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Proposed Rule2022-10490

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

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Published

May 31, 2022

Issuing agencies

Commodity Futures Trading Commission

Abstract

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.

Full Text

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[Federal Register Volume 87, Number 104 (Tuesday, May 31, 2022)]
[Proposed Rules]
[Pages 32898-32939]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-10490]

[[Page 32897]]

Vol. 87

Tuesday,

No. 104

May 31, 2022

Part V

Commodity Futures Trading Commission

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17 CFR Part 50

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; Proposed Rule

Federal Register / Vol. 87, No. 104 / Tuesday, May 31, 2022 /
Proposed Rules

[[Page 32898]]

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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.

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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:
<bullet> CFTC Comments Portal: <a href="https://comments.cftc.gov">https://comments.cftc.gov</a>. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
<bullet> Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
<bullet> 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
<a href="https://comments.cftc.gov">https://comments.cftc.gov</a>. 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 Sec. 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 <a href="https://comments.cftc.gov">https://comments.cftc.gov</a> 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 <a href="/cdn-cgi/l/email-protection#11627b7e62746179627e7f51727765723f767e67">[email&#160;protected]</a>; Melissa D'Arcy, Special
Counsel, at 202-418-5086 or <a href="/cdn-cgi/l/email-protection#e38e878291809aa380859780cd848c95">[email&#160;protected]</a>; or Daniel O'Connell,
Special Counsel, at 202-418-5583 or <a href="/cdn-cgi/l/email-protection#dfbbb0bcb0b1b1bab3b39fbcb9abbcf1b8b0a9">[email&#160;protected]</a>; 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 Sec. 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.\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\
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\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. Regulation Sec. 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.
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Section 2(h)(2)(D)(ii) of the CEA requires the Commission to
consider the

[[Page 32899]]

following five factors when making a clearing requirement
determination: (I) The existence of significant outstanding notional
exposures, trading liquidity, and adequate pricing data; (II) the
availability of rule framework, capacity, operational expertise and
resources, and credit support infrastructure to clear the contract on
terms that are consistent with the material terms and trading
conventions on which the contract is traded; (III) the effect on the
mitigation of systemic risk, taking into account the size of the market
for such contract and the resources of the DCOs available to clear the
contract; (IV) the effect on competition, including appropriate fees
and charges applied to clearing; and (V) the existence of reasonable
legal certainty in the event of the insolvency of the relevant DCO or
one or more of its clearing members with regard to the treatment of
customer and swap counterparty positions, funds, and property.\5\
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\5\ 7 U.S.C. 2(h)(2)(D)(ii).
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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 Sec. 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\
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\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. 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.
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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
Sec. 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\
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\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 <a href="https://stats.bis.org/statx/srs/table/d7?f=pdf">https://stats.bis.org/statx/srs/table/d7?f=pdf</a>;
BIS, Global OTC Derivatives Markets, June 2021, available at <a href="https://www.bis.org/publ/otc_hy2111/intgraphs/graphA1.htm">https://www.bis.org/publ/otc_hy2111/intgraphs/graphA1.htm</a>.
\10\ 17 CFR 50.4(a).
\11\ First Determination, 77 FR at 74308.
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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\
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\12\ Id. at 74309.
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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.
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\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.
\16\ Id. at 71205.
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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.
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\17\ See generally ICE Benchmark Administration (IBA), LIBOR,
available at <a href="https://www.theice.com/iba/libor">https://www.theice.com/iba/libor</a>.
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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\

[[Page 32900]]

