# 87 FR 32898: Clearing Requirement Determination Under Section 2(h) of the Commodity Exchange Act for Interest Rate Swaps To Account for the Transition From LIBOR and Other IBORs to Alternative Reference Rates

> Federal · Regulations · In force

URL: https://www.frixlaw.com/law-library/statutes/FR_PRORULE_2022-10490

## Section

- **Citation:** 87 FR 32898
- **Heading:** Clearing Requirement Determination Under Section 2(h) of the Commodity Exchange Act for Interest Rate Swaps To Account for the Transition From LIBOR and Other IBORs to Alternative Reference Rates
- **Jurisdiction:** Federal
- **Kind:** Regulations
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** Federal Register / Vol. 87 / 87 FR 32898

## Text

COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 50 RIN 3038-AF18 Clearing Requirement Determination Under Section 2(h) of the Commodity Exchange Act for Interest Rate Swaps To Account for the Transition From LIBOR and Other IBORs to Alternative Reference Rates AGENCY:
Commodity Futures Trading Commission.

ACTION:
Notice of proposed rulemaking.

SUMMARY:
The Commodity Futures Trading Commission (Commission or CFTC) is proposing to amend its interest rate swap clearing requirement regulations adopted under applicable provisions of the Commodity Exchange Act (CEA) in light of the global transition from reliance on certain interbank offered rates (IBORs) ( e.g., the London Interbank Offered Rate (LIBOR)) that have been, or will be, discontinued as benchmark reference rates to alternative reference rates, which are predominantly overnight, nearly risk-free reference rates (RFRs). The proposed amendments would revise the set of interest rate swaps that are required to be submitted for clearing pursuant to the CEA and the Commission's regulations to a derivatives clearing organization (DCO) that is registered under the CEA (registered DCO) or a DCO that has been exempted from registration under the CEA (exempt DCO). Among other things, the proposed amendments would modify the Commission's interest rate swap clearing requirement to reflect the market shift away from swaps that reference IBORs to swaps that reference RFRs.

DATES:
Comments must be received on or before June 30, 2022.

ADDRESSES:
You may submit comments, identified by RIN 3038-AF18, by any of the following methods:
• CFTC Comments Portal: https://comments.cftc.gov. Select the “Submit Comments” link for this rulemaking and follow the instructions on the Public Comment Form.
• Mail: Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
• Hand Delivery/Courier: Follow the same instructions as for Mail, above
nts Portal: https://comments.cftc.gov. Select the “Submit Comments” link for this rulemaking and follow the instructions on the Public Comment Form.
• Mail: Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
• Hand Delivery/Courier: Follow the same instructions as for Mail, above. Please submit your comments using only one of these methods. Submissions through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to https://comments.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act (FOIA), a petition for confidential treatment of the exempt information may be submitted according to the procedures established in § 145.9 of the Commission's regulations, 17 CFR 145.9.
The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from https://comments.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under FOIA.
FOR FURTHER INFORMATION CONTACT:
Sarah E. Josephson, Deputy Director, at 202-418-5684 or sjosephson@cftc.gov; Melissa D'Arcy, Special Counsel, at 202-418-5086 or mdarcy@cftc.gov; or Daniel O'Connell, Special Counsel, at 202-418-5583 or doconnell@cftc.gov; each in the Division of Clearing and Risk at the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581
R INFORMATION CONTACT:
Sarah E. Josephson, Deputy Director, at 202-418-5684 or sjosephson@cftc.gov; Melissa D'Arcy, Special Counsel, at 202-418-5086 or mdarcy@cftc.gov; or Daniel O'Connell, Special Counsel, at 202-418-5583 or doconnell@cftc.gov; each in the Division of Clearing and Risk at the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background A. Commission's Swap Clearing Requirement B. End of LIBOR C. Global Progress on Benchmark Reform II. Overview of the Request for Information A. Work by DCOs To Support the Transition to RFRs B. Work by Market Participants To Support the Transition to RFRs III. Domestic and International Coordination and Outreach A. Domestic Coordination Efforts B. International Coordination Efforts C. Clearing Requirements in Other Jurisdictions IV. Proposed Amendments to Regulation § 50.4(a) A. Overview of the Proposed Regulation B. Modifications to the Existing Clearing Requirements V. Proposed Determination Analysis for RFR OIS A. General Description of Information Considered B. Consistency With DCO Core Principles C. Consideration of the Five Statutory Factors VI. Proposed Implementation Schedule and Compliance Dates VII. Cost Benefit Considerations A. Statutory and Regulatory Background B. Overview of Swap Clearing C. Consideration of the Costs and Benefits of the Commission's Actions D. Costs and Benefits of the Proposed Amendments as Compared to Alternatives E. Section 15(a) Factors VIII. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act C. Antitrust Laws I. Background
A. Commission's Swap Clearing Requirement
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established a comprehensive new regulatory framework for swaps
D. Costs and Benefits of the Proposed Amendments as Compared to Alternatives E. Section 15(a) Factors VIII. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act C. Antitrust Laws I. Background
A. Commission's Swap Clearing Requirement
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established a comprehensive new regulatory framework for swaps. 1 Title VII of the Dodd-Frank Act (Title VII) amended the CEA to require, among other things, that a swap be cleared through a registered DCO or an exempt DCO if the Commission has determined that the swap, or group, category, type, or class of swaps, is required to be cleared, unless an exception to the clearing requirement applies. 2 The CEA, as amended by Title VII, provides that the Commission may issue a clearing requirement determination based either on a Commission-initiated review of a swap, 3 or a swap submission from a DCO. 4
1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
2 Section 2(h)(1)(A) of the CEA, 7 U.S.C. 2(h)(1)(A).
3 Section 2(h)(2)(A) of the CEA, 7 U.S.C. 2(h)(2)(A). Section 2(h)(2)(A) provides for a Commission-initiated review process whereby the Commission, on an ongoing basis, must review swaps, or a group, category, type, or class of swaps, to determine whether a swap, or a group, category, type, or class of swaps, should be required to be cleared.
4 Section 2(h)(2)(B) of the CEA, 7 U.S.C. 2(h)(2)(B). Section 2(h)(2)(B)(i) requires that each DCO submit to the Commission each swap, or group, category, type, or class of swaps, that it plans to accept for clearing. The swaps subject to this proposed determination were submitted by DCOs pursuant to CEA section 2(h)(2)(B)(i) and regulation 39.5(b), 17 CFR 39.5(b). Pursuant to section 2(h)(2)(B)-(C) of the CEA, the Commission must review swap submissions from DCOs to determine whether the swaps should be subject to required clearing
group, category, type, or class of swaps, that it plans to accept for clearing. The swaps subject to this proposed determination were submitted by DCOs pursuant to CEA section 2(h)(2)(B)(i) and regulation 39.5(b), 17 CFR 39.5(b). Pursuant to section 2(h)(2)(B)-(C) of the CEA, the Commission must review swap submissions from DCOs to determine whether the swaps should be subject to required clearing. Regulation § 39.5(b) implements the procedural elements of section 2(h)(2)(B)-(C) by establishing the process by which a DCO must submit the swaps it offers for clearing to the Commission for purposes of considering a clearing requirement determination.
Section 2(h)(2)(D)(ii) of the CEA requires the Commission to consider the 5
5 7 U.S.C. 2(h)(2)(D)(ii).
The Commission adopted its first clearing requirement determination (First Determination) in 2012. 6 The First Determination was implemented between March 2013 and October 2013 based on the schedule described in regulation § 50.25 and the preamble to the First Determination. 7 The First Determination applied to interest rate swaps in four classes: Fixed-to-floating swaps, basis swaps, forward rate agreements (FRAs), and overnight index swaps (OIS). 8
6 Clearing Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 2012) (First Determination).
7 17 CFR 50.25; First Determination, 77 FR at 74319-74321.
8 See generally First Determination. By way of background, an interest rate swap is generally an agreement by counterparties to exchange payments based on a series of cash flows over a specified period of time, typically calculated using two different rates. Fixed-to-floating swaps are interest rate swaps in which the payment(s) owed on one leg of the swap is calculated using a fixed rate, and the payment(s) owed on the other leg is calculated using a floating rate. Basis swaps are interest rate swaps for which the payments for both legs are calculated using floating rates
ver a specified period of time, typically calculated using two different rates. Fixed-to-floating swaps are interest rate swaps in which the payment(s) owed on one leg of the swap is calculated using a fixed rate, and the payment(s) owed on the other leg is calculated using a floating rate. Basis swaps are interest rate swaps for which the payments for both legs are calculated using floating rates. FRAs are interest rate swaps in which payments are exchanged on a predetermined date for a single period and one leg of the swap is calculated using a fixed rate while the other leg is calculated using a floating rate set on a predetermined date. OIS are interest rate swaps for which one leg of the swap is calculated using a fixed rate and the other leg is calculated using a floating rate based on a daily overnight rate.
In making its initial interest rate swap clearing determination, the Commission focused on the size of the interest rate swap market relative to the swap market overall, as well as the fact that these swaps were already widely being cleared. 9 As set forth in regulation § 50.4(a), the Commission identified four classes of interest rate swaps having certain specifications related to (i) the currency in which the notional and payment amounts are specified; (ii) the floating rate index referenced in the swap; (iii) the stated termination date; (iv) optionality; (v) dual currencies; and (vi) conditional notional amounts. 10 The Commission limited the interest rate swaps required to be cleared to those denominated in four currencies (U.S. dollar (USD), Euro (EUR), British pound (GBP), and Japanese yen (JPY)). The Commission noted that interest rate swaps denominated in these currencies comprised an outsized portion of the interest rate swap market in terms of notional amounts outstanding and trading volumes compared to interest rate swaps denominated in other currencies. 11
9 Id. at 74287, 74307
nominated in four currencies (U.S. dollar (USD), Euro (EUR), British pound (GBP), and Japanese yen (JPY)). The Commission noted that interest rate swaps denominated in these currencies comprised an outsized portion of the interest rate swap market in terms of notional amounts outstanding and trading volumes compared to interest rate swaps denominated in other currencies. 11
9 Id. at 74287, 74307. To this day, significant amounts of notional in interest rate swaps are traded in markets around the world, and these swaps comprise an outsized portion of notional among all swaps. According to the Bank for International Settlements (BIS), as of June 2021, there was an estimated $488 trillion in outstanding notional of interest rate swaps, which represents approximately 80% of the total outstanding notional of all over-the-counter (OTC) derivatives. See BIS, OTC Derivatives Outstanding, Table D7 (OTC, Interest Rate Derivatives, H1 2021), updated Nov. 15, 2021, available at https://stats.bis.org/statx/srs/table/d7?f=pdf; BIS, Global OTC Derivatives Markets, June 2021, available at https://www.bis.org/publ/otc_hy2111/intgraphs/graphA1.htm.
10 17 CFR 50.4(a).
11 First Determination, 77 FR at 74308.
The First Determination covered a number of interest rate swaps that reference IBORs, including fixed-to-floating swaps, basis swaps, and FRAs denominated in USD, GBP, and JPY, referencing USD, GBP, and JPY LIBOR, respectively, and OIS denominated in EUR referencing the Euro Overnight Index Average (EONIA). The Commission observed that interest rate swaps referencing those indexes had significant outstanding notional amounts and trading liquidity. 12
12 Id. at 74309.
The Commission adopted its second clearing requirement determination (Second Determination) in 2016
, referencing USD, GBP, and JPY LIBOR, respectively, and OIS denominated in EUR referencing the Euro Overnight Index Average (EONIA). The Commission observed that interest rate swaps referencing those indexes had significant outstanding notional amounts and trading liquidity. 12
12 Id. at 74309.
The Commission adopted its second clearing requirement determination (Second Determination) in 2016. 13 The Second Determination was implemented between December 2016 and October 2018, 14 and covered interest rate swaps in nine additional currencies: Australian dollar (AUD), Canadian dollar (CAD), Hong Kong dollar (HKD), Mexican peso (MXN), Norwegian krone (NOK), Polish zloty (PLN), Singapore dollar (SGD), Swedish krona (SEK), and Swiss franc (CHF). The Commission adopted the Second Determination largely in order to further harmonize its interest rate swap clearing requirement with those of other jurisdictions that had already issued, or were in the process of issuing, clearing mandates on similar interest rate swaps. 15 The Second Determination also covered swaps that reference other IBORs, including fixed-to-floating swaps denominated in SGD referencing the Singapore Swap Offer Rate (SOR-VWAP) and fixed-to-floating swaps denominated in CHF referencing CHF LIBOR. 16 These rates will be discussed further below.
13 Clearing Requirement Determination Under Section 2(h) of the Commodity Exchange Act for Interest Rate Swaps, 81 FR 71202 (Oct. 14, 2016) (Second Determination).
14 17 CFR 50.26; Second Determination, 81 FR at 71202.
15 Second Determination, 81 FR at 71203-71205. The Commission explained that such harmonization serves an important anti-evasion goal: If a non-U.S. jurisdiction issued a clearing requirement, and a swap dealer (SD) located in the United States were not subject to an analogous a clearing requirement under U.S. law, then market participants potentially could avoid the non-U.S. jurisdiction's clearing requirement by entering into a swap with an SD located in the United States. Id. at 71203
ion serves an important anti-evasion goal: If a non-U.S. jurisdiction issued a clearing requirement, and a swap dealer (SD) located in the United States were not subject to an analogous a clearing requirement under U.S. law, then market participants potentially could avoid the non-U.S. jurisdiction's clearing requirement by entering into a swap with an SD located in the United States. Id. at 71203.
