Both regulations 50.50 and 50.51 have reporting requirements, for which the reporting
counterparty generally would be a swap dealer.55 Reporting the election of an exception or
exemption from required clearing to a swap data repository allows the Commission access to
accurate data regarding uncleared swaps subject to section 2(h)(1)(a) of the CEA and Part 50 of
the Commission’s regulations.56
52 17 CFR part 23.
53 17 CFR part 45.
54 These rules and the statutory provisions upon which they are based also apply in the context of the Commission’s
uncleared margin requirements pursuant to Commission regulation 23.150(b), 17 CFR § 23.150(b).
55 See, e.g., regulations 50.50(a)(1)(iii), 50.50(b), and 50.51(c) (generally setting forth the framework that an entity
that elects an exception or exemption from the Clearing Requirement is the “electing counterparty” while the other
counterparty is the “reporting counterparty.”) The Commission explained in the preamble to the End-User
Exception to the Clearing Requirement for Swaps, 77 FR 42560, 42566 (July 19, 2012) (2012 End-User Exception
Final Rulemaking) that the reporting counterparty would report the following information regarding such swaps on a
swap-by-swap basis or an annual basis: “(1) Whether the electing counterparty is a financial entity or a finance
affiliate (i.e., is a financial
e preamble to the End-User
Exception to the Clearing Requirement for Swaps, 77 FR 42560, 42566 (July 19, 2012) (2012 End-User Exception
Final Rulemaking) that the reporting counterparty would report the following information regarding such swaps on a
swap-by-swap basis or an annual basis: “(1) Whether the electing counterparty is a financial entity or a finance
affiliate (i.e., is a financial entity electing the end-user exception by virtue of Sections 2(h)(7)(C)(ii) or (iii) or
2(h)(7)(D) of the CEA); (2) whether the swap hedges or mitigates commercial risk (the annual filing will state that
the electing counterparty will only elect the end-user exception for swaps that hedge or mitigate commercial risk);
(3) how the electing counterparty generally expects to meet its financial obligations; and (4) information related to
whether the electing counterparty is an issuer of securities with board approval to not clear the swaps for which the
end-user exception is elected.” Swap counterparties could choose the most cost-effective option. See id. DCR has
reviewed non-public swap data repository data that indicate it is primarily registered swap dealers and a handful of
other large financial entities that make reports on a swap-by-swap basis when their end-user counterparties elect an
exception or exemption from the Clearing Requirement.
56 See Commission regulation 50.50(b) and regulation 50.51(c), 17 CFR 50.50(b) and 50.51(c).
id. DCR has
reviewed non-public swap data repository data that indicate it is primarily registered swap dealers and a handful of
other large financial entities that make reports on a swap-by-swap basis when their end-user counterparties elect an
exception or exemption from the Clearing Requirement.
56 See Commission regulation 50.50(b) and regulation 50.51(c), 17 CFR 50.50(b) and 50.51(c).
Page 17
The end-user exception under regulation 50.50 also is available to certain small financial
entities, including banks, savings associations, farm credit system institutions, and credit unions,
provided such institutions have total assets of $10 billion or less on the last day of the
institution’s most recent fiscal year, pursuant to regulation 50.50(d).57 These financial entities
must meet the requirements of regulation 50.50(c) regarding hedging and mitigating their
commercial risk in order to elect the exception under regulation 50.50, as well.
B.