Although LIBOR was subject to a number of significant reform
efforts,\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\
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\18\ See, e.g., International Organization of Securities
Commissions (IOSCO), Principles for Financial Benchmarks, July 2013,
at 1, available at <a href="https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf">https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf</a>. See also David Bowman, et al., ``How Correlated Is
LIBOR With Bank Funding Costs?,'' FEDS Notes, June 29, 2020,
available at <a href="https://www.federalreserve.gov/econres/notes/feds-notes/how-correlated-is-libor-with-bank-funding-costs-20200629.htm">https://www.federalreserve.gov/econres/notes/feds-notes/how-correlated-is-libor-with-bank-funding-costs-20200629.htm</a>;
and Alternative Reference Rates Committee, Second Report, Mar. 2018,
at 1-3, available at <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report</a>.
\19\ See generally IBA, Methodology, available at <a href="https://www.theice.com/publicdocs/ICE_LIBOR_Methodology.pdf">https://www.theice.com/publicdocs/ICE_LIBOR_Methodology.pdf</a>; H.M. Treasury,
The Wheatley Review of LIBOR: Final Report, Sept. 2012, available at
<a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/191762/wheatley_review_libor_finalreport_280912.pdf">https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/191762/wheatley_review_libor_finalreport_280912.pdf</a>; Intercontinental
Exchange (ICE), ICE LIBOR Evolution, Apr. 25, 2018, at 4, available
at <a href="https://www.theice.com/publicdocs/ICE_LIBOR_Evolution_Report_25_April_2018.pdf">https://www.theice.com/publicdocs/ICE_LIBOR_Evolution_Report_25_April_2018.pdf</a>.
\20\ Andrew Bailey, ``The future of Libor,'' July 27, 2017,
available at <a href="https://www.fca.org.uk/news/speeches/the-future-of-libor">https://www.fca.org.uk/news/speeches/the-future-of-libor</a>.
\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 <a href="https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf">https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf</a>.
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(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\
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\22\ See section IV below (discussing the continued publication
of USD LIBOR for certain tenors through June 30, 2023).
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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.
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\23\ FCA Announcement on LIBOR Cessation. The FCA stated that
once a LIBOR rate becomes nonrepresentative, its representativeness
will not be restored.
\24\ Id.
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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\
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\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 <a href="https://www.newyorkfed.org/markets/opolicy/operating_policy_180403">https://www.newyorkfed.org/markets/opolicy/operating_policy_180403</a>. 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%20affiliat
e%20of%20the; and FRBNY, Additional Information about the Treasury
Repo Reference Rates, available at <a href="https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information">https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information</a>. 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 <a href="https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-2017.pdf">https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-2017.pdf</a>.
\29\ ARRC, Paced Transition Plan, available at <a href="https://www.newyorkfed.org/arrc/sofr-transition#pacedtransition">https://www.newyorkfed.org/arrc/sofr-transition#pacedtransition</a>. 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. (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.
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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
([euro]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
[euro]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\
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\30\ ESMA, Working Group on Euro Risk-Free Rates, available at
<a href="https://www.esma.europa.eu/policy-activities/benchmarks/working-group-euro-risk-free-rates">https://www.esma.europa.eu/policy-activities/benchmarks/working-group-euro-risk-free-rates</a>; European Money Markets Institute, EONIA,
available at <a href="https://www.emmi-benchmarks.eu/benchmarks/eonia/">https://www.emmi-benchmarks.eu/benchmarks/eonia/</a>.
\31\ Association of Banks in Singapore, About SC-STS, available
at <a href="https://www.abs.org.sg/benchmark-rates/about-sc-sts">https://www.abs.org.sg/benchmark-rates/about-sc-sts</a>.
\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
<a href="https://www.abs.org.sg/docs/library/timelines-to-cease-issuance-of-sor-derivatives-and-sibor-linked-financial-products.pdf">https://www.abs.org.sg/docs/library/timelines-to-cease-issuance-of-sor-derivatives-and-sibor-linked-financial-products.pdf</a>.

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[[Page 32901]]

