MPD is providing relief to swap dealers from registration de minimis requirements, uncleared swap margin rules, business conduct requirements, confirmation, documentation, and reconciliation requirements, and certain...
FederalAgency guidance
Ask Donna
How this section applies to your facts.
CFTC Staff Letters (2008-present) › MPD is providing relief to swap dealers from registration de minimis requirements, uncleared swap margin rules, business conduct requirements, confirmation, documentation, and reconciliation requirements, and certain...
Text
Summary: MPD is providing relief to swap dealers from registration de minimis requirements, uncleared swap margin rules, business conduct requirements, confirmation, documentation, and reconciliation requirements, and certain other eligibility requirements. 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. ( ARRC No-Action Relief Extension Request )
CFTC LETTER NO. 21-26 NO-ACTION DECEMBER 20, 2021
Market Participants
Division
Amanda L. Olear
Acting Director
Re:
Revised No-Action Positions to Facilitate an Orderly Transition of
Swaps from Inter-Bank Offered Rates to Alternative Benchmarks
Ladies and Gentlemen:
The U.K. Financial Conduct Authority (“FCA”), which regulates ICE Benchmark
Administration Limited, the administrator of ICE LIBOR, confirmed, on March 5, 2021,
that all London Interbank Offered Rate (“LIBOR”) settings will either cease to be
provided by any administrator or will no longer be representative: (i) for all GBP, EUR,
CHF and JPY LIBOR settings, and the 1-week and 2-month USD LIBOR settings,
immediately after December 31, 2021; and (ii) for all other USD LIBOR settings (the
“2023 USD LIBOR Settings”), immediately after June 30, 2023 (“FCA
Confirmation”).1 The Alternative Reference Rates Committee (“ARRC”) expects that,
as a result, some market participants may now transition their swaps referencing such
rates after December 31, 2021 but before June 30, 2023.
This letter is in response to a request received by the Market Participants Division
(“MPD”) of the Commodity Futures Trading Commission (“CFTC” or “Commission”)
from the ARRC on behalf of its members that are swap dealers (“SDs”) registered with
the Commission and ARRC members that are otherwise subject to Commission
regulations
g such
rates after December 31, 2021 but before June 30, 2023.
This letter is in response to a request received by the Market Participants Division
(“MPD”) of the Commodity Futures Trading Commission (“CFTC” or “Commission”)
from the ARRC on behalf of its members that are swap dealers (“SDs”) registered with
the Commission and ARRC members that are otherwise subject to Commission
regulations. ARRC has requested, in a letter dated December 2, 2021, that MPD amend
CFTC Staff Letter 20-23 (“Letter 20-23”)2 to modify the discussion of the end-user
1 Announcements on the end of LIBOR, March 5, 2021, available at: https://www.fca.org.uk/news/press-
releases/announcements-end-libor. See also “FCA announcement on future cessation and loss of
representativeness
of
the
LIBOR
benchmarks”
(Mar.
5,
2021),
available
at
https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-
benchmarks.pdf.; ICE Benchmark Administration Publishes Feedback Statement for the Consultation on
Its Intention to Cease the Publication of LIBOR® Settings, March 5, 2021, available at:
https://ir.theice.com/press/news-details/2021/ICE-Benchmark-Administration-Publishes-Feedback-
Statement-for-the-Consultation-on-Its-Intention-to-Cease-the-Publication-of-LIBOR-
Settings/default.aspx.
2 On December 17, 2019, MPD issued CFTC Staff Letter 19-26 (“Letter 19-26”) to facilitate an industry-
wide initiative associated with the transition of swaps that reference certain “Impaired Reference Rates”
U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5000
ublication-of-LIBOR-
Settings/default.aspx.
2 On December 17, 2019, MPD issued CFTC Staff Letter 19-26 (“Letter 19-26”) to facilitate an industry-
wide initiative associated with the transition of swaps that reference certain “Impaired Reference Rates”
U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5000
LIBOR Transition No-Action
Page 2
exception in Letter 20-23 consistent with the FCA Confirmation. Specifically, ARRC
requested that MPD provide that eligible end users should use their best efforts to work
toward amending the reference rate provisions in both Covered IRS documentation (as
defined below) and the related commercial arrangement documentation so that the
rates referenced therein match again by June 30, 2023 to the extent that the Covered
IRS references one of the 2023 USD LIBOR Settings.
This letter revises Letter 20-23 solely to revise such discussion and update the
background discussion. It does not modify any of the no-action positions provided in
Letter 20-23, which are repeated herein. Letter 20-23 is superseded by this letter and
no person may rely on Letter 20-23 after the date of this letter.
I.
Introduction
In connection with an industry-wide initiative associated with the transition of swaps
that reference LIBOR and other interbank offered rates (collectively with LIBOR, the
“IBORs”) to swaps that reference alternative benchmarks, ARRC requested that MPD
provide no-action relief for failure to comply with certain Commission regulations in
connection with the process of amending certain uncleared swaps referencing the
IBORs.
II.
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.3 The U.S
certain Commission regulations in
connection with the process of amending certain uncleared swaps referencing the
IBORs.
II.
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.3 The U.S.
Financial Stability Oversight Council (“FSOC”) has made repeated calls for member
to swaps that reference alternative benchmarks. On November 5, 2019 ARRC requested relief from MPD
(f/k/a the Division of Swap Dealer and Intermediary Oversight (“DSIO”)), the Division of Market
Oversight (“DMO”), and the Division of Clearing and Risk (“DCR”). All three divisions provided no-
action letters in response to ARRC’s letter. In formulating Letter 20-23, DSIO considered a July 20, 2020
letter, a June 16, 2020 letter, the November 5, 2019 letter, along with other submissions from ARRC, as
well as discussions related to ARRC’s requested relief. Letter 20-23 addressed only those ARRC requests
that relate to Part 23 of the Commission’s regulations, 17 CFR part 23. CFTC Staff Letters and letters
requesting relief are available on the Commission’s website at:
https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm
r 5, 2019 letter, along with other submissions from ARRC, as
well as discussions related to ARRC’s requested relief. Letter 20-23 addressed only those ARRC requests
that relate to Part 23 of the Commission’s regulations, 17 CFR part 23. CFTC Staff Letters and letters
requesting relief are available on the Commission’s website at:
https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm.
3 See generally 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.”); FSB Reforming Major Interest Rate Benchmarks (July 22, 2014), available at:
https://www.fsb.org/wp-content/uploads/r_140722.pdf, and IOSCO Principles for Financial
Benchmarks: Final Report (July 2013), available at:
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf.
LIBOR Transition No-Action
Page 3
agencies to work closely with market participants to identify and mitigate risks that may
arise during an IBOR transition process.4 In response to ongoing efforts such as these,
central banks in various jurisdictions, including the United States, the United Kingdom,
Japan, Switzerland, and the European Union, have convened working groups of market
participant and official sector representatives.
In 2014, the Federal Reserve Bank of New York convened ARRC in order to identify best
practices for U.S
R transition process.4 In response to ongoing efforts such as these,
central banks in various jurisdictions, including the United States, the United Kingdom,
Japan, Switzerland, and the European Union, have convened working groups of market
participant and official sector representatives.
In 2014, the Federal Reserve Bank of New York convened ARRC in order to identify best
practices for U.S. alternative reference rates, identify best practices for contract
robustness, develop an adoption plan, and create an implementation plan with metrics
of success and a timeline.5
In June 2017, ARRC identified a broad Treasuries repo financing rate, the secured
overnight financing rate (“SOFR”), as the preferred alternative benchmark to U.S.
Dollar LIBOR for certain new U.S. Dollar derivatives and other financial contracts.6 It
also published an updated “Paced Transition Plan” outlining the steps that ARRC,
central counterparties, and other market participants intend to take in order to help
build the liquidity required to support the issuance of, and transition to, contracts
referencing SOFR.7 In accordance with ARRC’s Paced Transition Plan8 and similar
plans in other jurisdictions, trading of SOFR-based derivatives and other financial
4E.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 …
en 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
(June
2013)
available
at:
https://www.treasury.gov/initiatives/fsoc/Documents/FSOC%202013%20Annual%20Report.pdf.
5 Similar committees have been established in other jurisdictions, including the United Kingdom, Japan,
Switzerland, and the European Union. In March 2018, ARRC was reconstituted with an expanded
participation by additional financial institutions and trade organizations, and with additional government
agencies added as ex officio members. ARRC, Press Release, March 7 , 2018, available at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-March-7 -2018-press-
release.pdf.
6 ARRC, Press Release, June 22, 2017, available at
https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-
2017.pdf.
7
ARRC,
Second
Report,
pp.17 -24,
March
5,
2018,
available
at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report.
8 ARRC, 2019 Incremental Objectives, available at:
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARRC_2019_Incremental_Objec
tives.pdf.
g/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-
2017.pdf.
7
ARRC,
Second
Report,
pp.17 -24,
March
5,
2018,
available
at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report.
8 ARRC, 2019 Incremental Objectives, available at:
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARRC_2019_Incremental_Objec
tives.pdf.
LIBOR Transition No-Action
Page 4
contracts linked to alternative benchmarks commenced in 2018 and has since expanded
in scope.9
In July 2017, the FCA, 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.