ARRC’s Initial Request
ARRC members that are commercial end-users and cooperatives have stated that, due to
the operational constraints and timing difficulties, they may not be able to simultaneously amend
both their swap documentation and the related commercial agreements (upon which such entities
rely in electing not to clear swaps subject to Part 50) by the December 31, 2021 deadline set by
global authorities. For example, a commercial end-user or cooperative may have a reference rate
mismatch between its swap documentation and its commercial documentation if one set of
documents is amended before the other
documentation and the related commercial agreements (upon which such entities
rely in electing not to clear swaps subject to Part 50) by the December 31, 2021 deadline set by
global authorities. For example, a commercial end-user or cooperative may have a reference rate
mismatch between its swap documentation and its commercial documentation if one set of
documents is amended before the other. More specifically, ARRC has stated that, as the IBOR-
linked IRS market transitions to alternative reference rates, there are likely to be situations where
commercial end-users and cooperatives will have to amend their swaps that reference IRRs and
are subject to the CFTC’s IRS Clearing Requirement, 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 also may be true (i.e., amendments to commercial
agreements may be completed before the related swaps are amended). This timing mismatch
means commercial end-users and cooperatives may not be able to make, or keep making, the
required representations under regulations 50.50(a)(1)(ii) and 50.51(b) regarding “hedging or
mitigating commercial risk” as that concept is defined in regulation 50.50(c).
Therefore, in its November 5, 2019 letter, ARRC requested that DCR 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 the underlying swap documentation or commercial
documentation is amended and the two sets of documentation no longer reference the same rate
or have different rates for some period of time.58 DCR issued Letter No. 19-28 in response to
this request
us 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 the underlying swap documentation or commercial
documentation is amended and the two sets of documentation no longer reference the same rate
or have different rates for some period of time.58 DCR issued Letter No. 19-28 in response to
this request.
57 In its May 2020 NPRM, the Commission proposed to codify several no-action letters that DCR previously issued
for the holding companies of small banks and savings and loan associations because it is frequently the holding
company that enters into swaps on behalf of the financial institution. 85 FR at 27963-65 (proposing to codify Letter
No. 16-01). In the same proposal, the Commission proposed to codify a no-action letter for community
development financing institutions (CDFIs). Id. (proposing to codify Letter No. 16-02). The May 2020 NPRM also
proposed to codify certain statements made by the Commission in the 2012 End-User Exception final rulemaking
exempting swaps entered into by central banks, central governments, the Bank of International Settlements, and 22
international financial institutions (IFIs) from the Clearing Requirement. Id. at 27957-63 (proposing to codify
Commission statements from the 2012 End-User Exception Final Rulemaking, 77, FR at 42561-62, and four staff
no-action letters, namely, Letter Nos. 13-25, 17-57, 17-58, and 17-59).
58 In addition to the November 5, 2019 ARRC letter requesting the relief discussed in this letter, Commission staff
also received a letter from the National Association of Corporate Treasurers (NACT), which set forth certain
requests for staff action on behalf of the entire end-user community
FR at 42561-62, and four staff
no-action letters, namely, Letter Nos. 13-25, 17-57, 17-58, and 17-59).
58 In addition to the November 5, 2019 ARRC letter requesting the relief discussed in this letter, Commission staff
also received a letter from the National Association of Corporate Treasurers (NACT), which set forth certain
requests for staff action on behalf of the entire end-user community. NACT, in support of ARRC’s request, stated
that “[d]uring this transitional phase, such derivatives contracts should maintain their status as swaps that are ‘used
to hedge or mitigate commercial risk’ as they will still ‘remain economically appropriate to the reduction of risks’ in
connection with the management of a commercial enterprise.’” NACT letter to DMO and DCR, Summary of
LIBOR-SOFR Transition Issues, page 4, dated June 5, 2019 (quoting Commission regulation 50.50(c)).
Page 18
C.
ARRC’s New Request for Relief
ARRC’s new request letter, dated July 20, 2020, raises a number of concerns with the no-
action position taken by DCR in Letter No. 19-28. ARRC requests that the time limit on the no-
action letter be eliminated, and the relief not be conditioned on commercial end-users amending
their commercial agreements by a date certain. ARRC also requests DCR clarify that (1)
commercial end-users be able to rely upon the representations made to their swap
counterparties59 at the time such end-users elected an exception or exemption from the IRS
Clearing Requirement; and (2) commercial end-users do not have an ongoing obligation to
monitor compliance with such an election.