16 Id. at 71205.
B. End of LIBOR
LIBOR is an interest rate benchmark that was intended to measure the average rate at which a bank can obtain unsecured funding in the London interbank market for a given tenor and currency. It had been one of the world's most frequently referenced interest rate benchmarks, serving as a reference rate for a wide variety of swaps and other financial products. Over the years, LIBOR was calculated based on submissions from a panel of contributor banks and published every London business day. Immediately prior to January 1, 2022, LIBOR was published for five currencies (USD, GBP, EUR, CHF, and JPY) and seven tenors (overnight or spot next depending on currency, 1-week, 1-month, 2-month, 3-month, 6-month, and 12-month), resulting in 35 individual LIBOR rates. 17 Beginning this year, these LIBOR rates have almost entirely ceased publication or become nonrepresentative of the underlying market they are intended to measure.
17 See generally ICE Benchmark Administration (IBA), LIBOR, available at https://www.theice.com/iba/libor.
Nearly a decade ago, government investigations concerning LIBOR, as well as a decline in the volume of interbank lending transactions that LIBOR is intended to measure, gave rise to concerns regarding the integrity and reliability of LIBOR and other IBORs. 18 19 regulators and global standard-setting bodies did not view these reforms as a long-term solution
e at https://www.theice.com/iba/libor.
Nearly a decade ago, government investigations concerning LIBOR, as well as a decline in the volume of interbank lending transactions that LIBOR is intended to measure, gave rise to concerns regarding the integrity and reliability of LIBOR and other IBORs. 18 19 regulators and global standard-setting bodies did not view these reforms as a long-term solution. On July 27, 2017, Andrew Bailey, then-Chief Executive of the United Kingdom (UK) Financial Conduct Authority (FCA), LIBOR's primary regulator, announced that the FCA would not use its authority to compel LIBOR panel banks to contribute to the benchmark after 2021. 20 On March 5, 2021, the FCA announced that publication of LIBOR would cease on December 31, 2021, for the following: 21
18 See, e.g., International Organization of Securities Commissions (IOSCO), Principles for Financial Benchmarks, July 2013, at 1, available at https://www.iosco.org/library/pubdocs/pdf/ David Bowman, et al., “How Correlated Is LIBOR With Bank Funding Costs?,” FEDS Notes, June 29, 2020, available at https://www.federalreserve.gov/econres/notes/feds-notes/how-correlated-is-libor-with-bank-funding-costs-20200629.htm; and Alternative Reference Rates Committee, Second Report, Mar. 2018, at 1-3, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report.
19 See generally IBA, Methodology, available at https://www.theice.com/publicdocs/ICE_LIBOR_Methodology.pdf; H.M. Treasury, The Wheatley Review of LIBOR: Final Report, Sept. 2012, available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/191762/wheatley_review_libor_finalreport_280912.pdf; Intercontinental Exchange (ICE), ICE LIBOR Evolution, Apr. 25, 2018, at 4, available at https://www.theice.com/publicdocs/ICE_LIBOR_Evolution_Report_25_April_2018.pdf.
20 Andrew Bailey, “The future of Libor,” July 27, 2017, available at https://www.fca.org.uk/news/speeches/the-future-of-libor
ernment/uploads/system/uploads/attachment_data/file/191762/wheatley_review_libor_finalreport_280912.pdf; Intercontinental Exchange (ICE), ICE LIBOR Evolution, Apr. 25, 2018, at 4, available at https://www.theice.com/publicdocs/ICE_LIBOR_Evolution_Report_25_April_2018.pdf.
20 Andrew Bailey, “The future of Libor,” July 27, 2017, available at https://www.fca.org.uk/news/speeches/the-future-of-libor.
21 FCA, FCA Announcement on Future Cessation and Loss of Representativeness of the LIBOR Benchmarks, Mar. 5, 2021 (FCA Announcement on LIBOR Cessation), available at https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf.
(i) EUR LIBOR in all tenors;
(ii) CHF LIBOR in all tenors;
(iii) JPY LIBOR in the spot next, 1-week, 2-month, and 12-month tenors;
(iv) GBP LIBOR in the overnight, 1-week, 2-month, and 12-month tenors; and
(v) USD LIBOR in the 1-week and 2-month tenors. 22
22 See section IV below (discussing the continued publication of USD LIBOR for certain tenors through June 30, 2023).
The FCA further determined that GBP and JPY LIBOR in 1-month, 3-month, and 6-month tenors would become nonrepresentative after December 31, 2021. 23 Additionally, the FCA determined that USD LIBOR in the overnight and 12-month tenors would cease after June 30, 2023, and that USD LIBOR in the 1-month, 3-month, and 6-month tenors would not be representative after that date. 24 At this time, EUR, CHF, JPY, and GBP LIBOR in all tenors, and USD LIBOR in the 1-week and 2-month tenors, have ceased publication or become nonrepresentative of the underlying market they are intended to measure.
23 FCA Announcement on LIBOR Cessation. The FCA stated that once a LIBOR rate becomes nonrepresentative, its representativeness will not be restored.
24 Id.
The historic circumstances surrounding the transition from IBORs to RFRs are the result of significant private and public sector coordinated efforts
ation or become nonrepresentative of the underlying market they are intended to measure.
23 FCA Announcement on LIBOR Cessation. The FCA stated that once a LIBOR rate becomes nonrepresentative, its representativeness will not be restored.
24 Id.
The historic circumstances surrounding the transition from IBORs to RFRs are the result of significant private and public sector coordinated efforts. 25 As plans to retire LIBOR proceeded, regulators in the United States and other jurisdictions worked to identify, develop, and implement reference rates to serve as alternatives to LIBOR and other IBORs. 26 In the United States, the Alternative Reference Rates Committee (ARRC), convened in 2014 by the Federal Reserve Board (FRB) and the Federal Reserve Bank of New York (FRBNY) and comprised of private market participants and ex officio banking and financial sector regulators, selected the Secured Overnight Financing Rate (SOFR) 27 as its preferred alternative to USD LIBOR. 28 The ARRC developed a Paced Transition Plan, which has now been completed, to facilitate an orderly transition from USD LIBOR to USD SOFR. 29
25 While not all benchmark rates considered to be alternative reference rates for IBORs may be RFRs, efforts to transition markets away from IBORs have focused on RFRs as alternatives. For purposes of brevity, the Commission uses the term “RFR” in this notice of proposed rulemaking to refer to alternative reference rates.
26 For additional background information, see Swap Clearing Requirement To Account for the Transition from LIBOR and Other IBORs to Alternative Reference Rates, 86 FR 66476, 66480 (Nov. 23, 2021) (RFI).
27 USD SOFR is an RFR that measures the cost of overnight repurchase agreement transactions collateralized by U.S. Treasury securities. FRBNY, Statement Introducing the Treasury Repo Reference Rates, Apr. 3, 2018, available at https://www.newyorkfed.org/markets/opolicy/operating_policy_180403
ion from LIBOR and Other IBORs to Alternative Reference Rates, 86 FR 66476, 66480 (Nov. 23, 2021) (RFI).
27 USD SOFR is an RFR that measures the cost of overnight repurchase agreement transactions collateralized by U.S. Treasury securities. FRBNY, Statement Introducing the Treasury Repo Reference Rates, Apr. 3, 2018, available at https://www.newyorkfed.org/markets/opolicy/operating_policy_180403. See also FRBNY, Secured Overnight Financing Rate Data, available at https://apps.newyorkfed.org/markets/autorates/SOFR#:~:text=The%20SOFR%20is%20calculated%20as,LLC%2C%20an%20affiliate%20of%20the; and FRBNY, Additional Information about the Treasury Repo Reference Rates, available at https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information. USD SOFR has been published each New York business day at 8 a.m. ET since April 3, 2018, by the FRBNY in cooperation with the U.S. Office of Financial Research.
28 ARRC, “The ARRC Selects a Broad Repo Rate as its Preferred Alternative Reference Rate,” June 22, 2017, available at https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-2017.pdf.
29 ARRC, Paced Transition Plan, available at https://www.newyorkfed.org/arrc/sofr-transition#pacedtransition. The Paced Transition Plan called for (i) the establishment of infrastructure for futures and/or OIS trading in USD SOFR by the second half of 2018; (ii) the start of trading in futures and/or bilateral, uncleared OIS that reference USD SOFR by the end of 2018; (iii) the start of trading in cleared OIS that reference USD SOFR in the effective Federal funds rate (EFFR) price alignment interest (PAI) and discounting environment by the end of the first quarter of 2019; (iv) Chicago Mercantile Exchange, Inc
in USD SOFR by the second half of 2018; (ii) the start of trading in futures and/or bilateral, uncleared OIS that reference USD SOFR by the end of 2018; (iii) the start of trading in cleared OIS that reference USD SOFR in the effective Federal funds rate (EFFR) price alignment interest (PAI) and discounting environment by the end of the first quarter of 2019; (iv) Chicago Mercantile Exchange, Inc. (CME)'s and LCH Limited (LCH)'s conversion of discounting, and PAI and price alignment amount, from EFFR to USD SOFR with respect to all outstanding cleared USD-denominated swaps by October 16, 2020; and (v) the ARRC's endorsement of a term reference rate based on USD SOFR derivatives markets by the end of the first half of 2021. The final step was completed on July 29, 2021, when the ARRC formally endorsed forward-looking term USD SOFR rates developed by CME.
C. Global Progress on Benchmark Reform
Regulators and public-private working groups in other IBOR currency jurisdictions have been working to identify, develop, and encourage market uptake of RFRs to replace LIBOR in currencies other than USD, as well as IBORs other than LIBOR. As relevant to this proposal, RFRs identified as alternatives for IBORs in currencies other than USD include: (i) The Sterling Overnight Index Average (SONIA) for GBP; (ii) the Swiss Average Rate Overnight (SARON) for CHF; (iii) the Tokyo Overnight Average (TONA) for JPY; and (iv) the Euro Short-Term Rate (€STR) for EUR.
In the European Union (EU), the Working Group on Euro Risk-Free Rates, convened in 2018 by the European Central Bank in connection with the Belgian Financial Services, the European Securities and Markets Authority (ESMA), and the European Commission (EC), also identified €STR as its preferred alternative to EUR EONIA, which ceased publication on January 3, 2022
ro Short-Term Rate (€STR) for EUR.
In the European Union (EU), the Working Group on Euro Risk-Free Rates, convened in 2018 by the European Central Bank in connection with the Belgian Financial Services, the European Securities and Markets Authority (ESMA), and the European Commission (EC), also identified €STR as its preferred alternative to EUR EONIA, which ceased publication on January 3, 2022. 30 Additionally, with regard to SGD, the Steering Committee for SOR & SIBOR Transition to SORA, established by the Monetary Authority of Singapore (MAS), has been working to oversee a transition from SGD SOR-VWAP to the Singapore Overnight Rate Average (SORA). 31 SGD SOR-VWAP relies on USD LIBOR as an input and is expected to be discontinued across all tenors after June 30, 2023. 32
30 ESMA, Working Group on Euro Risk-Free Rates, available at https://www.esma.europa.eu/policy-activities/benchmarks/working-group-euro-risk-free-rates; European Money Markets Institute, EONIA, available at https://www.emmi-benchmarks.eu/benchmarks/eonia/.
31 Association of Banks in Singapore, About SC-STS, available at https://www.abs.org.sg/benchmark-rates/about-sc-sts.
32 Steering Committee for SOR & SIBOR Transition to SORA, Timelines to Cease Issuance of SOR and SIBOR-Linked Financial Products, Mar. 31, 2021 (Timelines to Cease SOR), at 4, available at https://www.abs.org.sg/docs/library/timelines-to-cease-issuance-of-sor-derivatives-and-sibor-linked-financial-products.pdf.
Table 1 that follows this paragraph contains a non-exhaustive list of RFRs that have been identified to replace IBORs around the world: 33
33 See generally Financial Stability Board (FSB), Reforming Major Interest Rate Benchmarks, Nov. 20, 2020, at 29-43, 54-55, available at https://www.fsb.org/2020/11/reforming-major-interest-rate-benchmarks-2020-progress-report/. See also Andreas Schrimpf and Vladislav Sushko, “Beyond Libor: a primer on the new reference rates,” BIS Quarterly Review, Mar
fied to replace IBORs around the world: 33
33 See generally Financial Stability Board (FSB), Reforming Major Interest Rate Benchmarks, Nov. 20, 2020, at 29-43, 54-55, available at https://www.fsb.org/2020/11/reforming-major-interest-rate-benchmarks-2020-progress-report/. See also Andreas Schrimpf and Vladislav Sushko, “Beyond Libor: a primer on the new reference rates,” BIS Quarterly Review, Mar. 2019, at 35, available at https://www.bis.org/publ/qtrpdf/r_qt1903e.pdf; Bank of England, Preparing for 2022: What You Need to Know about LIBOR Transition, Nov. 2018, at 10, https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/what-you-need-to-know-about-libor-transition.pdf; ISDA, et al., IBOR Global Benchmark Survey 2018 Transition Roadmap, Feb. 2018, at 32, https://www.isda.org/a/g2hEE/IBOR-Global-Transition-Roadmap-2018.pdf; European Central Bank, Euro Short-Term Rate (€STR), available at https://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/euro_short-term_rate/html/index.en.html#:~:text=The%20euro%20short%2Dterm%20rate,activity%20on%201%20October%202019; Timelines to Cease SOR.