As noted above, in March 2021, the FCA confirmed that all LIBOR settings will either
cease to be provided by any administrator or will no longer be representative: (i) for all
GBP, EUR, CHF and JPY LIBOR settings, and the 1-week and 2-month USD LIBOR
settings, immediately after December 31, 2021; and (ii) for the 2023 USD LIBOR
Settings, immediately after June 30, 2023.1 0
A benchmark rate is a critical term for calculating payments under a swap. Due to the
discontinuation of LIBOR, market participants face uncertainty about the way their
swaps referencing the LIBOR benchmark and other IBORs will operate after the
permanent discontinuation date without a reliable benchmark rate. In many instances,
these firms may decide to amend existing swaps to replace an IBOR before the IBOR
becomes discontinued. Such amendments may also trigger follow-on amendments1 1
that the counterparties determine are necessary to maintain the economics of the swap.
III.
Consideration of ARRC’s Request
In order to facilitate the transition from IBORs to alternative reference rates, ARRC
requested that DSIO (now, MPD) provide the relief discussed below with regard to
certain Commission regulations applicable to uncleared swaps.
A
also trigger follow-on amendments1 1
that the counterparties determine are necessary to maintain the economics of the swap.
III.
Consideration of ARRC’s Request
In order to facilitate the transition from IBORs to alternative reference rates, ARRC
requested that DSIO (now, MPD) provide the relief discussed below with regard to
certain Commission regulations applicable to uncleared swaps.
A.
Definitions
For purposes of this letter, the IBORs include, but are not limited to, LIBOR, the Tokyo
Interbank Offered Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore
Interbank Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), the Euro
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered Rate
(HIBOR). However, the IBORs may not be the only reference rates that are phased out
or become impaired. Thus, in addition to the IBORs, the relief described in this letter
9 See, e.g., ARRC, SOFR: A Y ear in Review (Apr. 2019), available at:
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/SOFR_Anniversary.pdf; ISDA,
Interest Rate Benchmarks Review: Full Y ear 2018 and the Fourth Quarter of 2018 (Jan. 2019), available
at: https://www.isda.org/a/xogME/Benchmarks-Full-Year-2018.pdf.
10 See, n. 1, supra.
11 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.
st Rate Benchmarks Review: Full Y ear 2018 and the Fourth Quarter of 2018 (Jan. 2019), available
at: https://www.isda.org/a/xogME/Benchmarks-Full-Year-2018.pdf.
10 See, n. 1, supra.
11 Follow-on amendments may include a variety of spread adjustments resulting from the move from a
term rate to an overnight rate, from unsecured to secured, or could result from a change in tenor, among
others.
LIBOR Transition No-Action
Page 5
also will apply to conversions away from: (i) any other interest rate that the parties to a
swap reasonably expect to be discontinued or reasonably determines has lost its
relevance as a reliable benchmark due to a significant impairment; or (ii) any other
reference rate that succeeds any of the foregoing (the IBORs and any other rate meeting
either of the foregoing criterion are hereinafter collectively referred to as “Impaired
Reference Rates” or “IRRs”).
MPD recognizes that by defining IRRs in this manner, market participants will be
permitted to make more than one amendment to the same swap or portfolio of swaps
before settling on an alternative benchmark that adequately meets the counterparties’
commercial needs. To that end, this letter is intended to address situations in which an
alternative benchmark may become an IRR at some point in the future if the parties to a
swap reasonably expect the alternative benchmark to be discontinued or reasonably
determine it has lost its relevance as a reliable benchmark due to a significant
impairment. But it is also intended to permit further amendment or replacement of
such an alternative benchmark even if such rate is not impaired but simply does not
meet the counterparties’ commercial needs, so long as the original reference rate for the
swap was an IBOR or met the other criterion above.1 2 MPD intends to provide this
degree of flexibility for the public policy reasons discussed herein
But it is also intended to permit further amendment or replacement of
such an alternative benchmark even if such rate is not impaired but simply does not
meet the counterparties’ commercial needs, so long as the original reference rate for the
swap was an IBOR or met the other criterion above.1 2 MPD intends to provide this
degree of flexibility for the public policy reasons discussed herein. MPD expects that
any replacement rate would be negotiated between the parties after assessing its
complexity, safety and soundness, and taking into consideration appropriate risk
management practices.
B.
Anticipated Amendments
1.
Amendments to Replace Impaired Reference
Rates
To prepare for the possible permanent cessation of certain IRRs, and in order to
facilitate the adoption of alternative reference rates, ARRC represented that market
participants will take the following actions:
Amendment of Uncleared Swaps to Include IRR Fallback Provisions.
In order to protect against any permanent cessation of IRR publication, market
participants are expected to amend IRR-linked uncleared swaps to include new
fallbacks to alternative reference rates that are triggered when an IRR is
12 This flexibility is also intended to harmonize the relief provided by this letter with certain amendments
to the uncleared swap margin rules of the Prudential Regulators related to LIBOR cessation. See
generally Margin and Capital Requirements for Covered Swap Entities, 85 FR 39754 (Jul. 1, 2020).
(“Prudential Regulators’ Amendments”). For example, § 45.1(h)(3)(i)(C) of the OCC’s amended
uncleared swap margin rules permits an SD subject to the OCC’s rules to replace an IBOR with a
temporary interest rate and later replace the temporary interest rate with a permanent interest rate.
Prudential Regulators’ Amendments, 85 FR at 397 7 1.
Covered Swap Entities, 85 FR 39754 (Jul. 1, 2020).
(“Prudential Regulators’ Amendments”). For example, § 45.1(h)(3)(i)(C) of the OCC’s amended
uncleared swap margin rules permits an SD subject to the OCC’s rules to replace an IBOR with a
temporary interest rate and later replace the temporary interest rate with a permanent interest rate.
Prudential Regulators’ Amendments, 85 FR at 397 7 1.
LIBOR Transition No-Action
Page 6
permanently discontinued or is determined to be non-representative by the
benchmark administrator or the relevant authority in a jurisdiction. An
amendment to a swap solely for the purpose of including such fallbacks triggered
only by permanent discontinuation of an IRR or determination that an IRR is
non-representative by the benchmark administrator or the relevant authority in a
jurisdiction is hereinafter referred to as a “Fallback Amendment.”
Amendment of Uncleared Swaps to Replace IRRs with Alternate
Reference Rates. Some market participants may choose to voluntarily convert
IRR-linked uncleared swaps to alternative reference rates prior to any permanent
cessation of the applicable IRR or determination that an IRR is non-
representative by the benchmark administrator or the relevant authority in a
jurisdiction (“Replacement Rate Amendment”).
MPD understands that a universal protocol has been developed by the International
Swaps and Derivatives Association (“ISDA”) with respect to Fallback Amendments.1 3
By adhering to the ISDA protocol, the parties to an uncleared swap are able to make a
Fallback Amendment for multiple swaps without extensive, bilateral negotiations. To
accomplish a large volume of Replacement Rate Amendments, ARRC identified certain
methods of conversion considered likely to be used by market participants when
effecting a Replacement Rate Amendment, including, but not limited to, the following:
1
protocol, the parties to an uncleared swap are able to make a
Fallback Amendment for multiple swaps without extensive, bilateral negotiations. To
accomplish a large volume of Replacement Rate Amendments, ARRC identified certain
methods of conversion considered likely to be used by market participants when
effecting a Replacement Rate Amendment, including, but not limited to, the following:
1.
Single trade conversion for equivalent risk: Converting an IRR referenced
in an uncleared swap to an applicable alternative reference rate with a revised
spread, an additional spread, or a change to the fixed rate, to achieve equivalent
risk.
2.
Single trade conversion with payment: Converting an IRR referenced in an
uncleared swap to an alternative reference rate plus a payment to achieve
equivalent risk rather than a change to the ongoing spread or fixed rate.
3.
Single trade conversion (with or without payment) for non-equivalent
risk: Converting an IRR referenced in an uncleared swap to an alternative
reference rate, with a change in risk of a hedge (e.g., cash position) for all, or part,
of difference.
4.
Bilateral one-for-one swap portfolio conversion: Converting multiple
uncleared swaps referencing an IRR on a one-for-one basis to swaps referencing
an alternative reference rate using similar variations on resulting swaps as
described in Conversion Models 1 – 3 above, which would not be the same across
the swap portfolio (e.g., spread may only need to be changed on one trade).
13 See https://www.isda.org/protocol/isda-2020-ibor-fallbacks-protocol/.
a one-for-one basis to swaps referencing
an alternative reference rate using similar variations on resulting swaps as
described in Conversion Models 1 – 3 above, which would not be the same across
the swap portfolio (e.g., spread may only need to be changed on one trade).
13 See https://www.isda.org/protocol/isda-2020-ibor-fallbacks-protocol/.
LIBOR Transition No-Action
Page 7
5.
Bilateral swap portfolio conversion with compression: Converting
multiple uncleared swaps referencing an IRR to a portfolio of uncleared swaps
with equivalent risk referencing an alternative reference rate plus a spread (or to
an alternative reference rate plus a payment for the basis) resulting in fewer
outstanding swaps between the two counterparties.
6.
Bilateral conversion of a swap portfolio involving multiple SDs:
Converting multiple uncleared swaps referencing an IRR with more than one SD
to uncleared swaps referencing an alternative reference rate with one or more of
those SDs (with or without foregoing adjustments).