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 <a href="https://www.fsb.org/2020/11/reforming-major-interest-rate-benchmarks-2020-progress-report/">https://www.fsb.org/2020/11/reforming-major-interest-rate-benchmarks-2020-progress-report/</a>. 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
<a href="https://www.bis.org/publ/qtrpdf/r_qt1903e.pdf">https://www.bis.org/publ/qtrpdf/r_qt1903e.pdf</a>; Bank of England,
Preparing for 2022: What You Need to Know about LIBOR Transition,
Nov. 2018, at 10, <a href="https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/what-you-need-to-know-about-libor-transition.pdf">https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/what-you-need-to-know-about-libor-transition.pdf</a>;
ISDA, et al., IBOR Global Benchmark Survey 2018 Transition Roadmap,
Feb. 2018, at 32, <a href="https://www.isda.org/a/g2hEE/IBOR-Global-Transition-Roadmap-2018.pdf">https://www.isda.org/a/g2hEE/IBOR-Global-Transition-Roadmap-2018.pdf</a>; European Central Bank, Euro Short-Term
Rate ([euro]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
----------------------------------------------------------------------------------------------------------------
Identified Alternative rate
Currency Index alternative rate administrator Secured Published
----------------------------------------------------------------------------------------------------------------
AUD................. Bank Bill Swap Reserve Bank of Reserve Bank of No Yes.
Rate (BBSW). Australia Australia.
Interbank
Overnight Cash
Rate (AONIA).
CAD................. Canadian Dollar Canadian Bank of Canada.. Yes Yes.
Offered Rate Overnight Repo
(CDOR). Rate Average
(CORRA).
CHF................. LIBOR........... SARON........... SIX Swiss Yes Yes.
Exchange.
EUR................. LIBOR........... [euro]STR....... European Central No Yes.
Bank.
Euro Overnight [euro]STR....... European Central No Yes.
Index Average Bank.
(EONIA).
Euro Interbank [euro]STR....... European Central No Yes.
Offered Rate Bank.
(EURIBOR).
GBP................. LIBOR........... SONIA........... Bank of England. No Yes.
HKD................. Hong Kong Hong Kong Dollar Treasury Market No Yes.
Interbank Overnight Index Association.
Offered Rate Average (HONIA).
(HIBOR).
JPY................. LIBOR........... TONA............ Bank of Japan... No Yes.
MXN................. Term Interbank Overnight TIIE.. Banco de Mexico. Yes Yes.
Equilibrium
Interest Rate
(TIIE).
SGD................. SOR............. SORA............ Association of No Yes.
Banks in
Singapore.
Singapore SORA............ Association of No Yes.
Interbank Banks in
Offered Rate Singapore.
(SIBOR).
----------------------------------------------------------------------------------------------------------------

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 <a href="https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20201130a1.pdf">https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20201130a1.pdf</a>; and IOSCO, Statement on Benchmarks Transition,
June 2, 2021, available at <a href="https://www.iosco.org/library/pubdocs/pdf/IOSCOPD676.pdf">https://www.iosco.org/library/pubdocs/pdf/IOSCOPD676.pdf</a>.
\35\ CFTC, ``CFTC Market Risk Advisory Committee Adopts SOFR
First Recommendation at Public Meeting,'' July 13, 2021, available
at <a href="https://www.cftc.gov/PressRoom/PressReleases/8409-21">https://www.cftc.gov/PressRoom/PressReleases/8409-21</a>.
\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 <a href="https://www.cftc.gov/PressRoom/PressReleases/8469-21">https://www.cftc.gov/PressRoom/PressReleases/8469-21</a>.
\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 <a href="https://www.bankofengland.co.uk/news/2020/september/fca-and-boe-joint-statement-on-sonia-interest-rate-swap">https://www.bankofengland.co.uk/news/2020/september/fca-and-boe-joint-statement-on-sonia-interest-rate-swap</a>; 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 <a href="https://www.boj.or.jp/en/paym/market/jpy_cmte/data/cmt210726b.pdf">https://www.boj.or.jp/en/paym/market/jpy_cmte/data/cmt210726b.pdf</a>.
---------------------------------------------------------------------------

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.\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: <a href="https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx">https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx</a>.

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[[Page 32902]]

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.
Specifically, HKEX offers swaps referencing USD SOFR and EUR
[euro]STR for clearing. See Hong Kong Exchanges and Clearing,
Interest Rate Swaps, available at <a href="https://www.hkex.com.hk/Products/OTC-Derivatives/Interest-Rate-Swaps?sc_lang=en">https://www.hkex.com.hk/Products/OTC-Derivatives/Interest-Rate-Swaps?sc_lang=en</a>.
---------------------------------------------------------------------------

