By Anne Sherry, J.D.
With LIBOR’s end date in sight, panelists gathered at the Bipartisan Policy Center to discuss topics relating to a transition to the alternative benchmark rate SOFR. SEC Chairman Jay Clayton answered questions from CNBC’s John Harwood about the benchmark and other market regulation topics, but declined to comment on the Commission’s recent tangle with Elon Musk. Following a panel focused on the transition to SOFR, CFTC Commissioner Rostin Behnam offered his take on the reference rate measures in prepared remarks.
With LIBOR being phased out by the end of 2021, the Alternative Reference Rate Committee (ARRC) established the Secured Overnight Financing Rate (SOFR) as a new benchmark rate for U.S.-dollar-based transactions. Fannie Mae, which was represented at the discussion by Wells Engledow, in July issued the first floating-rate note indexed to SOFR, and CME recently cleared the first over-the-counter SOFR interest-rate swaps.
What keeps Clayton up at night. Harwood began his Q&A by asking Clayton about life at the Shortseller Enrichment Commission, an allusion to a tweet by Elon Musk in the wake of the SEC’s enforcement action against him. Clayton laughed but shook off the remark, calling it “an old joke.” When Harwood returned to the topic towards the end of the conversation, Clayton again declined to comment on the matter or its settlement, which many perceived as generous to Musk. Clayton would only say that because there was a lot of interest from Main Street investors, he took that opportunity to put out a statement to give those investors more insight into the SEC’s stance on enforcement.
The chairman did share some of the issues that he ponders at night, noting, “I’m never content; I get paid to worry.” He said that the transition from LIBOR, as well as Brexit, are concerns. The committee did well to choose a new benchmark rate that is tied to overnight treasuries, Clayton said, but implementation will be a big job. However, he was not particularly troubled by the recent sell-off in the stock market because the SEC is not tasked with conducting monetary or fiscal policy. His concern is whether the market is functioning as it should, and his assessment is that the market did function well the day before, digesting new information and new ideas.
Harwood asked about the concentration of equity securities in the hands of a fraction of the U.S. population, observing that there are twice as many private companies as public. Clayton agreed that the spectrum of investments available to retail investors is smaller as companies are waiting longer to go public. Although he does not have a specific proposal, one of the things on his mind is how to give retail investors access to private equity or venture capital without easing investor protections. This would not necessarily involve lowering the standards for accredited investors.
Finally, both Harwood and an audience member asked Clayton about crypto-related issues. The technology has promise, he responded, but he is wary of markets that appear to be well-regulated and well-understood but do not actually function that way. Investors should be cautious that a price quote doesn’t carry the same confidence and scrutiny as a quote on NYSE or Nasdaq. Clayton asserted that the capital markets system is built around clearly defined responsibilities. In a decentralized world, he asked rhetorically, who is responsible when something goes wrong?
Behnam’s work on benchmark reform. Behnam, whose term as CFTC commissioner also ends in 2021, said that the panel discussion highlighted the importance of reference rates to the global economic system. The CFTC has been involved in the global effort against fraud and manipulation within the rate-setting process, with a total of $3.3 billion in LIBOR-related sanctions since 2012. The commissioner himself sponsors the Market Risk Advisory Committee, which met in July to focus on benchmark reform in the context of the derivatives market. The Interest Rate Benchmark Reform Subcommittee recently approved by the CFTC will provide reports and recommendations to the MRAC regarding the transition to SOFR and its impact on the derivatives markets.
Specifically, the subcommittee may consider the treatment under Dodd-Frank of existing derivatives contracts that are amended to include new fallback provisions or otherwise reference alternative benchmark rates. It may also consider the impact of the transition on liquidity in derivatives and related markets. Behnam wants to use the subcommittee to complement the AARC’s work by shedding more light on challenges ahead, identifying risks for the markets and consumers, and providing solutions within the derivatives space.