Based on discussions with ARRC, MPD understands that a Fallback Amendment or
Replacement Rate Amendment accomplished pursuant to one or more of these
conversion methods may require a number of ancillary changes to existing trade terms
to conform to different market conventions, resulting, for example, in different reset
dates, fixed/floating leg payment dates, business day conventions, and day count
fractions. However, to ensure that this letter is consistent with no-action letters
previously issued by staff,1 4 and that counterparties are not using the relief provided in
this letter as an opportunity to renegotiate economic terms or otherwise engage in price-
forming activity, the relief provided by this letter is subject to a limitation on
amendments that: (i) extend the maximum maturity of a swap or a portfolio of swaps; or
letter is consistent with no-action letters
previously issued by staff,1 4 and that counterparties are not using the relief provided in
this letter as an opportunity to renegotiate economic terms or otherwise engage in price-
forming activity, the relief provided by this letter is subject to a limitation on
amendments that: (i) extend the maximum maturity of a swap or a portfolio of swaps; or
(ii) increase the total effective notional amount of a swap or the aggregate total effective
notional amount of a portfolio of swaps.1 5
MPD recognizes that counterparties employing any of the foregoing conversion methods
to effectuate Replacement Rate Amendments may complete the necessary amendments
by adherence to an ISDA-led protocol, by contractual amendment of an agreement or
confirmation, or by execution of new contract(s) in replacement of and immediately
upon termination of existing contract(s) (i.e., “tear-ups”).
For purposes of this letter, the amendment of an uncleared swap that references an IRR
solely to: (i) include new fallbacks to alternative reference rates triggered only by
permanent discontinuation of an IRR or determination that an IRR is non-
representative by the benchmark administrator or the relevant authority in a
jurisdiction; or (ii) accommodate the replacement of an IRR, is referred to as a
“Qualifying IRR Amendment.”
14 See, e.g., DSIO Staff No-Action Letter 19-13 (no-action relief limited to conducting compression
exercises in which the maximum maturity of the swap portfolios is not increased, among othe r
conditions).
15 These limitations are intended to harmonize the relief provided by this letter with certain amendments
to the uncleared swap margin rules of the Prudential Regulators related to LIBOR cessation. See
Prudential Regulators’ Amendments, 85 FR at 397 56-58.
ted to conducting compression
exercises in which the maximum maturity of the swap portfolios is not increased, among othe r
conditions).
15 These limitations are intended to harmonize the relief provided by this letter with certain amendments
to the uncleared swap margin rules of the Prudential Regulators related to LIBOR cessation. See
Prudential Regulators’ Amendments, 85 FR at 397 56-58.
LIBOR Transition No-Action
Page 8
In addition, MPD understands that some market participants may seek to transition
swap portfolios referencing IRRs to an alternative reference rate by means of one or
more new basis swaps that would swap the entire IRR basis of a portfolio with an
alternative reference rate basis without amending any of the swaps referencing IRRs
(such transition method, the “Basis Swap Method”). On behalf of SDs that may
participate in the Basis Swap Method with a counterparty with respect to a portfolio of
Legacy Swaps (as defined below), ARRC is seeking relief that would permit such SDs to
treat the resulting basis swaps as Legacy Swaps for purposes of compliance with the
Commission’s uncleared swap margin requirements.
2.
Amendments to Accommodate Certain Central
Counterparties’ Discounting Rate Changes
Following issuance of Letter 19-26, ARRC and various market participants have taken
additional steps to further progress the LIBOR transition. Consistent with the ARRC’s
paced transition plan, certain derivatives clearing organizations (“DCOs”), in particular
the Chicago Mercantile Exchange, Inc (“CME”), the LCH Ltd (“LCH”), and Eurex
Clearing AG (“Eurex”) changed 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
icular
the Chicago Mercantile Exchange, Inc (“CME”), the LCH Ltd (“LCH”), and Eurex
Clearing AG (“Eurex”) changed 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. Specifically, CME and LCH have
transitioned from using the daily effective federal funds rate (“EFFR”) to the Secured
Overnight Financing Rate (“SOFR”) with respect to USD discounted swaps. LCH and
Eurex have transitioned from using the Euro Over Night Index Average (“EONIA”) to
the Euro Short Term Rate (“€STR”) as of July 2020 with respect to EUR discounted
swaps.
These DCO discount rate changes apply to both existing and new cleared swaps. With
respect to the switch from EFFR to SOFR, both CME and LCH 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 switch. With respect to the switch from EONIA to €STR,
both Eurex and LCH 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.
ARRC represented that these DCO discount rate changes could also affect the value of
many uncleared USD and EUR denominated swaptions that exercise into cleared swaps
or that cash settle by reference to the discounting rates employed by CME, Eurex, or
LCH after the date on which the change in discounting rate occurs. To facilitate the
he value of the cleared swaps as a result of the switch.
ARRC represented that these DCO discount rate changes could also affect the value of
many uncleared USD and EUR denominated swaptions that exercise into cleared swaps
or that cash settle by reference to the discounting rates employed by CME, Eurex, or
LCH after the date on which the change in discounting rate occurs. To facilitate the
LIBOR Transition No-Action
Page 9
DCO discounting rate changes and to account for their effect on swaptions, the ARRC
issued a public consultation on swaptions impacted by this discounting transition.1 6
On May 14, 2020, the ARRC announced the results of that consultation, recommending,
among other things, that market participants:
(i)
Amend USD swaptions expiring after October 16, 2020, so that they include ISDA
Supplement 64 to the 2006 ISDA Definitions1 7 and to specify SOFR as the Agreed
Discount Rate; and
(ii)
Simultaneously voluntarily exchange compensation for the difference in the value
of these swaptions between EFFR discounting and SOFR discounting.1 8
ARRC noted that “[p]rompt determination is recommended to: (a) avoid an extended
period of uncertainty; (b) minimize any valuation difference because the market-implied
basis between EFFR and SOFR is currently fairly narrow (in absolute value); and (c)
promote responsible risk management and market liquidity and resiliency.”1 9
While the ARRC consultation and its recommendations apply only to USD-denominated
swaptions, the Working Group on Euro Risk Free Rates undertook a similar
consultation2 0 for EUR-denominated swaptions
erence because the market-implied
basis between EFFR and SOFR is currently fairly narrow (in absolute value); and (c)
promote responsible risk management and market liquidity and resiliency.”1 9
While the ARRC consultation and its recommendations apply only to USD-denominated
swaptions, the Working Group on Euro Risk Free Rates undertook a similar
consultation2 0 for EUR-denominated swaptions. The results of that consultation noted
that market participants also broadly supported the exchange of voluntary
compensation in that context.2 1
ARRC notes that the exchange of compensation or discount rate modification would
occur because of an agreement regarding the discount rate at the applicable DCO, and
16 ARRC Releases Consultation on Swaptions Impacted by Central Counterparty Clearing Houses’
Discounting Transition to SOFR, February 7, 2020, available at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Press_Release_Swaption
s_Consultation.pdf.
17 ARRC’s announcement, id. at n.7, explained that Supplement 64 was released by ISDA on March 30,
2020 and allows parties to specify an Agreed Discount Rate in swaptions.
18 ARRC Recommendations for Swaptions Impacted by the CCP Discounting Transition to SOFR, May 14,
2020, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-
swaptions-recommendations.pdf.
19 Id.
20 See generally Working Group on Euro Risk-Free Rates, Public Consultation by the Working Group on
Euro Risk-Free Rates on Swaptions Impacted by the CCP Discounting Transition from EONIA to the
€STR, March 13, 2020, available at https://www.ecb.europa.eu/paym/pdf/cons/euro_risk-
free_rates/ecb.public_consultation_20200313.en.pdf
es/arrc/files/2020/ARRC-
swaptions-recommendations.pdf.
19 Id.
20 See generally Working Group on Euro Risk-Free Rates, Public Consultation by the Working Group on
Euro Risk-Free Rates on Swaptions Impacted by the CCP Discounting Transition from EONIA to the
€STR, March 13, 2020, available at https://www.ecb.europa.eu/paym/pdf/cons/euro_risk-
free_rates/ecb.public_consultation_20200313.en.pdf.
21 See generally Working Group on Euro Risk-Free Rates, Public consultation on swaptions impacted by
the
CCP
discounting
transition
from
EONIA
to
the
€STR,
May
2020,
available at
https://www.ecb.europa.eu/paym/pdf/cons/euro_risk-
free_rates/ecb.202005.swaptionsfeedbacksummary.en.pdf.
LIBOR Transition No-Action
Page 10
not because of a change in the reference rate of the swap itself. Thus, ARRC is
concerned that these changes to a swap would not clearly meet the definition of
“Qualifying Amendment” under Letter 19-26, which is defined to include an amendment
made solely to accommodate the replacement of an IRR. Thus, ARRC requested that
DSIO (now, MPD) grant no-action relief providing that, solely as a result of an
announced intention by a central counterparty (“CCP”) to change the discount rate used
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: (1) the
voluntary exchange of compensation for a swaption; or (2) the amendment of a
swaption’s terms solely to reflect an agreement regarding the discount rate used by a
CCP (each a “Qualifying Swaption Amendment”), would be treated as a Qualifying
Amendment under Letter 19-26, and that therefore, such actions would not result in the
swap being newly subject to Commission regulatory requirements covered under Letter
19-26.
3
nsation for a swaption; or (2) the amendment of a
swaption’s terms solely to reflect an agreement regarding the discount rate used by a
CCP (each a “Qualifying Swaption Amendment”), would be treated as a Qualifying
Amendment under Letter 19-26, and that therefore, such actions would not result in the
swap being newly subject to Commission regulatory requirements covered under Letter
19-26.
3.