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 [euro]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 (``[euro]STR'') Ahead of Scheduled
Discontinuation of EONIA, Sept. 29, 2021, available at <a href="https://www.cmegroup.com/content/dam/cmegroup/market-regulation/rule-filings/2021/9/21-413.pdf">https://www.cmegroup.com/content/dam/cmegroup/market-regulation/rule-filings/2021/9/21-413.pdf</a>; LCH, LCH Limited Self-Certification:
Benchmark Reform--Rates Conversion, Sept. 29, 2021 (LCH Self-
Certification: Benchmark Reform--Rates Conversion), available at
<a href="https://www.lch.com/system/files/media_root/FINAL%20-%20LCH%20self%20cert_Benchmark%20Reform%202021%2009%2029%20v3%20%28Clean%29.pdf">https://www.lch.com/system/files/media_root/FINAL%20-%20LCH%20self%20cert_Benchmark%20Reform%202021%2009%2029%20v3%20%28Clean%29.pdf</a>; Eurex Clearing, ECAG Rule Certification 081-21, Sept.
16, 2021 (Eurex Rule Certification 081-21), available at <a href="https://www.eurex.com/resource/blob/2781070/61d1fccdd00bc1a06753877a5fa3f483/data/ecag_cftc_filing_for_circular_081-21.pdf">https://www.eurex.com/resource/blob/2781070/61d1fccdd00bc1a06753877a5fa3f483/data/ecag_cftc_filing_for_circular_081-21.pdf</a>; 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 <a href="https://www.eurex.com/ec-en/find/circulars/clearing-circular-2373634">https://www.eurex.com/ec-en/find/circulars/clearing-circular-2373634</a>.
\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 <a href="https://www.lch.com/membership/ltd-membership/ltd-member-updates/supplementary-statement-lchs-solution-outstanding">https://www.lch.com/membership/ltd-membership/ltd-member-updates/supplementary-statement-lchs-solution-outstanding</a>;
CME, CME IBOR Conversion Plan for Cleared Swaps, June 9, 2021,
available at <a href="https://www.cmegroup.com/trading/interest-rates/files/cleared-swaps-considerations-for-ibor-fallbacks-and-conversion-plan.pdf">https://www.cmegroup.com/trading/interest-rates/files/cleared-swaps-considerations-for-ibor-fallbacks-and-conversion-plan.pdf</a>; 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. 22, 2021, available at <a href="https://www.cmegroup.com/notices/clearing/2021/11/Chadv21-434.pdf">https://www.cmegroup.com/notices/clearing/2021/11/Chadv21-434.pdf</a> (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 <a href="https://www.lch.com/system/files/media_root/LIBOR%20Transition%20-%20Risk%20Notice%20Nov%202021.pdf">https://www.lch.com/system/files/media_root/LIBOR%20Transition%20-%20Risk%20Notice%20Nov%202021.pdf</a> (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 <a href="https://www.eurex.com/resource/blob/227404/760dd5a98729621e2de7720d28bc291a/data/ec15075e_Attach.pdf">https://www.eurex.com/resource/blob/227404/760dd5a98729621e2de7720d28bc291a/data/ec15075e_Attach.pdf</a>.
\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
--------------------------------------------------------------------------------------------------------------------------------------------------------
Floating rate
Swap class Currency 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- CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs).
[euro]STR.
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............. [euro]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).
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 32903]]