Table 1—RFRs Identified for IBORs Currency Index Identified alternative rate Alternative rate administrator Secured Published AUD Bank Bill Swap Rate (BBSW) Reserve Bank of Australia Interbank Overnight Cash Rate (AONIA) Reserve Bank of Australia No Yes. CAD Canadian Dollar Offered Rate (CDOR) Canadian Overnight Repo Rate Average (CORRA) Bank of Canada Yes Yes. CHF LIBOR SARON SIX Swiss Exchange Yes Yes. EUR LIBOR €STR European Central Bank No Yes. Euro Overnight Index Average (EONIA) €STR European Central Bank No Yes. Euro Interbank Offered Rate (EURIBOR) €STR European Central Bank No Yes. GBP LIBOR SONIA Bank of England No Yes. HKD Hong Kong Interbank Offered Rate (HIBOR) Hong Kong Dollar Overnight Index Average (HONIA) Treasury Market Association No Yes. JPY LIBOR TONA Bank of Japan No Yes. MXN Term Interbank Equilibrium Interest Rate (TIIE) Overnight TIIE Banco de Mexico Yes Yes
European Central Bank No Yes. Euro Interbank Offered Rate (EURIBOR) €STR European Central Bank No Yes. GBP LIBOR SONIA Bank of England No Yes. HKD Hong Kong Interbank Offered Rate (HIBOR) Hong Kong Dollar Overnight Index Average (HONIA) Treasury Market Association No Yes. JPY LIBOR TONA Bank of Japan No Yes. MXN Term Interbank Equilibrium Interest Rate (TIIE) Overnight TIIE Banco de Mexico Yes Yes. SGD SOR SORA Association of Banks in Singapore No Yes. Singapore Interbank Offered Rate (SIBOR) SORA Association of Banks in Singapore No Yes. Regulators and global standard-setting bodies have urged market participants to accelerate their adoption of USD SOFR and other RFRs and cease entering new swaps referencing LIBOR and other IBORs, 34 and have issued guidance and regulatory relief to facilitate the transition. In the United States, on July 13, 2021, the Commission's Market Risk Advisory Committee adopted SOFR First, a phased initiative to switch interdealer trading conventions from reliance on USD LIBOR to USD SOFR as a reference rate for swaps. 35 SOFR First was implemented in four phases between July 26, 2021, and December 16, 2021. 36 SOFR First mirrors similar best practices adopted in other jurisdictions to increase activity in swaps referencing RFRs. 37
34 See, e.g., FRB, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC), Statement on LIBOR Transition, Nov. 30, 2020, available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20201130a1.pdf; and IOSCO, Statement on Benchmarks Transition, June 2, 2021, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD676.pdf.
35 CFTC, “CFTC Market Risk Advisory Committee Adopts SOFR First Recommendation at Public Meeting,” July 13, 2021, available at https://www.cftc.gov/PressRoom/PressReleases/8409-21.
36 CFTC, CFTC's Interest Rate Benchmark Reform Subcommittee Issues User Guide for the Transition of Exchange-Traded Derivatives Activity to SOFR, Dec
able at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD676.pdf.
35 CFTC, “CFTC Market Risk Advisory Committee Adopts SOFR First Recommendation at Public Meeting,” July 13, 2021, available at https://www.cftc.gov/PressRoom/PressReleases/8409-21.
36 CFTC, CFTC's Interest Rate Benchmark Reform Subcommittee Issues User Guide for the Transition of Exchange-Traded Derivatives Activity to SOFR, Dec. 16, 2021, available at https://www.cftc.gov/PressRoom/PressReleases/8469-21.
37 See, e.g., Bank of England, “The FCA and the Bank of England encourage market participants in further switch to SONIA in interest rate swap markets,” Sept. 28, 2020, available at https://www.bankofengland.co.uk/news/2020/september/fca-and-boe-joint-statement-on-sonia-interest-rate-swap; Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks, “Transition of Quoting Conventions in the JPY interest rate swaps market (`TONA First'),” July 26, 2021, available at https://www.boj.or.jp/en/paym/market/jpy_cmte/data/cmt210726b.pdf.
II. Overview of the Request for Information
In light of ongoing efforts by the international regulatory community, market participants, and others to transition financial markets from IBORs to RFRs, on November 23, 2021, the Commission published an RFI seeking public input regarding how it should amend the interest rate swap clearing requirement to address the cessation of IBORs that have been used as benchmark reference rates and the market adoption of swaps that reference RFRs. 38 The RFI sought input on all aspects of the swap clearing requirement that may be affected by the transition from IBORs to RFRs, including enumerated requests for data and other information related to IBOR and RFR swaps. The Commission received 14 responses to the RFI from a variety of market infrastructure providers, market participants, and industry organizations
of swaps that reference RFRs. 38 The RFI sought input on all aspects of the swap clearing requirement that may be affected by the transition from IBORs to RFRs, including enumerated requests for data and other information related to IBOR and RFR swaps. The Commission received 14 responses to the RFI from a variety of market infrastructure providers, market participants, and industry organizations. 39 In addition to addressing the Commission's specific requests for information, many respondents to the RFI shared information regarding their own contributions to the transition from IBORs to RFRs.
38 RFI, 86 FR at 66486—66488.
39 Responses were submitted by: American Council of Life Insurers (ACLI), CCP12, London Stock Exchange Group (LSEG), Japan Securities Clearing Corporation (JSCC), Tradeweb Markets LLC (Tradeweb), Investment Company Institute (ICI), Managed Funds Association (MFA), Toronto-Dominion Bank (TD Bank), Eurex Clearing AG (Eurex), the International Swaps and Derivatives Association (ISDA), Alternative Investment Management Association (AIMA), Citadel, Bloomberg L.P., and CME Group Inc. (CMEG). The response letters are available on the CFTC Comments Portal: https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx.
A. Work by DCOs To Support the Transition to RFRs
The Commission received responses to its RFI from CMEG, 40 LSEG, 41 and Eurex, all of which operate or are registered DCOs that offer for clearing RFR swaps subject to this proposal. The Commission also received a response from JSCC, an exempt DCO that clears JPY TONA swaps. 42 Additionally, the Commission received a response from the CCP12, a global association of central counterparties (CCPs).
40 CMEG is the parent company of CME. CMEG Letter.
41 LSEG has majority ownership of LCH Group, which operates LCH. LSEG Letter.
42 OTC Clearing Hong Kong Limited (HKEX), another exempt DCO, also clears certain of the RFR swaps subject to this proposal
rs JPY TONA swaps. 42 Additionally, the Commission received a response from the CCP12, a global association of central counterparties (CCPs).
40 CMEG is the parent company of CME. CMEG Letter.
41 LSEG has majority ownership of LCH Group, which operates LCH. LSEG Letter.
42 OTC Clearing Hong Kong Limited (HKEX), another exempt DCO, also clears certain of the RFR swaps subject to this proposal. Specifically, HKEX offers swaps referencing USD SOFR and EUR €STR for clearing. See Hong Kong Exchanges and Clearing, Interest Rate Swaps, available at https://www.hkex.com.hk/Products/OTC-Derivatives/Interest-Rate-Swaps?sc_lang=en.
DCOs played an important role in the transition from IBORs to RFRs by offering clearing services for RFR swaps and converting cleared IBOR swaps to RFR OIS. 43 The DCOs' responses highlight the efforts they undertook to facilitate a smooth transition from cleared IBOR swaps to cleared RFR swaps. 44 As the CCP12 noted in its response, DCOs currently provide clearing services for RFR OIS and manage the risks associated with clearing such swaps. 45
43 As the Commission explained in the RFI, these conversion events were intended to address market participant concerns related to potential bifurcation of liquidity between trading in legacy IBOR swaps that had fallen back to RFRs ( i.e., as a result of the operation of DCO rules implementing ISDA's fallbacks) and new RFR OIS, as well as certain operational costs. RFI, 86 FR at 66484.
44 CMEG, LSEG, Eurex, and JSCC Letters.
45 CCP12 Letter.
Table 2 that follows this paragraph shows swaps referencing RFRs that registered DCOs have offered for clearing to facilitate the transition from IBORs. 46 After DCOs began clearing RFR swaps, they worked to move open interest in IBOR swaps to RFR swaps, reflecting the growing RFR swap market. CME, LCH, and Eurex each converted cleared EUR EONIA swaps outstanding after October 15, 2021, to €STR OIS, ahead of EUR EONIA's January 3, 2022 cessation
eferencing RFRs that registered DCOs have offered for clearing to facilitate the transition from IBORs. 46 After DCOs began clearing RFR swaps, they worked to move open interest in IBOR swaps to RFR swaps, reflecting the growing RFR swap market. CME, LCH, and Eurex each converted cleared EUR EONIA swaps outstanding after October 15, 2021, to €STR OIS, ahead of EUR EONIA's January 3, 2022 cessation. 47 These DCOs also converted cleared swaps referencing CHF, EUR, JPY, and GBP LIBOR to corresponding RFR OIS in December 2021, ahead of the December 31, 2021 cessation date for these LIBOR rates. 48 Additionally, in December 2021, JSCC completed a conversion of JPY LIBOR swaps to JPY TONA OIS. 49 Following these conversion events, with limited exceptions, swaps referencing these LIBOR rates were no longer offered for clearing. 50 The Commission anticipates that CME, LCH, and Eurex will launch similar conversion events for all swaps still referencing USD LIBOR prior to June 30, 2023. 51
46 Table 2 does not include information from exempt DCOs. Exempt DCOs, such as JSCC and HKEX, also offer clearing services for certain RFR swaps, but do not offer customer clearing to U.S. customers.
47 See CME, CME Submission No. 21-413, CFTC Regulation 40.6(a) Certification, Notification Regarding Modification of Cleared Euro Overnight Index Average (“EONIA”) Overnight Index Swaps to Reference Euro Short Term Rate (“€STR”) Ahead of Scheduled Discontinuation of EONIA, Sept. 29, 2021, available at https://www.cmegroup.com/content/dam/cmegroup/market-regulation/rule-filings/2021/9/21-413.pdf; LCH, LCH Limited Self-Certification: Benchmark Reform—Rates Conversion, Sept. 29, 2021 (LCH Self-Certification: Benchmark Reform—Rates Conversion), available at https://www.lch.com/system/files/media_root/FINAL%20-%20LCH%20self%20cert_Benchmark%20Reform%202021%2009%2029%20v3%20%28Clean%29.pdf; Eurex Clearing, ECAG Rule Certification 081-21, Sept
up/market-regulation/rule-filings/2021/9/21-413.pdf; LCH, LCH Limited Self-Certification: Benchmark Reform—Rates Conversion, Sept. 29, 2021 (LCH Self-Certification: Benchmark Reform—Rates Conversion), available at https://www.lch.com/system/files/media_root/FINAL%20-%20LCH%20self%20cert_Benchmark%20Reform%202021%2009%2029%20v3%20%28Clean%29.pdf; Eurex Clearing, ECAG Rule Certification 081-21, Sept. 16, 2021 (Eurex Rule Certification 081-21), available at https://www.eurex.com/resource/blob/2781070/61d1fccdd00bc1a06753877a5fa3f483/data/ecag_cftc_filing_for_circular_081-21.pdf; and Eurex, Eurex Clearing Circular 111/20 EurexOTC Clear: Summary of Consultation on the Transition Plan for Transactions Referencing the EONIA Benchmark, Dec. 14, 2020, available at https://www.eurex.com/ec-en/find/circulars/clearing-circular-2373634.
48 LCH Self-Certification: Benchmark Reform—Rates Conversion; LCH, Supplementary Statement on LCH's Solution for Outstanding Cleared LIBOR Contracts, LCH Circular No. 4146, Mar. 18, 2021, available at https://www.lch.com/membership/ltd-membership/ltd-member-updates/supplementary-statement-lchs-solution-outstanding; CME, CME IBOR Conversion Plan for Cleared Swaps, June 9, 2021, available at https://www.cmegroup.com/trading/interest-rates/files/cleared-swaps-considerations-for-ibor-fallbacks-and-conversion-plan.pdf; and Eurex Rule Certification 081-21. The Commission notes that only LCH conducted a conversion event for EUR LIBOR swaps because CME and Eurex did not offer these swaps for clearing at that time.
49 JSCC Letter.
50 CMEG, Advisory Notice #21-434, Modification of Cleared Over-the-Counter (OTC) British Pound (GBP), Japanese Yen (JPY) and Swiss Franc (CHF) Denominated Interest Rate Swap Products Referencing the London Interbank Offered Rate (LIBOR) and Limitation of Acceptance for Clearing, Nov
t for EUR LIBOR swaps because CME and Eurex did not offer these swaps for clearing at that time.