Amendments to Credit Support Annexes to
Align Interest Rates Paid on Posted Collateral
In addition, ARRC explained that market participants may also 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, an
SD may offset the risk of an uncleared swap with a third party by entering into a cleared
swap. In such cases, the SD will customarily seek to align the interest rate used in an
existing credit support annex (“CSA”), which may be a non-impaired rate, with the
discount rate used by the DCO to avoid basis risk. ARRC’s Recommended Best Practices
also encourage dealers to amend their interdealer CSAs to use SOFR for USD collateral
by December 31, 2020,2 2 and, because EONIA will be discontinued in January 2022,
market participants will need to amend CSAs referencing EONIA. ARRC argues 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 will also
provide greater liquidity for market participants across both markets.
ARRC believed that market participants would greatly benefit from clarity regarding the
status of such CSA amendments in order to ensure a smooth and orderly transition
support documents will not only eliminate the potential basis risk that
would otherwise exist between the cleared and uncleared swap markets, but will also
provide greater liquidity for market participants across both markets.
ARRC believed that market participants would greatly benefit from clarity regarding the
status of such CSA amendments in order to ensure a smooth and orderly transition.
Thus, ARRC requested that DSIO (now, MPD) provide a no-action position such that 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 (each a
22 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.
LIBOR Transition No-Action
Page 11
“Qualifying CSA Amendment”), would be treated as a Qualifying Amendment under
Letter 19-26, and that therefore, such actions would not result in swaps being newly
subject to Commission regulatory requirements covered under Letter 19-26.
C.
Legacy and Pre-Transition Uncleared Swaps
In order to facilitate the actions described above in support of the IBOR regulatory
reform agenda, ARRC requested clarity regarding the regulatory treatment of:
(A)
Legacy Swaps: Uncleared swaps that were entered into prior to the compliance
date of a particular regulatory requirement, with the result that such requirement
did not apply to those swaps (“Legacy Swaps”)
sition Uncleared Swaps
In order to facilitate the actions described above in support of the IBOR regulatory
reform agenda, ARRC requested clarity regarding the regulatory treatment of:
(A)
Legacy Swaps: Uncleared swaps that were entered into prior to the compliance
date of a particular regulatory requirement, with the result that such requirement
did not apply to those swaps (“Legacy Swaps”). For example, an uncleared
swap entered into prior to the applicable compliance date of the CFTC uncleared
margin rules would be a Legacy Swap for purposes of the uncleared margin
rules;2 3 and
(B)
Pre-Transition Swaps: Uncleared swaps, including, where relevant, Legacy
Swaps, that were entered into prior to the effective date of a Qualifying IRR
Amendment, Qualifying Swaption Amendment, or Qualifying CSA Amendment
(“Pre-Transition Swaps”).
As detailed below, to facilitate an efficient IBOR transition, ARRC requested that DSIO
(now, MPD) provide a no-action position with respect to:
(1)
SD registration threshold requirements;
(2)
SD uncleared swap margin requirements;
(3)
SD business conduct requirements;
(4)
SD confirmation, documentation and reconciliation requirements; and
(5)
Certain regulatory requirements applicable to certain end-users.
23 The Commission’s Office of the Chief Economist (“OCE”) published an analysis to estimate, among
other things, the population of uncleared swap positions that constitute Legacy Swaps. See Legacy Swaps
under the CFTC’s Uncleared Margin and Clearing Rules (May 22, 2019), available at:
https://www.cftc.gov/node/216426. In particular, OCE analyzed the notional amount of uncleared swaps
outstanding as of December 2018
ce of the Chief Economist (“OCE”) published an analysis to estimate, among
other things, the population of uncleared swap positions that constitute Legacy Swaps. See Legacy Swaps
under the CFTC’s Uncleared Margin and Clearing Rules (May 22, 2019), available at:
https://www.cftc.gov/node/216426. In particular, OCE analyzed the notional amount of uncleared swaps
outstanding as of December 2018. Focusing strictly on the entity pairs covered in phases 1 through 3 of
the uncleared margin rule, the three phases implemented as of the December 2018 reference date, OCE
estimated that approximately 41% of credit default swaps (“CDS”), 5% of forex products, and 40% of
interest rate swaps (“IRS”) were Legacy Swaps. OCE notes that many of these Legacy Swaps will be
terminated prior to maturity for a variety of reasons. Swaps executed by SDs with counterparties not yet
subject to the initial margin requirements (i.e., phases 4 and 5) may become Legacy Swaps as defined
above to the extent such are still in effect on the compliance dates for those phases.
LIBOR Transition No-Action
Page 12
ARRC argued that swap amendments required as part of a global reform agenda do not
reflect market participants voluntarily assuming risk or exercising independent
discretion. With respect to both Legacy Swaps and Pre-Transition Swaps, as detailed
below, ARRC concluded that relief from certain Commission regulations would
eliminate significant impediments to the efficient processing of large volumes of swaps
and would facilitate the orderly transition away from the use of IBORs, which is an
action encouraged by authorities around the world
independent
discretion. With respect to both Legacy Swaps and Pre-Transition Swaps, as detailed
below, ARRC concluded that relief from certain Commission regulations would
eliminate significant impediments to the efficient processing of large volumes of swaps
and would facilitate the orderly transition away from the use of IBORs, which is an
action encouraged by authorities around the world.
MPD supports such transition and has concluded that amendments to swaps necessary
to accomplish it should: (i) not cause a loss of legacy status resulting in a swap becoming
subject to regulatory requirements to which it was previously not subject; and (ii)
receive relief appropriate to facilitate an orderly market-wide transition consistent with
regulatory expectations.
IV.
MPD No-Action Positions
For purposes of the MPD no-action positions below, the amendment of an uncleared
swap 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.” As discussed above, a Qualifying
Amendment may include ancillary changes to existing trade terms to conform to
different market conventions, resulting, for example, in different reset dates,
fixed/floating leg payment dates, business day conventions, and day count fractions.
However, a Qualifying Amendment will not include any amendment that: (i) extends the
maximum maturity of a swap or a portfolio of swaps beyond what is necessary to
accommodate the differences between market conventions for an IRR or discount rate
used by a CCP and its replacement; or (ii) increases the total effective notional amount
of a swap or the aggregate total effective notional amount of a portfolio of swaps beyond
what is necessary to accommodate the differences between market conventions for an
IRR or a discount rate used by a CCP and its replacement.2 4
24 ARRC recommended that any
by a CCP and its replacement; or (ii) increases the total effective notional amount
of a swap or the aggregate total effective notional amount of a portfolio of swaps beyond
what is necessary to accommodate the differences between market conventions for an
IRR or a discount rate used by a CCP and its replacement.2 4
24 ARRC recommended that any relief permit changes in maturity or total effective notional amount that
are directly related to a transition from an IRR to an alternative rate. ARRC argued that the liquidity for
alternative rates may develop differently at different ends of the maturity spectrum (as compared to IBOR
swaps), such that constructing an amended or replacement position that is economically equivalent to an
existing IBOR portfolio may necessitate a shift in the total effective notional amount or maturity. As a
further example, ARRC explained that an IBOR conversion may also impact the total effective notional
amount as a result of differing day count fraction conventions. If, for example, a fixed-for-floating IBOR
swap uses a 30/360 day count fraction convention, but the market standard for an equivalent alternative
rate uses an actual/360 day count fraction convention, the notional amount would need to be adjusted to
ensure that the payment amounts on the fixed leg of the alternative rate swap are the same compared to
the IBOR swap. 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.
unt 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.
LIBOR Transition No-Action
Page 13
A.
De Minimis Exception to the Swap Dealer Definition
In accordance with the definition of “swap dealer” in section 1a(49)(D) of the
Commodity Exchange Act (“CEA”),2 5 the Commission has excepted from designation as
an SD any entity that engages in only a de minimis quantity of swap dealing with or on
behalf of its customers.2 6 Specifically, subparagraph (4) of the definition of “swap
dealer” in Commission regulation 1.3 provides that a person shall not be deemed to be
an SD until its aggregate gross notional amount of swaps connected with swap dealing
activity, during the preceding 12 months, exceeds the de minimis threshold.2 7 Such
Commission regulation further requires that, in determining whether its swap dealing
activity exceeds the de minimis threshold, a person must include the aggregate notional
value of the swaps connected with the dealing activities of its affiliates under common
control.2 8
ARRC is concerned that entities that actively monitor and manage their swap dealing
activities to stay below the de minimis threshold may be reluctant to transition from
IRRs voluntarily and early if they must count swaps modified to accommodate either a
Fallback Amendment or Replacement Rate Amendment toward such threshold.
In order to support an expeditious and orderly transition away from IRRs, MPD believes
that a position of no-action is warranted
ge their swap dealing
activities to stay below the de minimis threshold may be reluctant to transition from
IRRs voluntarily and early if they must count swaps modified to accommodate either a
Fallback Amendment or Replacement Rate Amendment toward such threshold.
In order to support an expeditious and orderly transition away from IRRs, MPD believes
that a position of no-action is warranted. Accordingly, MPD will not recommend that
the Commission take an enforcement action against any person if, for purposes of
determining whether it is deemed to be an SD pursuant to the criteria set forth in the
Commission’s definition of “swap dealer,”2 9 it does not include a swap solely to the
To permit changes in maturity or total effective notional amount that are directly related to a transiti on
from and IRR to an alternative rate, MPD intends that its no-action relief will be available for Qualifying
Amendments that make adjustments to maturities and notional amounts, but only to the extent necessary
to accommodate the operational differences between an IRR and an alternative rate. SDs relying on such
relief for Qualifying Amendments should be prepared to justify any extension of maturity or increase in
notional amount of the relevant swaps or portfolios of swaps.