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. 23,
2020, available at <a href="http://assets.isda.org/media/3062e7b4/23aa1658.pdf">http://assets.isda.org/media/3062e7b4/23aa1658.pdf</a>; ISDA, ``Amendments to the 2006 ISDA Definitions to
include new IBOR fallbacks,'' Oct. 23, 2020, available at <a href="http://assets.isda.org/media/3062e7b4/23aa1658.pdf">http://assets.isda.org/media/3062e7b4/23aa1658.pdf</a>; ISDA, ISDA 2020 IBOR
Fallbacks Protocol, Oct. 23, 2020, available at <a href="http://assets.isda.org/media/3062e7b4/08268161-pdf/">http://assets.isda.org/media/3062e7b4/08268161-pdf/</a>; ISDA 2021 Fallbacks
Protocol, December 2021 Benchmark Module, Dec. 16, 2021, available
at <a href="https://www.isda.org/a/UhtgE/ISDA-2021-Fallbacks-Protocol_December-2021-Benchmark-Module_Publication-Version.pdf">https://www.isda.org/a/UhtgE/ISDA-2021-Fallbacks-Protocol_December-2021-Benchmark-Module_Publication-Version.pdf</a>. 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.
\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. 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.
\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. 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 <a href="https://download.asic.gov.au/media/mjknuhlh/cp-353-published-6-december-2021.pdf">https://download.asic.gov.au/media/mjknuhlh/cp-353-published-6-december-2021.pdf</a>; 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 <a href="https://www.esma.europa.eu/sites/default/files/library/esma70-156-4953_final_report_on_the_co_and_dto_re_benchmark_transition.pdf">https://www.esma.europa.eu/sites/default/files/library/esma70-156-4953_final_report_on_the_co_and_dto_re_benchmark_transition.pdf</a>;
Bank of England, ``Derivatives clearing obligation--modifications to
reflect interest rate benchmark reform: Amendments to BTS 2015/
2205,'' May 20, 2021, available at <a href="https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform">https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform</a>-amendments; Bank of England,
``Derivatives clearing obligation--modifications to reflect interest
rate benchmark reform: Amendments to BTS 2015/2205,'' Sept. 29,
2021, available at <a href="https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform">https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform</a>; Bank of England, ``Derivatives clearing
obligation--introduction of contracts referencing TONA: Amendment to
BTS 2015/2205,'' Dec. 3, 2021, available at <a href="https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-introduction-of-contracts-referencing-tona">https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-introduction-of-contracts-referencing-tona</a>-ps; Bank of England,
``Derivatives clearing obligation--introduction of contracts
referencing TONA: Amendment to BTS 2015/2205,'' Sept. 29, 2021,
available at <a href="https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-introduction-of-contracts-referencing-tona">https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-introduction-of-contracts-referencing-tona</a>.

[[Page 32904]]

Table 3--Clearing Requirements in Other Jurisdictions
----------------------------------------------------------------------------------------------------------------
EU (Final Regulatory
Technical Standards--
Australia (proposed) EC to approve) Japan (final) UK (final)

----------------------------------------------------------------------------------------------------------------
USD...................... To be determined SOFR--7 days to 3 Not applicable (N/A) TBD.
(TBD). years.
GBP...................... SONIA--7 days to 50 SONIA--7 days to 50 N/A................. SONIA--7 days to 50
years. years. years.
EUR...................... [euro]STR--7 days to [euro]STR--7 days to N/A................. [euro]STR--7 days
2 years. 3 years. to 3 years.
JPY...................... TONA--7 days to 30 TBD................. TONA--7 days to 40 TONA--7 days to 30
years. years\62\. years.
----------------------------------------------------------------------------------------------------------------

IV. Proposed Amendments to Regulation Sec. 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
<a href="https://www.jpx.co.jp/jscc/en/cash/irs/product.html">https://www.jpx.co.jp/jscc/en/cash/irs/product.html</a>.
---------------------------------------------------------------------------

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 Sec. 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. 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 Sec. 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 Sec.
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 [euro]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

[[Page 32905]]

SONIA as a floating rate index in the OIS class to 50 years, for a new
stated termination date range of 7 days to 50 years.
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 Sec. 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
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The set of tables following this paragraph illustrates the effect
of further regulation Sec. 50.4(a) amendments that, if finalized,
would be effective as of July 1, 2023:
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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. 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.
---------------------------------------------------------------------------

\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 <a href="https://www.mas.gov.sg/news/media-releases/2018/mas-requires-otc-derivatives-to-be-centrally-cleared-to-mitigate-systemic-risk">https://www.mas.gov.sg/news/media-releases/2018/mas-requires-otc-derivatives-to-be-centrally-cleared-to-mitigate-systemic-risk</a>; MAS, Response to Feedback Received: Draft
Regulations for Mandatory Clearing of Derivatives Contracts, May 2,
2018, at 4, available at <a href="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">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</a>.
---------------------------------------------------------------------------

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

[[Page 32915]]

cleared.\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.
\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 Sec. 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 Sec. 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.
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).\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