ARRC also requests no-action relief for entities that were eligible to elect not to clear
IRS subject to the Clearing Requirement at the time they entered into the IRS, but are no longer
eligible to elect an exception or exemption under Part 50 because they no longer meet all the
conditions under the rule
s do not have an ongoing obligation to
monitor compliance with such an election.
ARRC also requests no-action relief for entities that were eligible to elect not to clear
IRS subject to the Clearing Requirement at the time they entered into the IRS, but are no longer
eligible to elect an exception or exemption under Part 50 because they no longer meet all the
conditions under the rule. ARRC provides the example of a small bank that qualified for, and
elected an exemption under regulation 50.50(d), when such a bank entered into an uncleared
IRS, but “would no longer be eligible for such exception (e.g., a bank that previously had total
assets of $10 billion or less, and that now exceeds that threshold).”60
Finally, in addition to requesting relief from ongoing obligations under Part 50’s
exceptions and exemptions in the context of making Fallback Amendments to swaps otherwise
subject to the IRS Clearing Requirement, ARRC asks DCR to expand its no-action position to
include making Replacement Rate Amendments to swaps subject to the IRS Clearing
Requirement but for which an exemption has been previously elected.
D.
DCR Revised No-Action Position Under Part 50
DCR recognizes that a temporary mismatch between the rates referenced in commercial
agreements and the rates referenced in the swap documentation for IRS used to hedge or mitigate
the risk of such commercial agreements may lead certain end-users to question whether the IRS
for which they previously elected an exception or an exemption under Part 50 still qualify as
instruments used to hedge or mitigate commercial risk, as prescribed by Commission regulations
50.50(c), 50.51(b)(2) or applicable condition of staff no-action relief. These entities also may
have concerns about whether they must reassess their status as commercial end-users when
making amendments as part of the IBOR transition process given the passage of time since the
original election of an exception or exemption
or mitigate commercial risk, as prescribed by Commission regulations
50.50(c), 50.51(b)(2) or applicable condition of staff no-action relief. These entities also may
have concerns about whether they must reassess their status as commercial end-users when
making amendments as part of the IBOR transition process given the passage of time since the
original election of an exception or exemption. Lastly, the entities may be uncertain about their
ongoing recordkeeping and reporting obligations.
For purposes of this letter, DCR will use the term “Eligible End-User” to refer to the
following types of entities: (1) a non-financial entity electing an exception under Commission
regulations 50.50(a)-(c); (2) a financial entity electing an exception under Commission
regulation 50.50(a)-(d); (3) an exempt cooperative electing an exemption under Commission
59 As explained above, in many if not most instances, this counterparty is likely to be a swap dealer subject to
regulations under Part 23 of the Commission’s regulations. Specific requests for relief related to Part 23’s
requirements for swap dealers are being addressed in a revised staff letter issued concurrently by DSIO.
60 See Attachment to ARRC request letter dated July 20, 2020, at page 8.
Page 19
regulation 50.51; and (4) an entity identified by the Commission in its recent notice of proposed
rulemaking under proposed regulations 50.77 (community development financial institutions),
50.78 (bank holding companies), and 50.79 (savings and loan holding companies).61
ARRC has not requested no-action relief for swaps entered into by the other types of
entities addressed in Commission’s May 2020 NPRM, namely central banks, central
governments, the Bank of International Settlements, and 22 international financial institutions
(IFIs)
nity development financial institutions),
50.78 (bank holding companies), and 50.79 (savings and loan holding companies).61
ARRC has not requested no-action relief for swaps entered into by the other types of
entities addressed in Commission’s May 2020 NPRM, namely central banks, central
governments, the Bank of International Settlements, and 22 international financial institutions
(IFIs). Generally speaking, the swaps entered into by these entities are excluded from the IRS
Clearing Requirement by action of the Commission in the 2012 End-User Rulemaking.62
Accordingly, these entities would not require a no-action position similar to that provided in this
letter when making amendments to their IRS as part of the IBOR transition process. However, to
the extent that these entities believe that such relief is needed with regard to moving from IBORs
to alternative reference rates, DCR staff stands ready to address such concerns.