49 JSCC Letter.
50 CMEG, Advisory Notice #21-434, Modification of Cleared Over-the-Counter (OTC) British Pound (GBP), Japanese Yen (JPY) and Swiss Franc (CHF) Denominated Interest Rate Swap Products Referencing the London Interbank Offered Rate (LIBOR) and Limitation of Acceptance for Clearing, Nov. 22, 2021, available at https://www.cmegroup.com/notices/clearing/2021/11/Chadv21-434.pdf (noting that CME provides limited clearing services for certain LIBOR swaps resulting from the exercise of bilateral uncleared swaptions, which are subject to a same-day conversion event on the day such swaps are accepted for clearing); LCH, LIBOR Transition—Risk Notice, Nov. 2021, available at https://www.lch.com/system/files/media_root/LIBOR%20Transition%20-%20Risk%20Notice%20Nov%202021.pdf (setting forth the terms of time-limited clearing services for certain “legacy” LIBOR transactions, including LIBOR swaps resulting from the exercise of certain swaptions; and Eurex, EurexOTC Clear Product List, available at https://www.eurex.com/resource/blob/227404/760dd5a98729621e2de7720d28bc291a/data/ec15075e_Attach.pdf.
51 Each registered DCO has made public its plans for full USD LIBOR transition. CMEG, LSEG, and Eurex Letters.
Table 2—Summary of Swaps Offered for Clearing To Support IBOR Transition Swap class Currency Floating rate index Registered DCOs o ffering clearing (Termination date range offered) Basis Swaps AUD BBSW-AONIA LCH (up to 31 yrs). CAD CDOR-CORRA LCH (up to 31 yrs). EUR EURIBOR-€STR CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs). GBP LIBOR-SONIA Eurex (up to 51 yrs), LCH (up to 51 yrs). JPY LIBOR-TONA Eurex (up to 31 yrs), LCH (up to 41 yrs). SGD SOR-SORA LCH (up to 21 yrs). USD LIBOR-SOFR CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs). Fed Funds-SOFR CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs). OIS AUD AONIA CME (up to 31 yrs), LCH (up to 31 yrs)
s), Eurex (up to 51 yrs), LCH (up to 51 yrs). GBP LIBOR-SONIA Eurex (up to 51 yrs), LCH (up to 51 yrs). JPY LIBOR-TONA Eurex (up to 31 yrs), LCH (up to 41 yrs). SGD SOR-SORA LCH (up to 21 yrs). USD LIBOR-SOFR CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs). Fed Funds-SOFR CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs). OIS AUD AONIA CME (up to 31 yrs), LCH (up to 31 yrs). CAD CORRA CME (up to 31 yrs), LCH (up to 31 yrs). CHF SARON CME (up to 31 yrs), Eurex (up to 31 yrs), LCH (up to 31 yrs). EUR €STR CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs). GBP SONIA CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs). JPY TONA CME (up to 31 yrs), Eurex (up to 31 yrs), LCH (up to 41 yrs). SGD SORA CME (up to 21 years), LCH (up to 21 yrs). USD SOFR CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs). B. Work by Market Participants To Support the Transition to RFRs
Market participants also played a significant role in the transition from reliance on IBORs to the adoption of RFRs through engagement with RFR working groups, such as the ARRC, and the provision of trading liquidity in interest rate swaps referencing RFRs. 52 As Citadel and ISDA noted in their responses to the RFI, many RFR swaps are now voluntarily cleared by market participants in large proportions. 53 Citadel explained that, in the interdealer market, the “vast majority” of trading activity has transitioned to USD SOFR, and that “streaming dealer prices can be observed across [swap execution facilities (SEFs)], evidencing the number of available market makers.” 54
52 For example, ISDA, as an organization of OTC derivatives market participants, played a key role in the development of contractual fallbacks for IBORs, ensuring that swaps documented under ISDA agreements that reference certain key IBORs can transition to adjusted versions of corresponding RFRs when those IBORs cease or become non-representative. ISDA, “Amendments to the 2006 ISDA Definitions to include new IBOR fallbacks,” Oct
ization of OTC derivatives market participants, played a key role in the development of contractual fallbacks for IBORs, ensuring that swaps documented under ISDA agreements that reference certain key IBORs can transition to adjusted versions of corresponding RFRs when those IBORs cease or become non-representative. ISDA, “Amendments to the 2006 ISDA Definitions to include new IBOR fallbacks,” Oct. 23, 2020, available at http://assets.isda.org/media/3062e7b4/23aa1658.pdf; ISDA, “Amendments to the 2006 ISDA Definitions to include new IBOR fallbacks,” Oct. 23, 2020, available at http://assets.isda.org/media/3062e7b4/23aa1658.pdf; ISDA, ISDA 2020 IBOR Fallbacks Protocol, Oct. 23, 2020, available at http://assets.isda.org/media/3062e7b4/08268161-pdf/; ISDA 2021 Fallbacks Protocol, December 2021 Benchmark Module, Dec. 16, 2021, available at https://www.isda.org/a/UhtgE/ISDA-2021-Fallbacks-Protocol_December-2021-Benchmark-Module_Publication-Version.pdf. See also RFI, 86 FR at 66483-84 (discussing ISDA's IBOR fallbacks protocol and supplement).
53 Citadel and ISDA Letters.
54 Citadel Letter. Citadel also noted that, for USD SOFR swaps, “robust liquidity exists across a wide range of maturities, from 7 days to 50 years.” Id.
For each of the amendments in this proposal, the Commission considered feedback and data from responses to the RFI. Respondents overwhelmingly supported updating the clearing requirement to account for the cessation of LIBOR and other IBORs. Many respondents specifically expressed a desire that the Commission harmonize any changes to the clearing requirement with changes taking place in other jurisdictions. 55 In particular, the Commission recognizes the information provided by respondents with regard to issuing a clearing requirement determination for OIS referencing USD SOFR with a termination date range as long as 50 years. 56
55 ACLI, CCP12, Eurex, ISDA, LSEG, MFA, and TD Bank Letters
Commission harmonize any changes to the clearing requirement with changes taking place in other jurisdictions. 55 In particular, the Commission recognizes the information provided by respondents with regard to issuing a clearing requirement determination for OIS referencing USD SOFR with a termination date range as long as 50 years. 56
55 ACLI, CCP12, Eurex, ISDA, LSEG, MFA, and TD Bank Letters.
56 E.g., AIMA Letter (“Market participants have taken multiple steps in preparation for the cessation of IBORs and LIBOR, and there has been a corresponding material transition to the use of SOFR and other RFRs for OTC contracts. As a result, liquidity in swaps referencing SOFR has grown, and will continue to grow, sufficient to justify the Commission making a clearing requirement determination for these contracts. Accordingly, we encourage the Commission to update the clearing requirement to include swaps referencing SOFR with maturities ranging from 7 days to 50 years.”); MFA Letter (“MFA strongly recommends that the Commission modify its Swap Clearing Requirement under Commission regulation 50.4 by adding a clearing obligation to the OIS class for SOFR swaps with a maturity range of 7 days to 50 years as soon as practicable.”).
III. Domestic and International Coordination and Outreach
The global shift from IBORs to RFRs represents a historic effort by international standard setting bodies such as IOSCO and the FSB, regulators, cross-jurisdictional working groups, market infrastructure providers, market participants, and others, to move global swap markets toward reliance on more sustainable benchmarks. 57 Due to the cross-border nature of this effort and the size of the affected markets, the Commission believes it is a priority to engage with domestic and international regulators as it considers changes to the clearing requirement
dictional working groups, market infrastructure providers, market participants, and others, to move global swap markets toward reliance on more sustainable benchmarks. 57 Due to the cross-border nature of this effort and the size of the affected markets, the Commission believes it is a priority to engage with domestic and international regulators as it considers changes to the clearing requirement. As discussed further below, the Commission's proposed clearing requirement determination is based upon this type of ongoing consultation and coordination among regulatory authorities and with market participants.
57 See RFI, 86 FR at 66478-66482.
A. Domestic Coordination Efforts
The Commission is committed to working with the FRB, FRBNY, Securities and Exchange Commission (SEC), and other domestic authorities to ensure transparency in its efforts and, to the greatest extent possible, consistency in the transition from IBORs to RFRs. To this end, the Commission consults with domestic authorities including the SEC, the FRB, and the FRBNY as part of this rulemaking process.
B. International Coordination Efforts
Section 752(a) of the Dodd-Frank Act directs the Commission to consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards for the regulations of swaps. 58 The Commission accomplished this with respect to the Second Determination by considering the ways in which it could harmonize its clearing requirement with clearing requirements in other jurisdictions. 59 The Commission has long recognized the interconnectedness of the interest rate swap market, and the importance of consulting and coordinating with its counterparts in other jurisdictions in the adoption of clearing requirements in order to promote regulatory consistency and certainty, and to prevent the evasion of clearing requirements. 60
58 Section 752 is not codified in the CEA.
59 Second Determination, 81 FR at 71203
gnized the interconnectedness of the interest rate swap market, and the importance of consulting and coordinating with its counterparts in other jurisdictions in the adoption of clearing requirements in order to promote regulatory consistency and certainty, and to prevent the evasion of clearing requirements. 60
58 Section 752 is not codified in the CEA.
59 Second Determination, 81 FR at 71203.
60 E.g., Second Determination, 81 FR at 71223 (noting that “the interest rate swaps market is global and market participants are interconnected”); First Determination, 77 FR at 74287 (“The Commission is mindful of the benefits of harmonizing its regulatory framework with that of its counterparts in foreign countries. The Commission has therefore monitored global advisory, legislative, and regulatory proposals, and has consulted with foreign regulators in developing the final regulations.”).
As part of this rulemaking process, the Commission is working with its counterparts overseas to ensure a coordinated approach to required clearing of interest rate swaps during the move from use of swaps referencing IBORs to swaps referencing RFRs. In particular, as part of the ongoing regulatory dialogue among authorities, Commission staff consulted with counterparts, including those at Bank of England, FCA, ESMA, Japanese Financial Services Agency (JFSA), Hong Kong Monetary Authority (HKMA), Australian Securities and Investments Commission (ASIC), and MAS. This type of dialogue reflects an effort to ensure consistency in interest rate swap clearing requirements across jurisdictions.
C. Clearing Requirements in Other Jurisdictions
In developing this proposal, the Commission considered relevant changes to clearing requirements in other jurisdictions, with a view toward ensuring that any changes the Commission proposes are harmonized to the greatest extent possible with those adopted by its international counterparts
rest rate swap clearing requirements across jurisdictions.
C. Clearing Requirements in Other Jurisdictions
In developing this proposal, the Commission considered relevant changes to clearing requirements in other jurisdictions, with a view toward ensuring that any changes the Commission proposes are harmonized to the greatest extent possible with those adopted by its international counterparts. This goal is consistent with the Commission's approach in the Second Determination and the views of a significant number of respondents to the RFI.
Table 3 that follows this paragraph outlines the way in which regulators in other jurisdictions have revised, or proposed to revise, clearing requirements to account for the transition from IBORs to RFRs. 61
61 ASIC, Consultation Paper 353, “Proposed amendments to the ASIC Derivative Transaction Rules (Clearing) 2015,” Dec. 2021, at 5, 14, available at https://download.asic.gov.au/media/mjknuhlh/cp-353-published-6-december-2021.pdf ; ESMA, Final Report, “On draft RTS on the clearing and derivative trading obligations in view of the benchmark transition to risk free rates,” Nov. 18, 2021, at 36-38, 63, available at https://www.esma.europa.eu/sites/default/files/library/esma70-156-4953_final_report_on_the_co_and_dto_re_benchmark_transition.pdf ; Bank of England, “Derivatives clearing obligation—modifications to reflect interest rate benchmark reform: Amendments to BTS 2015/2205,” May 20, 2021, https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform-amendments ; Bank of England, “Derivatives clearing obligation—modifications to reflect interest rate benchmark reform: Amendments to BTS 2015/2205,” Sept. 29, 2021, available at https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform ; Bank of England, “Derivatives clearing obligation—introduction of contracts referencing TONA: Amendment to BTS 2015/2205,” Dec
ives clearing obligation—modifications to reflect interest rate benchmark reform: Amendments to BTS 2015/2205,” Sept. 29, 2021, available at https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform ; Bank of England, “Derivatives clearing obligation—introduction of contracts referencing TONA: Amendment to BTS 2015/2205,” Dec. 3, 2021, available at https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-introduction-of-contracts-referencing-tona-ps ; Bank of England, “Derivatives clearing obligation—introduction of contracts referencing TONA: Amendment to BTS 2015/2205,” Sept. 29, 2021, available at https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-introduction-of-contracts-referencing-tona.
Table 3—Clearing Requirements in Other Jurisdictions Australia (proposed) EU (Final Regulatory Technical Standards— EC to approve) Japan (final) UK (final) USD To be determined (TBD) SOFR—7 days to 3 years Not applicable (N/A) TBD. GBP SONIA—7 days to 50 years SONIA—7 days to 50 years N/A SONIA—7 days to 50 years. EUR €STR—7 days to 2 years €STR—7 days to 3 years N/A €STR—7 days to 3 years. JPY TONA—7 days to 30 years TBD TONA—7 days to 40 years 62 TONA—7 days to 30 years. IV. Proposed Amendments to Regulation § 50.4(a)
62 Although JFSA does not clearly prescribe a termination date range in its public notice regarding its JPY TONA clearing requirement, the requirement went into effect on December 6, 2021. JSCC rules provide for the clearing of JPY TONA OIS with a termination date range of 7 days to 40 years. JSCC, Interest Rate Swap Clearing Products: List of Cleared Products, available at https://www.jpx.co.jp/jscc/en/cash/irs/product.html.
As described above, the global swap marketplace has made tremendous progress toward completing the transition from reliance on swaps that reference LIBOR and other IBORs to clearing and trading swaps that reference RFRs
mination date range of 7 days to 40 years. JSCC, Interest Rate Swap Clearing Products: List of Cleared Products, available at https://www.jpx.co.jp/jscc/en/cash/irs/product.html.