25 7 USC § 1 et seq.
26 7 U.S.C. 1a(49)(D) (directing the Commission to establish a de minimis exception from the SD
definition); paragraph (4) of the definition of “swap dealer,” 17 CFR § 1.3; see generally Further Definition
of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security -Based Swap
Participant,” and “Eligible Contract Participant,” 7 7 FR 30596, 30626-35 (May 23, 2012) (hereinafter
“Entity Definitions Rulemaking”).
27 Subparagraph (4)(i)(A) of the definition of “swap dealer,” 17 CFR § 1.3
of the definition of “swap dealer,” 17 CFR § 1.3; see generally Further Definition
of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security -Based Swap
Participant,” and “Eligible Contract Participant,” 7 7 FR 30596, 30626-35 (May 23, 2012) (hereinafter
“Entity Definitions Rulemaking”).
27 Subparagraph (4)(i)(A) of the definition of “swap dealer,” 17 CFR § 1.3. See also subparagraph (6) of the
definition of “swap dealer” in 17 CFR § 1.3 (identifying swaps that are not considered in determining
whether a person is a swap dealer).
28 Subparagraph (4)(i)(A) of the definition of “swap dealer,” 17 CFR § 1.3.
29 Subparagraph (4) of the definition of “swap dealer,” 17 CFR § 1.3. See generally Entity Definitions
Rulemaking, 7 7 FR at 30626-35.
LIBOR Transition No-Action
Page 14
extent such swap would be required to be included as a consequence of a Qualifying
Amendment to such swap.
B.
CFTC Uncleared Swap Margin Requirements
1.
Legacy Swaps
Pursuant to section 4s(e) of the CEA,3 0 the Commission is required to promulgate
margin requirements for uncleared swaps applicable to each SD for which there is no
Prudential Regulator, and thus the no-action position provided in this letter with
respect to compliance with the Commission’s uncleared swap margin requirements is
applicable only to such SDs.3 1 The Commission published final margin requirements for
such SDs in January 2016 (the “CFTC Margin Rule”).3 2
The CFTC Margin Rule applies only to uncleared swaps of SDs executed after the
applicable compliance date set forth in Commission regulation 23.161.3 3 Pursuant to
Commission regulation 23.161, compliance dates for the CFTC Margin Rule are
staggered such that SDs must come into compliance in a series of phases with
counterparties depending on the aggregate outstanding notional amounts of uncleared
swaps and certain other financial products
aps of SDs executed after the
applicable compliance date set forth in Commission regulation 23.161.3 3 Pursuant to
Commission regulation 23.161, compliance dates for the CFTC Margin Rule are
staggered such that SDs must come into compliance in a series of phases with
counterparties depending on the aggregate outstanding notional amounts of uncleared
swaps and certain other financial products. The first phase began on September 1, 2016,
and required SDs to comply with both the initial and variation margin requirements
with counterparties that have the largest aggregate outstanding notional amounts. The
second phase began on March 1, 2017, and required SDs to comply with the variation
margin requirements of Commission regulation 23.153 with all relevant counterparties
not covered in the first phase. On each September 1 thereafter until all of the phases
have been completed SDs began/will begin to comply with the initial margin
requirements with counterparties with successively lesser outstanding notional
30 7 U.S.C. § 6(s).
31 The Commission’s margin requirements for uncleared swaps apply only to SDs and major swap
participants for which there is not a prudential regulator. 7 U.S.C. 6s(e)(1)(B). SDs and major swap
participants for which there is a prudential regulator must meet the margin requirements for uncleared
swaps established by the applicable prudential regulator. 7 U.S.C. 6s(e)(1)(A). See also 7 U.S.C. 1a(39)
(defining the term “Prudential Regulator” to include the Board of Governors of the Federal Reserve
System; the Office of the Comptroller of the Currency; the Federal Deposit Insurance Corporation; the
Farm Credit Administration; and the Federal Housing Finance Agency). The Prudential Regulators
published final margin requirements in November 2015. Margin and Capital Requirements for Covered
Swap Entities, 80 FR 7 4840 (Nov. 30, 2015). There are no major swap participants registered with the
CFTC at this time
the Comptroller of the Currency; the Federal Deposit Insurance Corporation; the
Farm Credit Administration; and the Federal Housing Finance Agency). The Prudential Regulators
published final margin requirements in November 2015. Margin and Capital Requirements for Covered
Swap Entities, 80 FR 7 4840 (Nov. 30, 2015). There are no major swap participants registered with the
CFTC at this time. This letter does not address major swap participants explicitly, but MPD confirms that
the no-action positions taken with respect to SDs in this letter would apply to major swap participants.
32 Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR 636
(Jan. 6, 2016). The CFTC Margin Rule, which became effective April 1, 2016, is codified in part 23 of the
Commission’s regulations, 17 CFR §§ 23.150-159, 161.
33 Commission regulation 23.150(a), 17 CFR § 23.150(a).
LIBOR Transition No-Action
Page 15
amounts.3 4 As discussed above, uncleared swaps entered into prior to the relevant
compliance date are not subject to the applicable provisions of the CFTC Margin Rule
(“CFTC Margin Rule Legacy Swaps”).
Generally, pursuant to the CFTC Margin Rule, amendments to CFTC Margin Rule
Legacy Swaps following the compliance date applicable to an SD and its counterparty
would cause such swaps to be brought into scope and require compliance with the CFTC
Margin Rule.3 5 Margining in accordance with such rule is a material consideration in
determining the terms of a swap, including price. Because CFTC Margin Rule Legacy
Swaps were entered into with the assumption that such swaps would not be subject to
margining in accordance with the CFTC Margin Rule, bringing such swaps into scope for
the rule would likely have a materially adverse effect on the economic obligations of the
parties and potentially frustrate the purpose of the swaps
mining the terms of a swap, including price. Because CFTC Margin Rule Legacy
Swaps were entered into with the assumption that such swaps would not be subject to
margining in accordance with the CFTC Margin Rule, bringing such swaps into scope for
the rule would likely have a materially adverse effect on the economic obligations of the
parties and potentially frustrate the purpose of the swaps.
Because SDs and their counterparties are amending CFTC Margin Rule Legacy Swaps
pursuant to a global reform agenda, MPD is of the view that entering into a Qualifying
Amendment should not cause a loss of legacy status resulting in the swap becoming
subject to the CFTC Margin Rule. A Fallback Amendment to include a fallback
provision is an effort to retain the existing swap following an IRR discontinuation or
determination that the IRR is non-representative by the benchmark administrator or
the relevant authority in a jurisdiction, rather than a substitute for entering into a new
swap. Similarly, entering into voluntary Replacement Rate Amendments prior to
permanent discontinuation of an IRR or determination that the IRR is non-
representative is an effort to mitigate risks associated with the discontinuation of IRRs
as opposed to a decision to enter into a new swap with different economics. Finally,
MPD observes that SDs, as well as their financial end-user counterparties, will be
entering into Fallback Amendments and Replacement Rate Amendments in order to
advance an important public policy objective and not for the purposes of evading the
CFTC’s Margin Rule.
Given the foregoing, MPD believes that a no-action position is warranted with respect to
amendments to CFTC Margin Rule Legacy Swaps. Accordingly, MPD will not
recommend that the Commission take an enforcement action against an SD for a failure
to comply with the CFTC Margin Rule solely to the extent such compliance would be
required as a consequence of a Qualifying Amendment to a CFTC Margin Rule Legacy
Swap
g, MPD believes that a no-action position is warranted with respect to
amendments to CFTC Margin Rule Legacy Swaps. Accordingly, MPD will not
recommend that the Commission take an enforcement action against an SD for a failure
to comply with the CFTC Margin Rule solely to the extent such compliance would be
required as a consequence of a Qualifying Amendment to a CFTC Margin Rule Legacy
Swap.
34 Commission regulation 23.161, 17 CFR § 23.161. The final compliance phase was originally set for
September 2020, but has subsequently extended to September 2022. See Margin Requirements for
Uncleared Swaps for Swap Dealers and Major Swap Participants, 85 FR 7 1246 (Nov. 9, 2020).
35 CFTC Margin Rule, 81 FR at 67 5.
LIBOR Transition No-Action
Page 16
2.
Basis Swap Method Relief
In addition, MPD recognizes that counterparties may find it more appropriate to their
circumstances to accomplish the necessary transition using the Basis Swap Method
rather than amendments to individual swaps. MPD therefore believes that a no-action
position is warranted with respect to transition arrangements using the Basis Swap
Method, but solely for purpose of the CFTC Margin Rule. Because the Basis Swap
Method consists of entering into one or more new swaps, rather than amendments of
existing swaps, MPD does not believe that the other relief provided by this letter is
necessary or appropriate.3 6 Accordingly, MPD will not recommend that the
Commission take an enforcement action against an SD for failure to comply with the
CFTC Margin Rule with respect to a basis swap that meets the following conditions:
1.
The basis swap references only one or more CFTC Margin Rule Legacy Swaps;
2.
The basis swap is entered into solely to achieve substantially the same effect as
would be obtained by an amendment to the referenced CFTC Margin Rule Legacy
Swap(s) to accommodate the replacement of an IRR; and
3
comply with the
CFTC Margin Rule with respect to a basis swap that meets the following conditions:
1.
The basis swap references only one or more CFTC Margin Rule Legacy Swaps;
2.
The basis swap is entered into solely to achieve substantially the same effect as
would be obtained by an amendment to the referenced CFTC Margin Rule Legacy
Swap(s) to accommodate the replacement of an IRR; and
3.