For the avoidance of doubt, by issuing this letter, DCR is not taking a position regarding
whether the entities defined as Eligible End-Users require the relief requested by ARRC. Rather,
DCR is making such relief available should Eligible End-Users believe it is needed.
Further, for purposes of this letter, DCR will use the term “Covered IRS” to include any
interest rate swap that (1) qualified as a swap used to hedge or mitigate commercial risk as
defined pursuant to regulation 50.50(c) at the time of execution; (2) qualified as a swap for
which an Eligible End-User (a) elected an exception or exemption from the IRS Clearing
Requirement pursuant to regulations 50.50, 50.51, or any applicable no-action position taken by
DCR; and (b) notified its swap counterparty of such an election; and (3) was to the best of the
Eligible End-User’s knowledge reported to a swap data repository at the time an applicable
exception or exemption was elected, pursuant to regulation 50.50(a)(1)(iii), 50.51, or applicable
condition in a prior DCR staff letter
o regulations 50.50, 50.51, or any applicable no-action position taken by
DCR; and (b) notified its swap counterparty of such an election; and (3) was to the best of the
Eligible End-User’s knowledge reported to a swap data repository at the time an applicable
exception or exemption was elected, pursuant to regulation 50.50(a)(1)(iii), 50.51, or applicable
condition in a prior DCR staff letter.
In defining the terms Eligible End-User and Covered IRS, DCR is electing to provide a
no-action position for a broader group of end-users and the IRS that they have elected not to
clear than was covered by Letter No. 19-28. The objective in issuing this relief is to avoid being
under-inclusive and thus forcing ARRC’s membership to make additional requests for relief.
Eligible End-Users should independently determine whether to avail themselves of this relief
based on their own facts and circumstances. Nothing in this letter imposes new obligations or
burdens that would be inconsistent with prior Commission action or staff no-action positions.
DCR will not recommend the Commission commence an enforcement action against an
Eligible End-User for failure to comply with section 2(h)(1)(A) and 2(h)(7) of the CEA, and
Commission regulations 50.2, 50.4(a), 50.50, or 50.51, as applicable, when seeking to remain in
compliance with the hedging or mitigating risk prong of regulation 50.50(c), 50.51(b)(2), or
applicable condition in a prior DCR staff letter, when such an Eligible End-User enters into a
61 May 2020 NPRM, 85 FR at 27973-74.
62 See generally 2012 End-User Exception Final Rulemaking, 77 at 42562, and May 2020 NPRM, 85 FR at 27957-
61
o remain in
compliance with the hedging or mitigating risk prong of regulation 50.50(c), 50.51(b)(2), or
applicable condition in a prior DCR staff letter, when such an Eligible End-User enters into a
61 May 2020 NPRM, 85 FR at 27973-74.
62 See generally 2012 End-User Exception Final Rulemaking, 77 at 42562, and May 2020 NPRM, 85 FR at 27957-
61. For example, a foreign central bank entering into a Qualifying Amendment for swaps with its swap dealer
counterparty is unlikely to require the relief offered in this letter because the Commission has recognized that the
swaps entered into by central banks are not be subject to the Clearing Requirement in keeping with considerations of
comity and the traditions of the international system.
Page 20
Qualifying Amendment63 to a Covered IRS, provided that such an amendment is made for the
sole purpose of transitioning from an IRR to an alternative reference rate.
DCR also will not recommend the Commission commence an enforcement action against
an Eligible End-User for failure to remain in compliance with the hedging or mitigating risk
prong of regulation 50.50(c), 50.51(b)(2), or applicable condition in a prior DCR staff letter,
when electing an exception or exemption from the IRS Clearing Requirement when such an
Eligible End-User amends its underlying commercial agreement, provided that the amendment to
such commercial agreement is done for the sole 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
mmercial agreement, provided that the amendment to
such commercial agreement is done for the sole 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.