As described above, the global swap marketplace has made tremendous progress toward completing the transition from reliance on swaps that reference LIBOR and other IBORs to clearing and trading swaps that reference RFRs. The Commission intends to facilitate this transition further by modifying its interest rate swap clearing requirement to reflect the cessation or loss of representativeness of certain IBORs, and the market adoption of RFRs. The Commission is grateful to market participants and others who took the time to respond to its RFI. As stated above, the Commission reviewed those responses carefully in formulating this proposal, and the Commission looks forward to further comment on this proposal.
A. Overview of the Proposed Regulation
The Commission is proposing to amend regulation § 50.4(a) to remove all LIBOR and EUR EONIA swap clearing requirements, and add requirements to clear corresponding RFR swaps. While the IBOR swaps for which clearing requirements would be removed span all four classes of swaps currently required to be cleared—fixed-to-floating swaps, basis swaps, FRAs, and (in the case of EUR EONIA) OIS—the RFR swaps that the Commission proposes to add to the clearing requirement are all OIS. OIS are swaps where one leg is calculated based on a fixed rate and the other is calculated based on a daily overnight floating rate ( i.e., the RFR). On the other hand, RFR-linked basis swaps are currently cleared, but the Commission is not proposing to add any new requirements to clear RFR-linked basis swaps at this time because they are used primarily to move out of IBOR swap positions and into RFR swap positions. 63 By not proposing to add these interest rate swaps to the clearing requirement, the Commission believes that it is providing added flexibility for market participants
aps are currently cleared, but the Commission is not proposing to add any new requirements to clear RFR-linked basis swaps at this time because they are used primarily to move out of IBOR swap positions and into RFR swap positions. 63 By not proposing to add these interest rate swaps to the clearing requirement, the Commission believes that it is providing added flexibility for market participants. Commission staff will continue to monitor the use of RFR-linked basis swaps as the IBOR transition process moves forward.
63 RFR-linked basis swaps offered for clearing are generally RFR-IBOR basis swaps. See ACLI Letter (“We also do not believe that SOFR-LIBOR basis swaps should be added to the clearing requirement due to low liquidity and limitations on electronic execution. We expect SOFR-LIBOR basis swaps to require bilateral OTC treatment for their limited and dwindling use cases.”); ISDA Letter (“Due to low liquidity, we think SOFR-LIBOR basis swaps should not be subject to mandatory clearing.”).
This proposal is the first rule change that the Commission is proposing to facilitate the transition from IBORs to RFRs for purposes of the clearing requirement. But in many ways, the proposal is an update rather than expansion of the existing clearing requirement. In effect, the Commission's proposal would replace the requirement to clear IBOR swaps in a number of different classes with a requirement to clear RFR OIS because the IBOR swaps have become unavailable and liquidity has shifted into RFR OIS.
As discussed further below, the Commission is proposing that these amendments to part 50 to require clearing for certain RFR OIS would become effective 30 days after publication of the final rule in the Federal Register . The Commission is proposing to remove existing IBOR swap clearing requirements from regulation § 50.4 in two stages
e become unavailable and liquidity has shifted into RFR OIS.
As discussed further below, the Commission is proposing that these amendments to part 50 to require clearing for certain RFR OIS would become effective 30 days after publication of the final rule in the Federal Register . The Commission is proposing to remove existing IBOR swap clearing requirements from regulation § 50.4 in two stages. The Commission proposes to remove requirements to clear (i) non-USD LIBOR and EUR EONIA swaps, 30 days after the publication of the final rule in the Federal Register ; and (ii) USD LIBOR and SGD SOR-VWAP swaps, effective July 1, 2023. There remains outstanding USD LIBOR swaps activity, and a number of respondents to the RFI requested that the Commission retain its USD LIBOR swap clearing requirement until such time as that rate is unavailable. 64
64 See additional discussion of RFI responses below.
Specifically, the Commission is proposing to amend regulation § 50.4(a) as follows:
1. Effective 30 days after publication of the final rule in the Federal Register :
a. Remove swaps denominated in GBP, CHF, and JPY that reference LIBOR as a floating rate index from each of the fixed-to-floating swap, basis swap, and FRA classes, as applicable.
b. Remove swaps denominated in EUR that reference EONIA as a floating rate index from the OIS class.
c. Add to the OIS class:
i. Swaps denominated in USD that reference SOFR as a floating rate index with a stated termination date range of 7 days to 50 years,
ii. Swaps denominated in EUR that reference €STR as a floating rate index with a stated termination date range of 7 days to 3 years,
iii. Swaps denominated in CHF that reference SARON as a floating rate index with a stated termination date range of 7 days to 30 years,
iv. Swaps denominated in JPY that reference TONA as a floating rate index with a stated termination date range of 7 days to 30 years, and
v
minated in EUR that reference €STR as a floating rate index with a stated termination date range of 7 days to 3 years,
iii. Swaps denominated in CHF that reference SARON as a floating rate index with a stated termination date range of 7 days to 30 years,
iv. Swaps denominated in JPY that reference TONA as a floating rate index with a stated termination date range of 7 days to 30 years, and
v. Swaps denominated in SGD that reference SORA as a floating rate index with a stated termination date range of 7 days to 10 years.
d. Change the maximum stated termination date range for swaps denominated in GBP that reference
2. Effective July 1, 2023:
a. Remove swaps denominated in USD that reference LIBOR as a floating rate index from each of the fixed-to-floating swap, basis swap, and FRA classes.
b. Remove swaps denominated in SGD that reference SOR-VWAP as a floating rate index from the fixed-to-floating swap class.
A comparative overview of the effect of these proposed amendments to regulation § 50.4(a) is presented following this paragraph in tabular form for illustrative purposes. Swap classes and specifications that would be removed if the Commission's proposal is finalized are stricken through. Swap classes and specifications that would be added if the Commission's proposal is finalized are bolded. The set of tables following this paragraph illustrates the effect of the amendments as of 30 days after publication of a final rule in the Federal Register .
BILLING CODE 6351-01-P EP31MY22.225
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The set of tables following this paragraph illustrates the effect of further regulation § 50.4(a) amendments that, if finalized, would be effective as of July 1, 2023:
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EP31MY22.232
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BILLING CODE 6351-01-C The Commission observes that it is the only authority to require CHF LIBOR swaps be submitted to clearing
1MY22.228
EP31MY22.229
The set of tables following this paragraph illustrates the effect of further regulation § 50.4(a) amendments that, if finalized, would be effective as of July 1, 2023:
EP31MY22.230
EP31MY22.231
EP31MY22.232
EP31MY22.233
EP31MY22.234
BILLING CODE 6351-01-C The Commission observes that it is the only authority to require CHF LIBOR swaps be submitted to clearing. In 2016, the CFTC was aware that the Swiss Financial Market Supervisory Authority (FINMA) was considering adopting a clearing requirement for swaps referencing CHF LIBOR, and sought public comment on the matter prior to adopting a final rule that included CHF LIBOR swaps. 65 After the CFTC's final rule went into effect, FINMA did not adopt a clearing requirement for CHF LIBOR, and no other jurisdictions adopted such a clearing requirement. At this time, FINMA has not yet implemented mandatory clearing for CHF SARON OIS.
65 Clearing Requirement Determination Under Section 2(h) of the CEA for Interest Rate Swaps, 81 FR 39506, 39508 (June 16, 2016); Second Determination, 81 FR at 71205.
Similarly, while MAS did not require clearing of SGD SOR-VWAP swaps with a termination date range of 28 days to 10 years, until October 2018, the Commission was aware of this expected action, and took it into account when adopting a clearing requirement for SGD SOR-VWAP swaps in 2016. 66 At this time, MAS has not yet implemented mandatory clearing for SGD SORA OIS
Determination, 81 FR at 71205.
Similarly, while MAS did not require clearing of SGD SOR-VWAP swaps with a termination date range of 28 days to 10 years, until October 2018, the Commission was aware of this expected action, and took it into account when adopting a clearing requirement for SGD SOR-VWAP swaps in 2016. 66 At this time, MAS has not yet implemented mandatory clearing for SGD SORA OIS.
66 Second Determination, 81 FR at 71205; MAS, MAS Requires OTC Derivatives to be Centrally Cleared to Mitigate Systemic Risk, May 2, 2018, available at https://www.mas.gov.sg/news/media-releases/2018/mas-requires-otc-derivatives-to-be-centrally-cleared-to-mitigate-systemic-risk ; MAS, Response to Feedback Received: Draft Regulations for Mandatory Clearing of Derivatives Contracts, May 2, 2018, at 4, available at https://www.mas.gov.sg/-/media/MAS/News-and-Publications/Consultation-Papers/2018-May-02-Response-to-consultation-on-draft-regs-on-mandatory-clearing-of-derivatives/Response-to-Feedback-on-Draft-Regulations-for-Mandatory-Clearing-of-Derivatives-Contracts.pdf.
The Commission observes that clearing rates for CHF SARON OIS and SGD SORA OIS are already high. As Table 6 below illustrates, the Commission estimates that more than 98% of notional transacted in these rates in each of November 2021, December 2021, and January 2022, was 67 Furthermore, the Commission estimates that, as of January 28, 2022, there was $1,730 billion in outstanding notional in CHF SARON OIS, whereas there was $686 billion in outstanding notional in CHF LIBOR fixed-to-floating swaps. 68 Similarly, the Commission estimates that, as of January 28, 2022, there was $449 billion in outstanding notional in SGD SORA OIS, and $307 billion in outstanding notional in SGD SOR-VWAP fixed-to-floating swaps. 69
67 The data in Table 6 is based on the Commission's weekly swaps report data
SARON OIS, whereas there was $686 billion in outstanding notional in CHF LIBOR fixed-to-floating swaps. 68 Similarly, the Commission estimates that, as of January 28, 2022, there was $449 billion in outstanding notional in SGD SORA OIS, and $307 billion in outstanding notional in SGD SOR-VWAP fixed-to-floating swaps. 69
67 The data in Table 6 is based on the Commission's weekly swaps report data.
68 These outstanding notional figures are based on data for swaps that have been cleared at CME, LCH, or Eurex and reported to the CFTC under part 39 of the Commission's regulations. Commission staff compiled, processed, and reviewed the data presented in this proposal.
69 Id.
Based on this data, it would appear that roughly half of the CHF market remains in LIBOR, and that, while SGD SOR-VWAP is expected to continue until June 30, 2023, the transition to SGD SORA is well underway. Data presented in tables 4 and 5 below further illustrate that the CHF LIBOR and SGD SOR-VWAP swap markets have rapidly diminished as markets shift to swaps referencing RFRs. The Commission estimates that, in January 2022, there were no CHF LIBOR fixed-to-floating swap transactions, and 69 SGD SOR-VWAP fixed-to-floating swap transactions (comprising $5 billion notional). The Commission also estimates that, in January 2022, there were 2,283 CHF SARON OIS transactions (comprising $130 billion notional) and 3,794 SGD SORA OIS transactions (comprising $119 billion notional).
Request for Comment
The Commission requests comment on the proposed modifications to regulation § 50.4(a), including the adoption of clearing requirements for CHF SARON OIS and SGD SORA OIS.
B. Modifications to the Existing Clearing Requirements
1. Swaps No Longer Offered for Clearing
In addition to adding certain RFR OIS to the clearing requirement, this proposal would modify the existing clearing requirement to reflect the cessation or loss of representativeness of certain IBOR swaps
§ 50.4(a), including the adoption of clearing requirements for CHF SARON OIS and SGD SORA OIS.
B. Modifications to the Existing Clearing Requirements
1. Swaps No Longer Offered for Clearing
In addition to adding certain RFR OIS to the clearing requirement, this proposal would modify the existing clearing requirement to reflect the cessation or loss of representativeness of certain IBOR swaps. Currently, all LIBOR settings with the exception of overnight, 1-month, 3-month, 6-month, and 12-month USD LIBOR, and EUR EONIA, have ceased or become nonrepresentative. As explained above, CME, LCH, and Eurex have converted cleared EUR EONIA and non-USD LIBOR swaps into RFR OIS, and with limited exceptions, swaps referencing GBP, CHF, and JPY LIBOR, as well as EUR EONIA, are no longer offered for clearing. 70 As discussed above, regulators in the United States and other jurisdictions have called on market participants to transfer their swap positions from IBORs to RFRs, with corresponding liquidity shifting, and continuing to shift, from swaps referencing these IBORs to swaps referencing RFRs. Therefore, the Commission has preliminarily determined to update the clearing requirement for interest rate swaps where such IBOR swaps are no longer offered for clearing and have been replaced by RFR OIS.
70 While clearing services generally are no longer available for EUR LIBOR swaps, swaps referencing EUR LIBOR are not subject to required clearing under regulation § 50.4(a).
2. Swaps Affected by Future IBOR Unavailability
By contrast, remaining USD LIBOR settings, as well as SGD SOR-VWAP settings, are not expected to cease or become nonrepresentative until after June 30, 2023. For this reason, the Commission proposes not to remove the clearing requirement for swaps referencing USD LIBOR and SGD SOR-VWAP, which relies on USD LIBOR as an input, until July 1, 2023
).