The basis swap does not have the effect of: (i) extending the maturity of the
referenced CFTC Margin Rule Legacy Swap(s) beyond what is necessary to
accommodate the differences between market conventions for an IRR and its
replacement; or (ii) increasing the total effective notional amount of the
referenced CFTC Margin Rule Legacy Swap(s) or the aggregate total effective
notional amount of a portfolio of the referenced CFTC Margin Rule Legacy
Swap(s) beyond what is necessary to accommodate the differences between
market conventions for an IRR and its replacement.3 7
C.
SD Business Conduct Requirements
The Commission’s business conduct requirements for SDs under subpart H to part 23 of
the Commission’s regulations, which sets forth business conduct standards for SDs in
their dealings with counterparties (the “Counterparty BCS”),3 8 require SDs to provide
or
obtain
specific
information
from their counterparties, to obtain specific
36 MPD recognizes, however, that an amendment to a basis swap referencing an IRR, including one
entered into for purposes of the Basis Swap Method that is subsequently amended, would qualify for all
applicable relief provided by this letter.
37 MPD intends that a basis swap entered into in compliance with these conditions would retain its relief
from the CFTC Margin Rule in the event that it is subsequently amended solely to accommodate the
replacement of an IRR, and such subsequent amendment is entered into in compliance with these
conditions.
38 17 CFR §§ 23.400 through 23.451, § 23.7 01
plicable relief provided by this letter.
37 MPD intends that a basis swap entered into in compliance with these conditions would retain its relief
from the CFTC Margin Rule in the event that it is subsequently amended solely to accommodate the
replacement of an IRR, and such subsequent amendment is entered into in compliance with these
conditions.
38 17 CFR §§ 23.400 through 23.451, § 23.7 01. See generally Business Conduct Standards for Swap
Dealers and Major Swap Participants with Counterparties, 7 7 FR 97 34 (Feb. 17 , 2012).
LIBOR Transition No-Action
Page 17
representations in writing from their counterparties, and to perform certain due
diligence inquiries with respect to their counterparties prior to entering into (or in some
cases, offering to enter into) a swap with such counterparties.3 9 Certain safe harbors
under the Counterparty BCS permit SDs to rely on written representations from their
counterparties and standardized disclosures, each of which may require amendments or
supplements to an SD’s relationship documentation with such counterparties prior to
entering into a swap with such counterparties.4 0
In the preamble to the Counterparty BCS final rule adopting release, the Commission
noted that the Counterparty BCS will not apply to swaps executed before the effective
date of the Counterparty BCS final rules if the requirement does not impose an ongoing
duty on the swap dealer (such swaps, “Counterparty BCS Legacy Swaps”).4 1
However, the Commission also stated that if Counterparty BCS Legacy Swaps were
materially amended, such swaps would be subject to the requirements of the
Counterparty BCS as if they were new swaps.4 2
ARRC requested a no-action position from SD compliance with the Counterparty BCS
when entering into a Qualifying Amendment to a Counterparty BCS Legacy Swap,
arguing that such swaps are being amended pursuant to a global reform agenda rather
than as a substitute for entering into a new swap
, such swaps would be subject to the requirements of the
Counterparty BCS as if they were new swaps.4 2
ARRC requested a no-action position from SD compliance with the Counterparty BCS
when entering into a Qualifying Amendment to a Counterparty BCS Legacy Swap,
arguing that such swaps are being amended pursuant to a global reform agenda rather
than as a substitute for entering into a new swap.
With respect to Pre-Transition Swaps, ARRC further argued that certain of such swaps
are already subject to the Counterparty BCS, and SDs should not be required to re-
perform obligations to counterparties under such rules in order to address the
39 Commission regulation 23.402(b), 17 CFR §23.402(b) (requiring SDs to obtain essential facts about
their counterparty prior to execution of a transaction); § 23.430(a) (requiring SDs to verify that a
counterparty meets the eligibility standards for an eligible contract participant before offering to enter
into or entering into a swap with such counterparty); § 23.431(a) (requiring SDs to provide material
information concerning the risks and characteristics of a swap to its counterparty at a reasonably
sufficient time prior to entering into the swap); § 23.431(b) (requiring SDs to provide notice to
counterparties that they can request and consult on the design of a scenario analysis); § 23.431(d)
(requiring SDs to provide notice to counterparties of the right to receive the daily mark from a derivatives
clearing organization for cleared swaps); § 23.432 (requiring SDs to provide notice to counterparties of
the right to select clearing and the derivatives clearing organization on which a swap is to be cleared);
§ 23.434 (requiring SDs that recommend a swap to have a reasonable basis to believe that the swap is
suitable for the counterparty); § 23.440 (requiring SDs that act as an advisor to a Special Entity to act in
such entity’s best interest); § 23.450 (requiring SDs to inquire into the knowledge and status o
lect clearing and the derivatives clearing organization on which a swap is to be cleared);
§ 23.434 (requiring SDs that recommend a swap to have a reasonable basis to believe that the swap is
suitable for the counterparty); § 23.440 (requiring SDs that act as an advisor to a Special Entity to act in
such entity’s best interest); § 23.450 (requiring SDs to inquire into the knowledge and status o f a
representative of a counterparty that is a Special Entity); § 23.451 (prohibiting SDs from entering into
swaps with certain governmental entities if it has made political contributions to an official of such
entity); and § 23.701 (requiring SDs to prov ide counterparties with notice of the right to require any initial
margin provided to the SD be segregated with a custodian).
40 Commission regulations 23.402(d), (e), and (f), 17 CFR § 23.402(d), (e), and (f).
41 Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties, 7 7
Fed. Reg. 97 34, 97 41 (Feb. 17 , 2012).
42 Id.
LIBOR Transition No-Action
Page 18
regulatory-driven reform agenda.4 3 ARRC stated that re-performance of certain of these
obligations may result in terminations of swaps with counterparties that cannot make
the necessary representations due to a change in circumstances since originally entering
into the swap. For example, an SD may be unable to obtain or re-verify a counterparty’s
eligible contract participant status, including because the counterparty may no longer be
an ECP.4 4 Similarly, for the external business conduct requirement related to
suitability,4 5 a counterparty may not be able to provide the representation an SD needs
to rely on the applicable safe harbor and the SD may not be able to reasonably
determine that the counterparty is capable of independently evaluating investment risks
with regard to the amendment. In such cases, the swap may have to be terminated
rather than continue
siness conduct requirement related to
suitability,4 5 a counterparty may not be able to provide the representation an SD needs
to rely on the applicable safe harbor and the SD may not be able to reasonably
determine that the counterparty is capable of independently evaluating investment risks
with regard to the amendment. In such cases, the swap may have to be terminated
rather than continue.
Because SDs and their counterparties are amending Counterparty BCS Legacy Swaps
and Pre-Transition Swaps pursuant to a global reform agenda, MPD is of the view that
entering into a Fallback Amendment or a Replacement Rate Amendment should not
cause a loss of legacy status or require re-performance of the full complement of
Counterparty BCS. However, MPD does not believe that relief is appropriate for an SD’s
obligation under Commission regulation § 23.431(a) to provide material information
concerning the risks and characteristics of a swap to its counterparty at a reasonably
sufficient time prior to entering into the swap, though MPD does believe that relief is
appropriate for the requirement to provide the mid-market mark of the swap pursuant
to Commission regulation 23.431(a)(3)(i). Pursuant to the IRR transition,
counterparties to SDs will often be moving from familiar reference rates to newly
created rates. MPD therefore believes SDs should be required to provide material
information about such new rates in order for counterparties to better understand the
amendments into which they are entering.4 6
MPD agrees that a Fallback Amendment to include a fallback provision is an effort to
retain the existing swap following an IRR discontinuation or determination that the IRR
43 ARRC stated that at least with respect to the pre-trade disclosure requirements of Commission
regulation 23.431(a), 17 CFR § 23.431(a), SDs have already begun taking steps to revise the risk
disclosures for Pre-Transition Swaps as appropriate in the context of the transition t
wap following an IRR discontinuation or determination that the IRR
43 ARRC stated that at least with respect to the pre-trade disclosure requirements of Commission
regulation 23.431(a), 17 CFR § 23.431(a), SDs have already begun taking steps to revise the risk
disclosures for Pre-Transition Swaps as appropriate in the context of the transition to RFRs.
44 The requirement that swap counterparties be ECPs, and that a swap dealer verify ECP status, in
Commission regulation 23.430 applies prior to offering to enter into or entering into a swap with a
counterparty. It is not a continuous obligation that applies throughout the duration of the swap. 17 CFR §
23.430.
45 See Commission regulation 23.434. 17 CFR § 23.434.
46 MPD notes the Commission’s view when adopting Commission regulation 23.431(a) that “the disclosure
rules are intended to level the information playing field by requiring swap dealers and major swap
participants to provide sufficient information about a swap to enable counterparties to make their own
informed decisions about the appropriateness of entering into the swap.” Business Conduct Standards for
Swap Dealers and Major Swap Participants with Counterparties, 7 7 FR 97 34, 97 58-59 (Feb. 17 , 2012).