Because DCR recognizes that amendments to Covered Swaps and amendments to related
commercial agreements may not occur at the same time and one amendment may occur before
the other, DCR will not recommend an enforcement action be taken against an Eligible End-
User in these instances for failure to remain in compliance with the hedging or mitigating risk
prong of regulation 50.50(c), 50.51(b)(2), or applicable condition in a prior DCR staff letter,
provided that the amendments are being made for the sole purpose of transitioning from an IRR
to an alternative reference rate.
DCR expects that the Covered IRS documentation and any related commercial agreement
documentation will be amended as soon as commercially practicable after the Qualifying
Amendment is made so that the documentation again reflects that the Covered IRS qualifies as a
swap used to hedge or mitigate the commercial risk of an Eligible End-User pursuant to
Commission regulation 50.50(c), 50.51(b)(2), or applicable condition in a prior DCR staff letter.
Eligible End-Users and their swap counterparties should use their best efforts to work
toward amending the reference rate provisions in both Covered IRS documentation and the
related commercial arrangement documentation so that the rates referenced therein match again
by December 31, 2021.
This relief also does not alter any independent obligations that swap dealers may have
under Part 23 of the Commission’s regulations, including requirements to know their
counterparties, keep records of their swaps, and report such swaps to swap data repositories.
E
d the
related commercial arrangement documentation so that the rates referenced therein match again
by December 31, 2021.
This relief also does not alter any independent obligations that swap dealers may have
under Part 23 of the Commission’s regulations, including requirements to know their
counterparties, keep records of their swaps, and report such swaps to swap data repositories.
E.
DCR No-Action Relief Related to Eligible End-User Representations,
Reporting, and Ongoing Monitoring
DCR recognizes that Eligible End-Users may not be in a position to ensure that their
swap counterparties are maintaining records of the Eligible End-User’s election not to clear its
IRS subject to Part 50 of the Commission’s regulations, as well as maintaining records of the
representations made by the Eligible End-User necessary to make such an election. Nor will
Eligible End-Users be able to ensure that their swap counterparties are accurately and regularly
63 To maintain consistency with the definition of a “Qualifying Amendment” discussed above, DCR acknowledges
that any such amendment to a Covered IRS may include ancillary changes to existing terms to conform to different
market conventions.
Page 21
reporting such elections or material amendments to a Covered Swap to a swap data repository,
pursuant to Commission regulations 45.3 and 45.4, because this data is not publicly available
f a “Qualifying Amendment” discussed above, DCR acknowledges
that any such amendment to a Covered IRS may include ancillary changes to existing terms to conform to different
market conventions.
Page 21
reporting such elections or material amendments to a Covered Swap to a swap data repository,
pursuant to Commission regulations 45.3 and 45.4, because this data is not publicly available.
For these reasons, DCR will not recommend the Commission commence an enforcement
action against an Eligible End-User making a Qualifying Amendment to a Covered IRS, for
failure to comply with sections 2(h)(1)(A) and 2(h)(7) of the CEA, and Commission regulations
50.2, 50.4(a), 50.50, 50.51, or any applicable conditions in prior DCR staff letters, when such an
Eligible End-User is relying on prior representations made to their swap counterparties at the
time such end-users originally elected an exception or exemption from the IRS Clearing
Requirement, provided such a Qualifying Amendment is made for the sole purpose of
transitioning from an IRR to an alternative rate.
Similarly, DCR will not recommend an enforcement action against Eligible End-Users
for failure to monitor ongoing compliance with an election of exception or exemption from the
Clearing Requirement, including pursuant to the requirements under regulation 50.50(b)(2),
50.50(c), 50.51, or any applicable conditions in prior DCR staff letters when entering into a
Qualifying Amendment to a Covered IRS, provided such a Qualifying Amendment is made for
the sole purpose of transitioning from an IRR to an alternative reference rate.
Swap counterparties to Eligible End-Users may continue to have independent
monitoring, recordkeeping, and reporting obligations, including but not limited to compliance
with regulation 23.505 and Part 45 obligations
g into a
Qualifying Amendment to a Covered IRS, provided such a Qualifying Amendment is made for
the sole purpose of transitioning from an IRR to an alternative reference rate.