2. Swaps Affected by Future IBOR Unavailability
By contrast, remaining USD LIBOR settings, as well as SGD SOR-VWAP settings, are not expected to cease or become nonrepresentative until after June 30, 2023. For this reason, the Commission proposes not to remove the clearing requirement for swaps referencing USD LIBOR and SGD SOR-VWAP, which relies on USD LIBOR as an input, until July 1, 2023. Because interest rate swaps referencing USD LIBOR and SGD SOR-VWAP are offered for clearing currently, and there are still outstanding notional exposures and trading activity in these swaps, the Commission believes that these swaps should remain subject to the clearing requirement. The remaining USD LIBOR settings are expected to cease or become nonrepresentative after June 30, 2023, and the Commission anticipates that there will be no new interest rate swaps referencing USD LIBOR on or after July 1, 2023. The Commission will continue to monitor the use of interest rate swaps referencing USD LIBOR and SGD SOR-VWAP as the IBOR transition process moves forward.
In anticipation of this USD LIBOR end date, the Commission anticipates that DCOs will continue to conduct conversion events to replace all outstanding USD LIBOR swaps with USD SOFR OIS, and will cease offering clearing services for USD LIBOR swaps. Until that time, however, the Commission proposes to maintain the clearing requirement for USD LIBOR swaps, and SGD SOR-VWAP swaps, until those rates cease publication.
This decision would be consistent with the fact that Bank of England has not yet proposed a clearing requirement for USD SOFR swaps and has left its USD LIBOR swap clearing obligation in place. 71 By contrast, ESMA adopted regulatory technical standards that, subject to European Commission approval, will remove ESMA's current USD LIBOR clearing requirements and add a requirement to clear USD SOFR OIS (7 days to 3 years)
consistent with the fact that Bank of England has not yet proposed a clearing requirement for USD SOFR swaps and has left its USD LIBOR swap clearing obligation in place. 71 By contrast, ESMA adopted regulatory technical standards that, subject to European Commission approval, will remove ESMA's current USD LIBOR clearing requirements and add a requirement to clear USD SOFR OIS (7 days to 3 years). 72 While a number of respondents to the RFI expressed a desire for the Commission to harmonize its clearing requirement with clearing obligations in other jurisdictions, including the EU, 73 several respondents specifically called for the Commission to maintain its USD LIBOR clearing requirement until such 74 Maintaining the clearing requirement for USD LIBOR swaps, and SGD SOR-VWAP swaps, until those rates cease publication would reflect both international coordination and input from responses to the RFI.
71 Bank of England, “Derivatives clearing obligation—modifications to reflect interest rate benchmark reform: Amendments to BTS 2015/2205,” Sept. 29, 2021, available at https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform.
72 ESMA, Final Report, “On draft RTS on the clearing and derivative trading obligations in view of the benchmark transition to risk free rates,” Nov. 18, 2021, at 36-38, 63, available at https://www.esma.europa.eu/sites/default/files/library/esma70-156-4953_final_report_on_the_co_and_dto_re_benchmark_transition.pdf. In choosing to replace its USD LIBOR swap clearing requirement with a USD SOFR OIS clearing requirement, ESMA stated, “ESMA believes it is important to be consistent for the [clearing obligation] with the communication made by ESMA and other EU authorities, as well as the communications made by several other authorities in other jurisdictions and at the international level who expect entities to stop referencing LIBOR (including USD LIBOR) by the end of the year
h a USD SOFR OIS clearing requirement, ESMA stated, “ESMA believes it is important to be consistent for the [clearing obligation] with the communication made by ESMA and other EU authorities, as well as the communications made by several other authorities in other jurisdictions and at the international level who expect entities to stop referencing LIBOR (including USD LIBOR) by the end of the year. If ESMA and other regulators [ ' ] expectations are fulfilled, there should no longer be material liquidity in OTC interest rate derivatives referencing USD LIBOR from the start of next year. Therefore, the liquidity criteria of the [European Market Infrastructure Regulation] procedure would no longer be met at the end of the year. Following from this, ESMA is proposing to remove the USD LIBOR classes from the clearing obligation and the RTS has been modified accordingly.” Id. at 31. However, as shown in tables 4 and 5 below, there continues to be trading activity in USD LIBOR swaps.
73 E.g., TD Bank Letter (suggesting that the Commission's clearing requirement “may be updated to reflect those of UK and EU”); ISDA Letter (“The market needs global conformity with respect to mandated clearing as much as possible.”); ACLI Letter (“ESMA has issued its Final Report on Draft RTS on the Clearing and Derivative Trading Obligations in View of the Benchmark Transition to Risk Free Rates, which includes a recommendation to remove classes of swaps referencing EONIA (EUR) and LIBOR (GBP, JPY and USD) from its clearing obligation. We encourage the Commission similarly to remove classes of swaps referencing IBORs—including USD-LIBOR—from the clearing requirement.”); Eurex Letter (“Eurex Clearing notes that it previously responded to [ESMA's] request for comment . . . and strongly encourages continued cooperation among the Commission, ESMA, and other regulators to facilitate international cooperation and global convergence in the transition to the RFRs to the extent possible. . .
of swaps referencing IBORs—including USD-LIBOR—from the clearing requirement.”); Eurex Letter (“Eurex Clearing notes that it previously responded to [ESMA's] request for comment . . . and strongly encourages continued cooperation among the Commission, ESMA, and other regulators to facilitate international cooperation and global convergence in the transition to the RFRs to the extent possible. . . . Eurex Clearing believes the Commission and ESMA should coordinate their decision on a prospective removal of the USD LIBOR from the clearing obligation and implementation of a clearing obligation on SOFR OIS.”).
74 E.g., AIMA Letter (“The RFI notes that the U.K. Financial Conduct Authority has determined that USD LIBOR in the overnight and 12-month tenors will cease after June 30, 2023, and that USD LIBOR in 1-month, 3-month and 6-month tenors will not be representative after that date. Until such time, we believe the Commission should maintain its clearing requirement for USD LIBOR as it continues to monitor the developments associated with LIBOR's cessation.”) (footnote omitted); Citadel Letter (“While we support updating the clearing requirement to include certain OTC derivatives referencing SOFR, it remains premature to remove the clearing requirement for OTC derivatives referencing USD LIBOR. This is because material volumes continue to be executed in USD LIBOR swaps that are currently subject to the clearing requirement, particularly in the dealer-to-customer segment of the market.”); MFA Letter (“Since trading activity continues to occur in USD LIBOR swaps as well, USD LIBOR should not be removed from the Swap Clearing Requirement until such time as the rate is not available (either because the rate is permanently discontinued or is deemed non-representative as of its cessation date).”)
the clearing requirement, particularly in the dealer-to-customer segment of the market.”); MFA Letter (“Since trading activity continues to occur in USD LIBOR swaps as well, USD LIBOR should not be removed from the Swap Clearing Requirement until such time as the rate is not available (either because the rate is permanently discontinued or is deemed non-representative as of its cessation date).”).
Request for Comment
The Commission requests comment regarding implementing changes to the existing interest rate swap clearing requirement, including when to remove the USD LIBOR and SGD SOR-VWAP swap clearing requirements.
V. Proposed Determination Analysis for RFR OIS
The Commission is proposing to modify its interest rate swap clearing requirement to include OIS referencing RFRs by adopting a new clearing requirement determination. The Commission has completed a review of the current RFR OIS offered for clearing and is prepared to consider the specific statutory factors required to make a new clearing requirement determination.
A. General Description of Information Considered
CME, LCH, and Eurex provided the Commission with regulation § 39.5(b) submissions relating to RFR OIS. 75 In addition to the DCOs' submissions, the Commission looks to the ability of each DCO to clear RFR OIS, DCO swap data, swap data repository (SDR) data, publicly available data, the rule frameworks and risk management policies of each DCO, and information provided in response to the RFI.
75 Regulation § 39.5(b) submissions from DCOs are available on the Commission's website, www.cftc.gov, under DCO Swaps Submissions.
This proposed clearing requirement determination is distinguishable from prior determinations insofar as it responds to a public and private sector, consensus-driven market event that has resulted, or will result, in liquidity shifting to new benchmark rates from rates that have become, or will soon become, unavailable
lable on the Commission's website, www.cftc.gov, under DCO Swaps Submissions.
This proposed clearing requirement determination is distinguishable from prior determinations insofar as it responds to a public and private sector, consensus-driven market event that has resulted, or will result, in liquidity shifting to new benchmark rates from rates that have become, or will soon become, unavailable. In that sense, central clearing in the RFR OIS markets, which rely on benchmark rates that are less susceptible to manipulation, may offer unique benefits that prior interest rate swap market clearing did not. 76 As a result of this, and in light of the quick pace of market adoption along with DCOs' willingness to provide clearing for a wide variety of RFR swaps, the Commission believes the RFR swap markets are prepared for this clearing requirement determination proposal.
76 A discussion of the costs and benefits of this proposed rulemaking appears below.
B. Consistency With DCO Core Principles
Section 2(h)(2)(D)(i) of the CEA requires the Commission to determine whether a clearing requirement determination would be consistent with core principles for DCOs set forth in section 5b(c)(2) of the CEA. 77 CME, LCH, and Eurex are registered DCOs, and currently clear the RFR OIS identified in Table 2 above. CME, LCH, and Eurex are required to comply with the DCO core principles (and applicable Commission regulations) with respect to the RFR OIS being considered by the Commission as part of this proposed determination, and are subject to the Commission's DCO examination and risk surveillance programs.
77 7 U.S.C. 2(h)(2)(D)(i). The core principles address numerous issues, including financial resources, participant and product eligibility, risk management, settlement procedures, default management, system safeguards, reporting, recordkeeping, public information, and legal risk, among other subjects. 7 U.S.C. 7a-1(c)(2)
subject to the Commission's DCO examination and risk surveillance programs.
77 7 U.S.C. 2(h)(2)(D)(i). The core principles address numerous issues, including financial resources, participant and product eligibility, risk management, settlement procedures, default management, system safeguards, reporting, recordkeeping, public information, and legal risk, among other subjects. 7 U.S.C. 7a-1(c)(2). The Commission implemented the core principles through regulations that are applicable to registered DCOs. 17 CFR part 39.
The Commission believes that CME, LCH, and Eurex will be able to maintain compliance with the DCO core principles and applicable Commission regulations if the Commission adopts a clearing requirement determination for the RFR OIS. For the reasons discussed below, the Commission has preliminarily determined that subjecting any of the RFR OIS identified in this proposal to a clearing requirement is unlikely to impair CME's, LCH's, or Eurex's ability to comply with the DCO core principles, along with applicable Commission regulations. Moreover, in their responses to the RFI, each DCO stated that requiring clearing of USD SOFR or other RFR OIS would not negatively affect their ability to comply with the DCO core principles and applicable Commission regulations. 78
78 CMEG Letter (“CME Clearing currently offers clearing for swaps referencing SOFR and other alternative reference rates that are not currently subject to the Clearing Requirement . . . . CME Group considers that should such swaps become subject to the Clearing Requirement this would not have any impact on CME Clearing's ability to comply with the relevant core principles for DCOs”); LSEG Letter (“Provided that each DCO remains in control of setting its product eligibility criteria, the ability to comply with the core principles . .
ntly subject to the Clearing Requirement . . . . CME Group considers that should such swaps become subject to the Clearing Requirement this would not have any impact on CME Clearing's ability to comply with the relevant core principles for DCOs”); LSEG Letter (“Provided that each DCO remains in control of setting its product eligibility criteria, the ability to comply with the core principles . . . would not be affected by the implementation of a clearing requirement for SOFR or any other relevant alternative reference rate”); and Eurex Letter (“Requiring the clearing of swaps referencing SOFR or other RFRs that are not currently subject to the Clearing Requirement will not affect Eurex Clearing's ability to comply with the CEA's core principles for DCOs.”).
While exempt DCOs are not subject to the DCO core principles per se, the Commission determined that each was subject to comparable, comprehensive supervision and regulation by its home country regulator before granting such DCOs an exemption from registration, as required by the CEA. 79 With regard to the two exempt DCOs that offer RFR OIS for clearing, namely, JSCC and HKEX, the Commission believes that both DCOs will continue to comply with their home country law and regulations if the Commission adopts a clearing requirement determination for the RFR OIS. 80
79 The Commission may exempt a DCO from registration if it determines that the DCO is subject to comparable, comprehensive supervision by appropriate government authorities in its home country. The Commission determined that JSCC demonstrated compliance with the requirements of the CEA for which it must comply in order to be eligible for an exemption from registration as a DCO. JSCC Order of Exemption from Registration, Oct
t a DCO from registration if it determines that the DCO is subject to comparable, comprehensive supervision by appropriate government authorities in its home country. The Commission determined that JSCC demonstrated compliance with the requirements of the CEA for which it must comply in order to be eligible for an exemption from registration as a DCO. JSCC Order of Exemption from Registration, Oct. 26, 2015, at 1, available at http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf; JSCC Amended Order of Exemption from Registration, May 15, 2017, at 1, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf. Likewise, HKEX is an exempt DCO that the Commission determined has demonstrated compliance with the requirements of the CEA. OTC Clearing Hong Kong Limited Order of Exemption from Registration, Dec. 21, 2015, at 1, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/otccleardcoexemptorder12-21-15.pdf. See also section V.C. for additional information regarding maintaining status as an exempt DCO.
80 JSCC Letter (“Including JPY TONA OIS in the CFTC's Clearing Requirement would not affect the ability of DCOs to comply with the CEA or the relevant legal and regulatory regime in any other jurisdiction.”).
