CFTC updates rules to reflect changing reference rate regime

By Mark S. Nelson, J.D.

The CFTC adopted a final rule that revises CFTC Regulations 50.4 and 50.26 to account for newer overnight, nearly risk-free reference rates that have begun to replace LIBOR, which is being phased out years after a global manipulation scandal. Prior to January 2022, LIBOR consisted of five currencies with seven tenors, resulting in 35 individual LIBOR rates that now either are no longer published or are no longer representative of markets. The revised rules are effective 30 days after publication in the Federal Register (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, Release No. RIN 3038-AF18, August 12, 2022 (voting draft).

“As we focus our collective efforts on the fast approaching end of LIBOR, this rule provides legal certainty and regulatory transparency for DCOs, market participants, and our fellow international authorities,” said CFTC Chairman Rostin Behnam. “This is essential to ensure cross border harmonization in the interest rate swaps market.”

Key effective dates. A press release announcing that the CFTC had adopted a final rule amending its regulations governing reference rates and clearing requirements summarized the effective dates for different swaps:

• Effective 30 days after publication in the Federal Register—(1) Removes the requirement to clear swaps referencing British pound (GBP) LIBOR, Swiss franc (CHF) LIBOR, Japanese yen (JPY) LIBOR, and euro (EUR) Euro Overnight Index Average (EONIA) in each of the fixed-to-floating swap, basis swap, forward rate agreement (FRA), and overnight index swap (OIS) classes; (2) Adds a requirement to clear OIS referencing CHF Swiss Average Rate Overnight (SARON) (with a stated termination date range of seven days to 30 years), JPY Tokyo Overnight Average rate (TONA) (seven days to 30 years), and EUR Euro Short-Term Rate (€STR) (seven days to three years); and (3) Extends the stated termination date range for GBP Sterling Overnight Index Average (SONIA) OIS required to be cleared to include seven days to 50 years.
• Effective October 31, 2022—Adds a requirement to clear OIS referencing U.S. dollar (USD) Secured Overnight Financing Rate (SOFR) (seven days to 50 years) and Singapore dollar (SGD) Singapore Overnight Rate Average (SORA) (seven days to 10 years).
• Effective July 1, 2023—Removes the requirement to clear interest rate swaps referencing USD LIBOR and SGD Swap Offer Rate (SOR-VWAP) in each of the fixed-to-floating swap, basis swap, and FRA classes, as applicable.

Commissioners’ remarks. CFTC Commissioner Caroline D. Pham concurred with the final rule, stating that she had concerns about the CFTC adopting rules that apply to Swiss and Singaporean swaps before those countries’ regulators update their own rules. Pham also said she would have favored an effective date of October 31, 2022, for certain overnight index swaps (the final rule specified 30 days after publication in the Federal Register). Pham also suggested that a future rulemaking consider the additional issues of trade execution and post-trade risk reduction.

CFTC Commissioner Kristin N. Johnson stated that she supported the Commission’s action and explained that “this final rule represents the culmination of years of work by the Commission as well as its counterparts across the globe to ensure a more reliable, more transparent set of interest rate benchmarks.” She added that “[i]n collaboration with our international colleagues’ efforts in jurisdictions around the world, the Commission’s efforts to adopt and implement this final rule serves to preserve the stability and integrity of our markets and to reduce the systemic risks that precipitated the financial crisis.”

According to CFTC Commissioner Christy Goldsmith Romero, who also supported the final rule, “[t]he certainty of the CFTC’s timeline for adding interest rate swaps referencing USD SOFR to its clearing requirement, and for removing interest rate swaps referencing USD LIBOR, should assist international regulators who are also revising clearing requirements for these swaps.”

The release is No. RIN 3038-AF18.