Swap counterparties to Eligible End-Users may continue to have independent
monitoring, recordkeeping, and reporting obligations, including but not limited to compliance
with regulation 23.505 and Part 45 obligations. Swap counterparties to Eligible End-Users are
reminded that they may remain subject to requirements under Parts 23, 45, or 50, as applicable,
when entering into Qualifying Amendments to Covered IRS with Eligible End-Users.
Specifically, such swap counterparties must:
1.
Maintain records of the election by an Eligible End-User not to clear a Covered IRS that
would otherwise be subject to the IRS Clearing Requirement pursuant to regulation
23.505(a)(1)-(3), (5), and keep records pursuant to regulation 23.505(b);
2.
Ensure that in making and maintaining such an election by an Eligible End-User, it is
relying on the most recently filed documents meeting the requirements of Commission
regulation 50.50(b), 50.51(c), or similar provision under prior staff no-action letter;
3.
Comply with all reporting requirements under Part 45 related to Qualifying Amendments
made to Covered Swaps.
For the avoidance of doubt, this no-action position does not alter the responsibilities of
any reporting counterparty to report swaps for which an exception or exemption is elected by an
Eligible End-User under Part 45 of the Commission’s regulations. Nor does it alter any
independent obligations that swap dealers may have under Part 23 of the Commission’s
regulations, including requirements to know their counterparties, keep records of their swaps,
and report such swaps to swap data repositories. 64
64 In Letter No. 19-26, DSIO provided swap dealers limited no-action relief with regard to regulation 23.505 in
December 2019
igations that swap dealers may have under Part 23 of the Commission’s
regulations, including requirements to know their counterparties, keep records of their swaps,
and report such swaps to swap data repositories. 64
64 In Letter No. 19-26, DSIO provided swap dealers limited no-action relief with regard to regulation 23.505 in
December 2019. DSIO has not provided no-action relief from all recordkeeping and documentation requirements
under regulation 23.505. The Commission must be able to monitor the transition from IBORs based on data that is
accurately reflected through Part 45 reporting to a swap data repository.
Page 22
Finally, the terms and conditions used in this letter are generally consistent with relief
provided by DSIO and the prudential regulators with regard to margin for uncleared swaps.65
VI.
CONCLUSION
This letter, and the positions taken herein, represent the views of DCR only, and do 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 CEA or in Commission
regulations. It does not create or confer any rights for or obligations on any person or persons
subject to compliance with the CEA that bind the Commission or any of its other offices or
divisions. Further, this letter and the positions taken herein are based upon the facts and
circumstances presented to DCR. Any different, changed, or omitted material facts or
circumstances might render the relief provided by this letter void. Finally, as with all staff
letters, DCR retains the authority to condition further, modify, suspend, terminate, or otherwise
restrict the terms of relief provided herein, in their discretion.
If you have any questions concerning this correspondence, please contact Sarah E
Any different, changed, or omitted material facts or
circumstances might render the relief provided by this letter void. Finally, as with all staff
letters, DCR retains the authority to condition further, modify, suspend, terminate, or otherwise
restrict the terms of relief provided herein, in their discretion.
If you have any questions concerning this correspondence, please contact Sarah E.
Josephson, Deputy Director, at (202) 418-5684 or sjosephson@cftc.gov.
Sincerely,
M. Clark Hutchison III
65 The Prudential Regulators cited to CFTC Letter No. 19-28 and CFTC Letter No. 19-26 such that swap
transactions subject to the Prudential Regulators’ margin rules would continue to be eligible for an exemption from
margin for uncleared swaps when swap dealers subject to prudential regulation amend their swaps with a
commercial or cooperative end user. Margin and Capital Requirements for Covered Swap Entities, 85 FR 39754 at
39758 (Jul. 1, 2020). DCR understands that DSIO staff will consult with the Prudential Regulators regarding the
issuance of revised CFTC staff no-action letters as part of the ongoing implementation of uncleared margin rules.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.