Request for Comment
The Commission requests comment as to whether the proposed determination would adversely affect any DCO's ability to comply with the DCO core principles.
C. Consideration of the Five Statutory Factors
Set forth below is the Commission's consideration of the five factors set forth in section 2(h)(2)(D)(ii) of the CEA as they relate to OIS (i) denominated in USD and referencing SOFR; (ii) denominated in GBP and referencing SONIA; (iii) denominated in CHF and referencing SARON; (iv) denominated in JPY and referencing TONA; (v) denominated in EUR and referencing €STR; and (vi) denominated in SGD and referencing SORA
the Commission's consideration of the five factors set forth in section 2(h)(2)(D)(ii) of the CEA as they relate to OIS (i) denominated in USD and referencing SOFR; (ii) denominated in GBP and referencing SONIA; (iii) denominated in CHF and referencing SARON; (iv) denominated in JPY and referencing TONA; (v) denominated in EUR and referencing €STR; and (vi) denominated in SGD and referencing SORA. 81
81 The Commission is conducting this analysis only with respect to the swaps that would be added to the clearing requirement under this proposed determination. Modifications to the clearing requirement, such as removing swaps that are no longer offered for clearing from Commission regulation § 50.4, are not considered in this analysis.
1. Factor (I)—Outstanding Notional Exposures and Trading Liquidity
Liquidity has shifted, and continues to shift, from swaps referencing IBORs to swaps referencing RFRs. The first of the five factors under section 2(h)(2)(D)(ii) of the CEA requires the Commission to consider “the existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data” related to “a submission made [by a DCO].” 82 The Commission reviewed data from multiple sources, including but not limited to data from SDRs, data from DCOs, and other, publicly available data ( e.g., data published by ISDA). For purposes of this proposed rulemaking, the Commission principally presents notional and liquidity information based on the Commission's own collected data.
82 7 U.S.C. 2(h)(2)(D)(ii).
a. Outstanding Notional Exposures and Trading Liquidity
In assessing outstanding notional exposures and trading liquidity for a swap, the Commission reviews data to determine whether there is an active market for the swap, including whether there is a measurable amount of notional exposure and whether the swap is traded regularly as reflected by trade count, such that a DCO can adequately risk manage the swap
Notional Exposures and Trading Liquidity
In assessing outstanding notional exposures and trading liquidity for a swap, the Commission reviews data to determine whether there is an active market for the swap, including whether there is a measurable amount of notional exposure and whether the swap is traded regularly as reflected by trade count, such that a DCO can adequately risk manage the swap. The data indicates that there is sufficient outstanding notional exposure and trading liquidity in RFR OIS to support a clearing requirement determination. Specifically, the data presented below generally demonstrates that there is significant activity in new USD SOFR, GBP SONIA, EUR €STR, CHF SARON, JPY TONA, and SGD SORA OIS trading. The Commission compiled the data used in tables 4-7 below from transaction data collected under part 45 of the Commission's regulations. 83
83 The data presented in these tables is the same as the data used to create the Commission's weekly swaps report. This data represents only those swaps that are reported to the CFTC's registered SDRs by swap market participants. The Commission's weekly swaps report currently incorporates data from three SDRs (CME Group SDR, DTCC Data Repository, and ICE Trade Vault). The raw SDR data has been filtered to represent, as accurately as possible, the market-facing trades that occur and excludes certain inter-affiliate transactions. For more information about the data components in the weekly swaps report, please visit the CFTC's web page available at: https://www.cftc.gov/MarketReports/SwapsReports/index.htm.
In Table 4 below, the Commission provides estimates of notional transacted by month for various categories of RFR OIS, and IBOR fixed-to-floating and basis swaps, for the period beginning November 1, 2021 and ending January 31, 2022. The data in Table 4 generally indicates significant, and relatively steady or increasing, amounts of notional transacted in RFR OIS from November 2021 through January 2022
ble 4 below, the Commission provides estimates of notional transacted by month for various categories of RFR OIS, and IBOR fixed-to-floating and basis swaps, for the period beginning November 1, 2021 and ending January 31, 2022. The data in Table 4 generally indicates significant, and relatively steady or increasing, amounts of notional transacted in RFR OIS from November 2021 through January 2022. The data also illustrates that there was comparatively little notional transacted during the same time period in fixed-to-floating swaps referencing IBORs that ceased or became nonrepresentative in December 2021 and January 2022.
The Commission notes, however, that significant amounts of notional were transacted in USD LIBOR fixed-to-floating swaps, and that while notional traded per month in USD SOFR OIS nearly doubled between December 2021 and January 2022, the amount of such notional transacted in January 2022 was still less than half that of the amount of notional transacted during the same month in USD LIBOR fixed-to-floating swaps. 84 Thus, it appears that while the transition of liquidity from USD LIBOR fixed-to-floating swaps to USD SOFR OIS is well underway, it is not yet complete.
84 Table 4 shows notional volume in USD LIBOR more than doubling from December 2021 to January 2022, but Table 5 below shows only a slight increase in trade count, suggesting the average trade size doubled in USD LIBOR but actually fell slightly in USD SOFR
ears that while the transition of liquidity from USD LIBOR fixed-to-floating swaps to USD SOFR OIS is well underway, it is not yet complete.
84 Table 4 shows notional volume in USD LIBOR more than doubling from December 2021 to January 2022, but Table 5 below shows only a slight increase in trade count, suggesting the average trade size doubled in USD LIBOR but actually fell slightly in USD SOFR.
Table 4—Estimated Notional Transacted [USD billions] 85 Product November 2021 December 2021 January 2022 USD SOFR OIS $2,384 $2,011 $3,918 USD LIBOR Fixed-to-Floating Swaps 6,674 4,409 9,598 USD LIBOR-LIBOR Basis Swaps 1,049 602 292 EUR €STR OIS 3,394 2,022 3,488 EUR EONIA OIS 2 8 0 CHF SARON OIS 208 108 130 CHF LIBOR Fixed-to-Floating Swaps 62 0 0 GBP SONIA OIS 5,852 3,151 4,149 GBP LIBOR Fixed-to-Floating Swaps 340 205 2 JPY TONA OIS 425 360 377 JPY LIBOR Fixed-to-Floating Swaps 45 15 0 SGD SORA OIS 74 41 119 SGD SOR Fixed-to-Floating Swaps 8 3 5 Table 5 that follows this paragraph provides estimates of trade counts for the same categories of RFR and IBOR swaps during the same three-month period. The data in Table 5 indicates that, with regard to RFR OIS, monthly trade count generally increased or was relatively steady between November 2021 and January 2022, with an especially pronounced increase in the number of USD SOFR OIS transactions. Conversely, trade counts for swaps referencing IBORs that ceased or became nonrepresentative in December 2021 and January 2022 dropped off
85 The data in Table 4 is based on the Commission's weekly swaps report data. In this table, a notional figure of $0 billion indicates that the notional transacted during a given time period was less than $1 billion
in the number of USD SOFR OIS transactions. Conversely, trade counts for swaps referencing IBORs that ceased or became nonrepresentative in December 2021 and January 2022 dropped off
85 The data in Table 4 is based on the Commission's weekly swaps report data. In this table, a notional figure of $0 billion indicates that the notional transacted during a given time period was less than $1 billion.
Table 5—Estimated Trade Count 86 Product November 2021 December 2021 January 2022 USD SOFR OIS 18,484 19,110 41,728 USD LIBOR Fixed-to-Floating Swaps 48,245 29,309 30,749 USD LIBOR-LIBOR Basis Swaps 1,025 831 329 EUR €STR OIS 8,415 5,420 8,962 EUR EONIA OIS 7 1 0 CHF SARON OIS 2,698 1,574 2,283 CHF LIBOR Fixed-to-Floating Swaps 390 19 0 GBP SONIA OIS 24,275 12,913 17,654 GBP LIBOR Fixed-to-Floating Swaps 2,061 1,286 12 JPY TONA OIS 5,311 4,639 5,141 JPY LIBOR Fixed-to-Floating Swaps 577 69 9 SGD SORA OIS 2,422 1,846 3,794 SGD SOR Fixed-to-Floating Swaps 197 94 69 Table 6 that follows this paragraph presents estimates of the percentage of notional cleared for the RFR OIS subject to this proposed determination, based on notional transacted by month during the period beginning November 1, 2021 and ending January 31, 2022. The data in Table 6 illustrates that, with respect to the RFR OIS, significant amounts of notional are already being cleared voluntarily. The proportion of notional transacted each month from November 2021 through January 2022 that was cleared was consistently high—approaching 100%—with regard to OIS referencing each of USD SOFR, GBP SONIA, EUR €STR, CHF SARON, JPY TONA, and SGD SORA.
86 The data in Table 5 is based on the Commission's weekly swaps report data
significant amounts of notional are already being cleared voluntarily. The proportion of notional transacted each month from November 2021 through January 2022 that was cleared was consistently high—approaching 100%—with regard to OIS referencing each of USD SOFR, GBP SONIA, EUR €STR, CHF SARON, JPY TONA, and SGD SORA.
86 The data in Table 5 is based on the Commission's weekly swaps report data.
Table 6—Estimated Percentage of Notional Cleared (Based on Notional Transacted by Month) 87 OIS Percentage notional cleared— November 2021 Percentage notional cleared— December 2021 Percentage notional cleared— January 2022 USD SOFR 96.3 94.9 95.1 GBP SONIA 98.8 98.7 97.8 EUR €STR 99.0 99.2 97.6 CHF SARON 99.6 98.1 99.2 JPY TONA 96.6 98.7 98.0 SGD SORA 98.2 98.6 98.7 Table 7 that follows this paragraph presents a breakdown of notional transacted and trade count for the period beginning January 1, 2022 and ending January 31, 2022, by tenor, for the relevant RFR OIS. Table 7 illustrates that RFR OIS are being cleared across a wide range of maturities. By notional and trade count, most clearing activity occurs in RFR OIS dated between 6 months and 15 years. However, the Commission notes that with respect to USD SOFR and GBP SONIA OIS in particular, there is also significant clearing activity in swaps dated 15 years or greater.
87 The data in Table 6 is based on the Commission's weekly swaps report data.
Table 7—Estimated Cleared Notional and Trade Count by Tenor [January 2022 transaction data] 88 OIS Tenor Notional cleared (USD billions) Trade count USD SOFR 7 days-3 months $199 213 3-6 months 210 296 6 months-1 year 191 498 1-5 years 1,328 8,841 5-15 years 1,559 22,230 >15 years 234 7,589 GBP SONIA 7 days-3 months 778 434 3-6 months 1,136 470 6 months-1 year 673 357 1-5 years 846 5,016 5-15 years 503 7,570 >15 years 124 3,351 EUR €STR 7 days-3 months 336 210 3-6 months 302 226 6 months-1 year 1,295 642 1-5 years 1,110 3,365 5-15 years 329 3,487 >15 years 32 865 CHF SARON 7 days-3 months 7 11 3-6 months 16 26 6 mont
8 1-5 years 1,328 8,841 5-15 years 1,559 22,230 >15 years 234 7,589 GBP SONIA 7 days-3 months 778 434 3-6 months 1,136 470 6 months-1 year 673 357 1-5 years 846 5,016 5-15 years 503 7,570 >15 years 124 3,351 EUR €STR 7 days-3 months 336 210 3-6 months 302 226 6 months-1 year 1,295 642 1-5 years 1,110 3,365 5-15 years 329 3,487 >15 years 32 865 CHF SARON 7 days-3 months 7 11 3-6 months 16 26 6 months-1 year 6 12 1-5 years 56 625 5-15 years 42 1,447 >15 year 2 135 JPY TONA 7 days-3 months 12 10 3-6 months 20 20 6 months-1 year 15 30 1-5 years 122 718 5-15 years 164 2,801 >15 years 36 1,455 SGD SORA 7 days-3 months 2 10 3-6 months 2 12 6 months-1 year 16 122 1-5 years 69 1,480 5-15 years 29 2,114 >15 years 0 8 In addition to this transaction-level data, Table 8 that follows this paragraph presents open swaps data illustrating outstanding notional in the RFR OIS subject to this proposed determination.
88 The data in Table 7 is based on the Commission's weekly swaps report data. Tenor length is approximate. In Table 7, a notional figure of $0 billion USD indicates that the notional transacted during a given time period was less than $1 billion.
Table 8—Outstanding Notional as of January 28, 2022 89 OIS Outstanding notional (USD billions) USD SOFR $8,558 GBP SONIA 23,363 EUR €STR 10,496 CHF SARON 1,730 JPY TONA 4,256 SGD SORA 449 Finally, to demonstrate that clearing has expanded beyond the short-dated maturities for USD SOFR fixed-to-floating swaps, in particular, the data in Table 9 that follows this paragraph reflects the total volumes of cleared outstanding notional swaps by tenor. The Commission has preliminarily determined that the data collectively indicates sufficient outstanding notional exposures and regular trading activity in RFR OIS for purposes of demonstrating the liquidity necessary for DCOs to risk manage these products and to support a proposed clearing requirement
follows this paragraph reflects the total volumes of cleared outstanding notional swaps by tenor. The Commission has preliminarily determined that the data collectively indicates sufficient outstanding notional exposures and regular trading activity in RFR OIS for purposes of demonstrating the liquidity necessary for DCOs to risk manage these products and to support a proposed clearing requirement. The Commission anticipates that RFR OIS notional exposures and trading activity will increase over time as markets continue to adopt RFR OIS in place of swaps referencing IBORs that have, or will by mid-2023, become unavailable. In addition to the extensive data presented and analyzed in this proposal, and as discussed in detail below, the Commission is basing this preliminary determination on its ongoing supervision of DCOs and its monitoring of the cleared interest rate swap market for purposes of risk surveillance.