LIBOR Transition No-Action
Page 19
is non-representative by the benchmark administrator or the relevant authority in a
jurisdiction, rather than a substitute for entering into a new swap. Similarly, entering
into voluntary Replacement Rate Amendments prior to permanent discontinuation of
an IRR or determination that the IRR is non-representative is an effort to mitigate risks
associated with such changes to an IRR as opposed to a decision to enter into a new
swap with different economics
evant authority in a
jurisdiction, rather than a substitute for entering into a new swap. Similarly, entering
into voluntary Replacement Rate Amendments prior to permanent discontinuation of
an IRR or determination that the IRR is non-representative is an effort to mitigate risks
associated with such changes to an IRR as opposed to a decision to enter into a new
swap with different economics. Finally, MPD observes that SDs, as well as their
financial end-user counterparties, will be entering into Fallback Amendments and
Replacement Rate Amendments in order to advance an important public policy
objective and not for the purposes of evading the CFTC’s Counterparty BCS.
Given the foregoing, MPD believes that a no-action position is warranted. Accordingly,
MPD will not recommend that the Commission take an enforcement action against an
SD for a failure to comply with the Counterparty BCS (excluding Commission regulation
23.431(a), but including the mid-market mark requirement of subparagraph
23.431(a)(3)(i)), solely to the extent such compliance would be required as a
consequence of a Qualifying Amendment to an uncleared swap.
D.
CFTC Documentation and Swap Processing
Requirements
1.
Confirmation
The Commission’s swap confirmation rules require SDs to confirm amendments to
swaps within certain time frames.4 7
The Commission’s swap trading relationship documentation (“STRD”) rules require
SDs to enter into STRD with each counterparty prior to entering in to an uncleared swap
transaction with such counterparty.4 8 However, SDs are not required to enter into
STRD with respect to uncleared swaps entered into prior to the date an SD was required
to be in compliance with the STRD rule (such uncleared swaps, “STRD Legacy
Swaps”).4 9
As discussed above, ARRC expected that the Fallback Amendments will be
accomplished by means of one or more multilateral protocols that are currently being
developed by ISDA
8 However, SDs are not required to enter into
STRD with respect to uncleared swaps entered into prior to the date an SD was required
to be in compliance with the STRD rule (such uncleared swaps, “STRD Legacy
Swaps”).4 9
As discussed above, ARRC expected that the Fallback Amendments will be
accomplished by means of one or more multilateral protocols that are currently being
developed by ISDA. ARRC contemplated that many Replacement Rate Amendments
could also be accomplished by the protocol methodology. By adhering to an ISDA
protocol, the counterparties could relatively easily amend multiple swaps without
47 Commission regulation 23.500, 17 CFR § 23.500 (defining a “swap transaction” to include amendments
to swaps); Commission regulation 23.501, 17 CFR § 23.501 (requiring SDs to issue a confirmation for any
swap transaction).
48 Commission regulation 23.504(a)(2), 17 CFR § 23.504(a)(2).
49 Commission regulation 23.504(a)(1)(i), 17 CFR § 23.504(a)(1)(i).
LIBOR Transition No-Action
Page 20
extensive, bilateral negotiations. Given that through adherence to a protocol, multiple
swaps could be legally amended, and confirmed, simultaneously, ARRC sought
confirmation that SDs will not be required to issue new confirmations for STRD Legacy
Swaps and Pre-Transition Swaps that are amended via a multilateral protocol.
Similarly, ARRC expected that the Fallback Amendments may be accomplished for
portfolios of swaps between certain counterparties via a bilateral agreement that
amends multiple swaps simultaneously. Given that through such a bilateral agreement,
multiple swaps could be legally amended, and confirmed, simultaneously, ARRC sought
confirmation that SDs will not be required to issue new confirmations for STRD Legacy
Swaps and Pre-Transition Swaps that are amended via such a bilateral agreement.
Given the foregoing, MPD believes that a no-action position is warranted
ple swaps simultaneously. Given that through such a bilateral agreement,
multiple swaps could be legally amended, and confirmed, simultaneously, ARRC sought
confirmation that SDs will not be required to issue new confirmations for STRD Legacy
Swaps and Pre-Transition Swaps that are amended via such a bilateral agreement.
Given the foregoing, MPD believes that a no-action position is warranted. Accordingly,
provided that the amendment is accomplished pursuant to a multilateral protocol or a
bilateral agreement that amends multiple swaps, MPD will not recommend that the
Commission take an enforcement action against an SD for a failure to comply with the
confirmation requirement of Commission regulation 23.501 solely to the extent such
compliance would be required as a consequence of a Qualifying Amendment to an
uncleared swap.
2.
Swap Trading Relationship Documentation
With respect to STRD requirements, as noted above, Commission regulation
§ 23.504(a)(2) requires SDs to enter into swap trading relationship documentation prior
to entering into any “swap transaction.” Commission regulation 23.500(l) defines
“swap transaction” as “any event that results in a new swap or in a change to the terms
of a swap, including execution, termination, assignment, novation, exchange, transfer,
amendment, conveyance, or extinguishing of rights or obligations of a swap.”5 0 Thus, an
amendment of a STRD Legacy Swap would be a new “swap transaction” causing the
swap to lose its status as an STRD Legacy Swap and an SD would be required to enter
into documentation conforming to the rule.
For the same reasons recognized above with respect to the confirmation requirement of
Commission regulation 23.501, MPD believes that a no-action position is warranted
a swap.”5 0 Thus, an
amendment of a STRD Legacy Swap would be a new “swap transaction” causing the
swap to lose its status as an STRD Legacy Swap and an SD would be required to enter
into documentation conforming to the rule.
For the same reasons recognized above with respect to the confirmation requirement of
Commission regulation 23.501, MPD believes that a no-action position is warranted.
Accordingly, MPD will not recommend that the Commission take an enforcement action
against an SD for a failure to comply with the STRD requirement of Commission
regulation 23.504 solely to the extent such compliance would be required as a
consequence of a Qualifying Amendment to an STRD Legacy Swap.
50 17 CFR § 23.500(l).
LIBOR Transition No-Action
Page 21
3.
Reconciliation
The Commission’s portfolio reconciliation rules require SDs to resolve discrepancies in
“material terms” of their swaps with other SDs “immediately,”5 1 and discrepancies with
other counterparties “in a timely fashion.”5 2 ARRC stated that it expects that in certain
circumstances, SDs and market participants may book Fallback Amendments or
Replacement Rate Amendments to their Pre-Transition Swaps differently and at
different times, creating potential discrepancies across counterparties’ books that will
appear in the counterparties’ reconciliation processes. Given the potential volume of
such discrepancies, ARRC requested clarification that SDs may engage in good faith
compliance efforts to resolve any such discrepancies during a transitionary phase.
Given the foregoing, MPD believes that a no-action position is warranted. Accordingly,
MPD will not recommend that the Commission take an enforcement action against an
SD for a failure to comply with the discrepancy resolution timing requirements of
Commission regulations 23.502(a)(4) and (b)(4) solely to the extent such compliance
would be required as a consequence of a Qualifying Amendment to an uncleared swap.
E
believes that a no-action position is warranted. Accordingly,
MPD will not recommend that the Commission take an enforcement action against an
SD for a failure to comply with the discrepancy resolution timing requirements of
Commission regulations 23.502(a)(4) and (b)(4) solely to the extent such compliance
would be required as a consequence of a Qualifying Amendment to an uncleared swap.
E.
Relief Requested Related to End-Users
1.
Exceptions and Exemptions from Compliance
with the CFTC Margin Rule
Commission regulations 50.50(c) and 50.51(b)(2) provide the basis for an exception for
non-financial entities (i.e., commercial end-users eligible to elect an exception under
Commission regulation 50.50(c)) and an exemption for cooperatives from the
Commission’s clearing requirement promulgated pursuant to section 2(h)(1)(A) of the
CEA and codified in Part 50 of the Commission’s regulations (“Clearing
Requirement”), as well as the CFTC Margin Rule pursuant to Commission regulation
23.150(b), provided that certain conditions are satisfied, including the requirement that
the swap is used to “hedge or mitigate commercial risk.”
ARRC stated that, as the market transitions to alternatives to the IBORS, there are likely
to be situations where commercial end-users and cooperatives will have to amend their
swaps that reference IRRs that are subject to the CFTC’s Clearing Requirement or CFTC
Margin Rule to include Fallback Amendments or Replacement Rate Amendments, but
have not yet amended their IRR-linked loan agreements, debt instruments, and other
agreements or transactions to include new fallbacks or alternative reference rates. The
reverse may also be true (i.e., amendments to such financial agreements may be
completed before the related swaps are amended). Therefore, ARRC requested that
51 Commission regulation 23.502(a)(4); 17 CFR § 23.502(a)(4).
52 Commission regulation 23.502(b)(4); 17 CFR § 23.502(b)(4).
o include new fallbacks or alternative reference rates. The
reverse may also be true (i.e., amendments to such financial agreements may be
completed before the related swaps are amended). Therefore, ARRC requested that
51 Commission regulation 23.502(a)(4); 17 CFR § 23.502(a)(4).
52 Commission regulation 23.502(b)(4); 17 CFR § 23.502(b)(4).
LIBOR Transition No-Action
Page 22
DSIO (now, MPD) provide relief for a transitional period to allow commercial end-users
and cooperatives to maintain the status of swaps that are “used to hedge or mitigate
commercial risk” pursuant to Commission regulations 50.50(c) and 50.51(b)(2)
respectively, even if amended to include a Fallback Amendment or Replacement Rate
Amendment.5 3 Where such swaps of these end-users and cooperatives have been
entered into with SDs, the SDs are also relying on the status of the swaps as being “used
to hedge or mitigate [the] commercial risk” of such end-users and cooperatives for an
exception/exemption from the Clearing Requirement and/or the CFTC Margin Rule.