89 The data in Table 8 represents swaps that have been cleared at CME, LCH, or Eurex and reported to the CFTC under part 39 of the Commission's regulations.
Table 9—Outstanding Notional as of January 25, 2022 90 OIS Tenor Notional cleared (USD billions) USD LIBOR Fixed-to-Floating Swaps 0-1 months $118 >1 month to 3 months 299 >3 months to 1 year 876 >1-3 years 1,933 >3-5 years 848 >5-7 years 509 >7-10 years 426 >10-15 years 249 >15-25 years 291 >25-35 years 137 >35 years 13 USD SOFR Fixed-to-Floating Swaps 0-1 months 30 >1 month to 3 months 220 >3 months to 1 year 741 >1-3 years 985 >3-5 years 269 >5-7 years 110 >7-10 years 125 >10-15 years 54 >15-25 years 59 >25-35 years 41 >35 years 4 Request for Comment
90 The data in Table 9 represents swaps that have been cleared at CME, LCH, or Eurex and reported to the CFTC under part 39 of the Commission's regulations
rs 13 USD SOFR Fixed-to-Floating Swaps 0-1 months 30 >1 month to 3 months 220 >3 months to 1 year 741 >1-3 years 985 >3-5 years 269 >5-7 years 110 >7-10 years 125 >10-15 years 54 >15-25 years 59 >25-35 years 41 >35 years 4 Request for Comment
90 The data in Table 9 represents swaps that have been cleared at CME, LCH, or Eurex and reported to the CFTC under part 39 of the Commission's regulations.
The Commission requests comment and any relevant market analysis regarding the sufficiency of outstanding notional exposures and trading liquidity in USD SOFR, GBP SONIA, EUR €STR, CHF SARON, JPY TONA, and SGD SORA OIS, including for the proposed termination date ranges, to support a clearing requirement.
The Commission invites commenters to submit additional data from any available data sources.
b. Pricing Data
The Commission regularly reviews pricing data for the RFR OIS subject to this proposed determination and has found that these OIS are capable of being priced off of deep and liquid markets. Commission staff regularly receives and reviews margin model information from DCOs that includes particular procedures that they follow to ensure that market liquidity exists in order to close out a position in a stressed market, including the time required to determine a price. 91 Because of the stability of access to pricing data from these markets, the pricing data for the OIS that are the subject of this proposed determination is generally viewed as being reliable. Based on this information, the Commission has preliminarily determined that there is adequate pricing data to support required clearing of RFR OIS.
91 As discussed further below, Commission staff receives and reviews margin model information from the registered DCOs that clear these swaps, including information regarding how those DCOs would ensure that liquidity exists in order to exit a position in a stressed market
on, the Commission has preliminarily determined that there is adequate pricing data to support required clearing of RFR OIS.
91 As discussed further below, Commission staff receives and reviews margin model information from the registered DCOs that clear these swaps, including information regarding how those DCOs would ensure that liquidity exists in order to exit a position in a stressed market. For purposes of the first statutory factor, the Commission considers possible periods of market stress, particularly when assessing whether there is sufficient liquidity and pricing data. Second Determination, 81 FR at 71210 (noting that the Commission considered “the effect a new clearing mandate will have on a DCO's ability to withstand stressed market conditions” as part of its analysis in connection with the Second Determination).
In addition, as part of their regulation § 39.5(b) submissions, the registered DCOs that clear the RFR OIS subject to this proposed determination provided information to support the Commission's conclusion that there exists adequate pricing data to justify a clearing requirement determination. In its regulation § 39.5(b) submissions, CME provided data regarding transaction volumes and market participation, and LCH provided information on daily volumes, and noted that pricing data for each of the RFR OIS that it clears is available from brokers. LCH also noted the range of maturities for which quotes can be obtained from brokers. In its submissions to the Commission, Eurex provided relevant language from its FCM Regulations and Clearing Conditions regarding determination of daily pricing. Eurex stated that it believes its reliance on Reuters for pricing data is accurate because it is a readily available and conventional source. Eurex noted that it also can receive pricing data from Bloomberg and has multiple backup sources
In its submissions to the Commission, Eurex provided relevant language from its FCM Regulations and Clearing Conditions regarding determination of daily pricing. Eurex stated that it believes its reliance on Reuters for pricing data is accurate because it is a readily available and conventional source. Eurex noted that it also can receive pricing data from Bloomberg and has multiple backup sources.
In the RFI, the Commission specifically requested feedback on whether adequate pricing data exists for DCO risk and default management of swaps referencing USD SOFR. CME, LCH, and Eurex each stated that adequate pricing data exists for DCO risk and default management of USD SOFR swaps. 92 Respondents to the RFI also provided support for the conclusion that sufficient liquidity and pricing data exists in RFR OIS markets to withstand stressed market conditions. 93
92 CMEG Letter (“CME Clearing has accepted SOFR swaps for clearing since October 2018. Throughout this time there has been, and continues to be, adequate pricing data for DCO risk and default management of swaps referencing SOFR given the depth and liquidity of SOFR markets.”); LSEG Letter (“SOFR liquidity and related pricing data has developed to an adequate extent and continues to further increase. We also note that the number of underlying transactions supporting the production of the SOFR rate itself is very high, supporting the rate's robustness. Such robustness, transparency and confidence in the SOFR rate is reflected in the swap market, both in terms of trading and clearing volumes, including in relation to the availability of pricing data. This ultimately means that in the case of a default, there would be adequate swap pricing data for LCH to manage such default.”); Eurex Letter (“Eurex Clearing believes there is adequate pricing data for DCO risk and default management of swaps referencing SOFR.”). JSCC did not have any specific responses related to this question, as JSCC “[does] not have a plan to clear swaps referencing SOFR.” JSCC Letter
ately means that in the case of a default, there would be adequate swap pricing data for LCH to manage such default.”); Eurex Letter (“Eurex Clearing believes there is adequate pricing data for DCO risk and default management of swaps referencing SOFR.”). JSCC did not have any specific responses related to this question, as JSCC “[does] not have a plan to clear swaps referencing SOFR.” JSCC Letter.
93 LSEG noted significant increases in USD SOFR volumes after SOFR First, and Eurex noted that liquidity in USD SOFR swaps increased considerably after March 5, 2021. LSEG and Eurex Letters. TD Bank agreed that market participants have observed sufficient outstanding notional exposures and trading liquidity in swaps referencing USD SOFR during both stressed and non-stressed market conditions to support a clearing requirement. TD Bank Letter.
Request for Comment
The Commission requests comment and any relevant market analysis regarding whether there is adequate pricing data for DCO risk and default management of the products subject to this proposal, including with regard to the proposed stated termination date ranges.
The Commission also requests comment regarding whether DCOs offering clearing for RFR OIS markets would be able to risk manage these products during stressed market conditions.
2. Factor (II)—Availability of Rule Framework, Capacity, Operational Expertise and Resources, and Credit Support Infrastructure
Section 2(h)(2)(D)(ii)(II) of the CEA requires the Commission to take into account the availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the proposed classes of swaps on terms that are consistent with the material terms and trading conventions on which they are now traded
tise and Resources, and Credit Support Infrastructure
Section 2(h)(2)(D)(ii)(II) of the CEA requires the Commission to take into account the availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the proposed classes of swaps on terms that are consistent with the material terms and trading conventions on which they are now traded. Based on their regulation § 39.5(b) submissions, as well as ongoing oversight, the Commission believes that each of the registered DCOs has developed rule frameworks, capacity, operational expertise and resources, and credit support infrastructure to clear the interest rate swaps they currently clear, including the RFR OIS subject to this proposal, on terms that are consistent with the material terms and trading conventions on which those swaps are being traded. The Commission subjects each of the registered DCOs to ongoing review, risk surveillance, and examination to ensure compliance with the CEA's core principles and Commission regulations, including with respect to the submitted swaps. 94
94 In order to be registered with the Commission, a DCO must comply with the DCO core principles under section 5b of the CEA and applicable Commission regulations. Once a DCO is registered with the Commission, Commission staff periodically examine each DCO to determine whether the DCO is maintaining compliance with the CEA and Commission regulations. In addition, Commission staff monitors the risks posed to and by DCOs, clearing members, and market participants, and conducts independent stress testing.
Each of the registered DCOs has procedures pursuant to which they regularly review their clearing of the RFR OIS subject to this proposal in order to confirm or adjust margin and other risk management tools. When reviewing each of the registered DCOs' risk management tools, the Commission considers whether the DCO is able to manage risk during stressed market conditions to be one of the most significant considerations
d DCOs has procedures pursuant to which they regularly review their clearing of the RFR OIS subject to this proposal in order to confirm or adjust margin and other risk management tools. When reviewing each of the registered DCOs' risk management tools, the Commission considers whether the DCO is able to manage risk during stressed market conditions to be one of the most significant considerations. Each of the registered DCOs has developed detailed risk management practices, including a description of risk factors considered when establishing margin levels. 95 The Commission reviews and oversees each of the registered DCOs' risk management practices and development of margin models. Margin models are further refined by stress testing and daily back testing. The Commission also considers stress testing and back testing when assessing whether each of the registered DCOs can clear swaps safely during stressed market conditions.
95 E.g., historical volatility, intraday volatility, seasonal volatility, liquidity, open interest, market concentration, and potential moves to default. For additional information, each of CME, LCH, and Eurex has published a document outlining its compliance with the Principles for Financial Market Infrastructures (PFMI) published by the Committee on Payments and Market Infrastructures (CPMI; formerly, CPSS) and IOSCO. CPSS-IOSCO Principles for Financial Market Infrastructure (PFMI), Apr. 16, 2012, available at https://www.bis.org/cpmi/publ/d101.htm. See CMEG, CME Clearing: PFMI Disclosure, Nov. 30, 2021, available at https://www.cmegroup.com/clearing/risk-management/files/cme-clearing-principles-for-financial-market-infrastructures-disclosure.pdf; LCH PFMI Self-Assessment 2020, available at https://www.lch.com/system/files/media_root/CPMI%20IOSCO%20Self%20Qualitative%20Assessment%20of%20LCH%20LTD_1.pdf; and Eurex Clearing AG, Assessment of Eurex Clearing AG's compliance against the PFMI and disclosure framework associated to the PFMI, Feb
ring/risk-management/files/cme-clearing-principles-for-financial-market-infrastructures-disclosure.pdf; LCH PFMI Self-Assessment 2020, available at https://www.lch.com/system/files/media_root/CPMI%20IOSCO%20Self%20Qualitative%20Assessment%20of%20LCH%20LTD_1.pdf; and Eurex Clearing AG, Assessment of Eurex Clearing AG's compliance against the PFMI and disclosure framework associated to the PFMI, Feb. 16, 2021, available at https://www.eurex.com/resource/blob/2446522/22f4869a8649f15b54a1e86bf635c63c/data/cpss-iosco-pfmi_assessment_2020_en.pdf.
The registered DCOs clearing the RFR OIS subject to this proposed determination design and conduct stress tests, and Commission staff monitors development of these stress tests. Each of the registered DCOs also conducts reverse stress tests to ensure that their default funds are sized appropriately and to ascertain whether any changes to their financial resources or margin models are necessary. 96 Commission staff monitors markets in real-time and also performs stress tests against the DCOs' margin models and may recommend changes to a margin model. The registered DCOs conduct back testing on a daily basis to ensure that the margin models capture market movements for member portfolios. 97
96 Reverse stress testing uses plausible market movements that could deplete guaranty funds and cause large losses for top clearing members. For example, CME, LCH, and Eurex may use scenarios for stress testing and reverse stress testing that capture, among other things, historical price volatilities, shifts in price determinants and yield curves, multiple defaults over various time horizons, and simultaneous pressures in funding and asset markets.
97 Back testing tests margin models to determine whether they are performing as intended, and checks whether margin models produce margin coverage levels that meet the DCO's established standards
, among other things, historical price volatilities, shifts in price determinants and yield curves, multiple defaults over various time horizons, and simultaneous pressures in funding and asset markets.
97 Back testing tests margin models to determine whether they are performing as intended, and checks whether margin models produce margin coverage levels that meet the DCO's established standards. Back testing helps CME, LCH, and Eurex determine whether their clearing members satisfy the required margin coverage levels and liquidation timeframe.
Before offering a new product for clearing, each of the DCOs considers stress tests and back testing results in determining whether it has sufficient financial resources to offer new clearing services. The Commission also reviews initial margin models and default resources to ensure that the DCOs can risk manage their portfolio of products offered for clearing. This combination of stress testing and back testing in anticipation of offering new products for clearing provides the registered DCOs with greater certainty that new product offerings will be risk-managed appropriately. The process of stress testing and back testing also gives the DCOs practice incorporating the new product into their models. In addition to the Commission's surveillance and oversight, each of the registered DCOs continues to monitor and test their margin models over time so that they can operate effectively in stressed and non-stressed market environments. Registered DCOs review and validate their margin models regularly. 98
98 Exempt D

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/FR_PRORULE_2022-10490. Check the current official text before relying on it. Not legal advice.