For purposes of the relief in this section, MPD 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 regulation 50.51; (4) a community development financial
institution under Commission regulation 50.77; (5) a bank holding company under
Commission regulation 50.78; and (6) a savings and loan holding company under
Commission regulation 50.79.
Further, for purposes of the relief in this section, MPD 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 pursuant to Commission regulation 50.50(c) at the time of execution;
holding company under
Commission regulation 50.78; and (6) a savings and loan holding company under
Commission regulation 50.79.
Further, for purposes of the relief in this section, MPD 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 pursuant to Commission 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 Commission regulations
50.50, 50.51, or any prior no-action position taken by DCR, and (b) notified its swap
counterparty of such an election; and (3) was reported to a swap data repository at the
time an applicable exception or exemption was elected, pursuant to Commission
regulations 50.50(a)(1)(iii), 50.51, or applicable condition in a prior DCR staff letter.5 4
In defining the terms Eligible End-User and Covered IRS, MPD is electing to provide a
no-action position covering a broad group of end-users and the Covered IRS that they
have elected not to clear. The objective in issuing this relief is to avoid being under-
inclusive and thus forcing ARRC’s membership to make additional requests for relief on
behalf of commercial end-users. Nothing in this letter imposes new obligations or
burdens that would be inconsistent with prior Commission action or staff no-action
positions.
53 In addition to the ARRC letters requesting the relief discussed in this letter, Commission staff also
received a letter from the National Association of Corporate Treasurers, which among other things, set
forth certain requests for staff action on behalf of the end-user community
t with prior Commission action or staff no-action
positions.
53 In addition to the ARRC letters requesting the relief discussed in this letter, Commission staff also
received a letter from the National Association of Corporate Treasurers, which among other things, set
forth certain requests for staff action on behalf of the end-user community.
54 MPD is using the defined terms “Eligible End-User” and “Covered IRS” to ensure that the relief in this
section is consistent with relief provided by DCR to Eligible End-Users pursuant to the revised DCR no-
action letter issued concurrently with this letter.
LIBOR Transition No-Action
Page 23
With respect to Fallback Amendments and Replacement Rate Amendments, MPD
recognizes that a temporary mismatch in the interest rates referenced in commercial
arrangements and the Covered IRS used to hedge the risk of such arrangements may
lead Eligible End-Users and their SD counterparties to question whether one or more
Covered IRS still qualify as instruments used to hedge or mitigate commercial risk as
prescribed by Commission regulations 50.50(c) and 50.51(b)(2), and therefore continue
to qualify for the exception from the CFTC Margin Rule.
To alleviate any question in this regard, MPD believes that a no-action position is
warranted. Accordingly, MPD will not recommend the Commission commence an
enforcement action against an SD for failure to comply with the CFTC Margin Rule with
respect to a Covered IRS entered into with an Eligible End-User if compliance with the
CFTC Margin Rule would be required solely as a consequence of a Qualifying
Amendment to such Covered IRS, or, with respect to the related commercial
arrangement upon which an Eligible End-User is relying for purposes of electing an
exception or exemption from the Clearing Requirement, solely as a consequence of an
amendment to such commercial arrangement solely for the purpose of: (a) including
new fallbacks to alternative reference
as a consequence of a Qualifying
Amendment to such Covered IRS, or, with respect to the related commercial
arrangement upon which an Eligible End-User is relying for purposes of electing an
exception or exemption from the Clearing Requirement, solely as a consequence of an
amendment to such commercial arrangement solely for the purpose of: (a) including
new fallbacks to alternative reference rates triggered only by permanent discontinuation
of an IRR or determination that an IRR is non-representative by the benchmark
administrator or the relevant authority in a jurisdiction; or (b) accommodating the
replacement of an IRR.5 5 5 6
MPD expects that the Covered IRS documentation and the documentation for any
related commercial arrangement 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
regulations 50.50(c), 50.51(b)(2), or applicable condition in a prior DCR staff letter.
SDs and their Eligible End-User 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
are aligned again by December 31, 2021, or, to the extent that the Covered IRS
references one of the 2023 USD LIBOR Settings, by June 30, 2023.
55 Consistent with the definition of a “Qualifying Amendment” discussed above, MPD recognizes that any
such amendment to a commercial arrangement referencing an IRR may include ancillary changes to
existing terms to conform to different market conventions for an IRR and any alternative rate.
56 DCR is providing comparable relief for Eligible End-User counterparties to SDs pursuant to a revised
no-action letter issued concurrently with this letter.
ment” discussed above, MPD recognizes that any
such amendment to a commercial arrangement referencing an IRR may include ancillary changes to
existing terms to conform to different market conventions for an IRR and any alternative rate.
56 DCR is providing comparable relief for Eligible End-User counterparties to SDs pursuant to a revised
no-action letter issued concurrently with this letter.
LIBOR Transition No-Action
Page 24
2.
Status as Eligible Contract Participants
(“ECPs”)
Related to the foregoing, some end-users identify themselves as ECPs based on a swap’s
purpose “to manage the risk associated with an asset or liability owned or incurred or
reasonably likely to be owned or incurred” by the end-user in the conduct/operation of
the end-user’s business.5 7 ARRC argued that a swap with such purpose should maintain
its status as such despite a Fallback Amendment or Replacement Rate Amendment for
the purpose of the eligible contract participant representations given to SDs pursuant to
Commission regulation 23.430(a). A temporary mismatch in the interest rates
referenced in an “asset or liability owned or incurred” and the swaps used to hedge the
risk of such asset or liability may lead end-users to question whether they continue to
qualify as an eligible contract participant.
To alleviate any question in this regard, MPD will not recommend that the Commission
commence an enforcement action against any person for failure to comply with section
2(e) of the CEA or to qualify as an eligible contract participant pursuant to section
1a(18) of the CEA solely to the extent such status is relevant as a consequence of a
Qualifying Amendment to an uncleared swap.
3
ipant.
To alleviate any question in this regard, MPD will not recommend that the Commission
commence an enforcement action against any person for failure to comply with section
2(e) of the CEA or to qualify as an eligible contract participant pursuant to section
1a(18) of the CEA solely to the extent such status is relevant as a consequence of a
Qualifying Amendment to an uncleared swap.
3.
End-User Documentation Requirements
Finally, MPD recognizes that an SD entering into swaps with an Eligible End-User that
uses swaps to hedge or mitigate commercial risk pursuant to Commission regulations
50.50(b) or 50.51(c) may be required to obtain documentation from the Eligible End-
User counterparty pursuant to Commission regulation 23.505(a)(4) that provides the
SD with a reasonable basis to believe that the counterparty is hedging or mitigating
commercial risk.
In light of the foregoing, MPD believes that a no-action position is warranted.
Accordingly, MPD will not recommend that the Commission commence an enforcement
action against an SD for failure to obtain documentation meeting the requirements of
Commission regulation 23.505(a)(4) from an Eligible End-User for which it has
previously obtained such documentation solely to the extent such would be required as a
consequence of a Qualifying Amendment to an uncleared swap.
It is important that SD counterparties to Eligible End-Users may continue to have
independent monitoring, recordkeeping, and reporting obligations, including but not
limited to compliance with other parts of Commission regulation 23.505 and Part 45
obligations. SD counterparties to Eligible End-Users are reminded that they may
remain subject to requirements under Parts 23, 45, or 50, as applicable, when entering
57 Section 1a(18)(A)(xi) of the CEA, 7 U.S.C 1a(18)(A)(xi).
ing obligations, including but not
limited to compliance with other parts of Commission regulation 23.505 and Part 45
obligations. SD counterparties to Eligible End-Users are reminded that they may
remain subject to requirements under Parts 23, 45, or 50, as applicable, when entering
57 Section 1a(18)(A)(xi) of the CEA, 7 U.S.C 1a(18)(A)(xi).
LIBOR Transition No-Action
Page 25
into Qualifying Amendments to Covered IRS with Eligible End-Users. Specifically, such
SDs may be required to:
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
Commission regulation 23.505(a)(1)-(3), (5), and keep records pursuant to
Commission 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 regulations 50.50(b), 50.51(c), or similar provision under prior staff
no-action letter; and
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 SDs 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.
V.
Conclusion
This letter, and the positions taken herein, represent the views of MPD only, and does
not necessarily represent the position or view of the Commission or of any other office
or division of the Commission
er 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.
V.
Conclusion
This letter, and the positions taken herein, represent the views of MPD only, and does
not necessarily represent the position or view of the Commission or of any other office
or division of the Commission. The relief issued by this letter does not excuse persons
relying on it from compliance with any other applicable requirements contained in the
CEA or in Commission regulations. Further, this letter, and the positions taken herein,
are based upon the facts and circumstances presented to MPD. Any different, changed,
or omitted material facts or circumstances might render the relief provided by this letter
void.
Finally, as with all staff letters, the MPD retains the authority to condition further,
modify, suspend, terminate, or otherwise restrict the terms of relief provided herein, in
its discretion.
If you have any questions concerning this correspondence, please contact Frank
Fisanich, Chief Counsel, MPD, at (202) 418-5949 or ffisanich@cftc.gov, or Jacob
Chachkin, Associate Chief Counsel, MPD, at (202) 418-5496 or jchachkin@cftc.gov.
Very truly yours,
LIBOR Transition No-Action
Page 26
___________________________________
Amanda L. Olear
Acting Director
Market Participants Division
cc:
Regina Thoele, Compliance
National Futures Association, Chicago
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.