[[Page 32916]]

time as that rate is unavailable.\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 <a href="https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform">https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform</a>.
\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
<a href="https://www.esma.europa.eu/sites/default/files/library/esma70-156-4953_final_report_on_the_co_and_dto_re_benchmark_transition.pdf">https://www.esma.europa.eu/sites/default/files/library/esma70-156-4953_final_report_on_the_co_and_dto_re_benchmark_transition.pdf</a>. 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.
If ESMA and other regulators[hairsp][']
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. . . . 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).'').
---------------------------------------------------------------------------

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 Sec.
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 Sec. 39.5(b) submissions from DCOs are
available on the Commission's website, <a href="http://www.cftc.gov">www.cftc.gov</a>, 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). 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 . . . 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. 26, 2015, at 1, available
at <a href="http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf">http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf</a>; JSCC Amended Order of Exemption from
Registration, May 15, 2017, at 1, available at <a href="https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf">https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf</a>. 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
<a href="https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/otccleardcoexemptorder12-21-15.pdf">https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/otccleardcoexemptorder12-21-15.pdf</a>. 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.

[[Page 32917]]

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 [euro]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 Sec. 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. 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 [euro]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:
<a href="https://www.cftc.gov/MarketReports/SwapsReports/index.htm">https://www.cftc.gov/MarketReports/SwapsReports/index.htm</a>.
---------------------------------------------------------------------------

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. 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.

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 [euro]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

[[Page 32918]]

precipitously by January 2022. While there were still a significant
number of USD LIBOR fixed-to-floating swap transactions during the
three-month period that Table 5 measures, the monthly trade count for
such transactions declined significantly during that period.
---------------------------------------------------------------------------

\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 [euro]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
[euro]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\
----------------------------------------------------------------------------------------------------------------
Percentage notional Percentage notional Percentage notional
OIS cleared-- November cleared-- December cleared-- January
2021 2021 2022
----------------------------------------------------------------------------------------------------------------
USD SOFR...................................... 96.3 94.9 95.1
GBP SONIA..................................... 98.8 98.7 97.8
EUR [euro]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\
----------------------------------------------------------------------------------------------------------------
Notional cleared
OIS Tenor (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 [euro]STR........................... 7 days-3 months........... 336 210

[[Page 32919]]

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\
------------------------------------------------------------------------
Outstanding notional
OIS (USD billions)
------------------------------------------------------------------------
USD SOFR.......................................... $8,558
GBP SONIA......................................... 23,363
EUR [euro]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. 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\
------------------------------------------------------------------------
Notional cleared
OIS Tenor (USD billions)
------------------------------------------------------------------------
USD LIBOR Fixed-to-Floating 0-1 months....... $118
Swaps.
>1 month to 3 299
months.
>3 months to 1 876
year.
>1-3 years....... 1,933

[[Page 32920]]

>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 0-1 months....... 30
Swaps.
>1 month to 3 220
months.
>3 months to 1 741
year.
>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 [euro]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. 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 Sec. 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 Sec. 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 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.
\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.

[[Page 32921]]

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. Based on their regulation Sec. 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. 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
<a href="https://www.bis.org/cpmi/publ/d101.htm">https://www.bis.org/cpmi/publ/d101.htm</a>. See CMEG, CME Clearing: PFMI
Disclosure, Nov. 30, 2021, available at <a href="https://www.cmegroup.com/clearing/risk-management/files/cme-clearing-principles-for-financial-market-infrastructures-disclosure.pdf">https://www.cmegroup.com/clearing/risk-management/files/cme-clearing-principles-for-financial-market-infrastructures-disclosure.pdf</a>; LCH PFMI Self-
Assessment 2020, available at <a href="https://www.lch.com/system/files/media_root/CPMI%20IOSCO%20Self%20Qualitative%20Assessment%20of%20LCH%20LTD_1.pdf">https://www.lch.com/system/files/media_root/CPMI%20IOSCO%20Self%20Qualitative%20Assessment%20of%20LCH%20LTD_1.pdf</a>
; 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 <a href="https://www.eurex.com/resource/blob/2446522/22f4869a8649f15b54a1e86bf635c63c/data/cpss-iosco-pfmi_assessment_2020_en.pdf">https://www.eurex.com/resource/blob/2446522/22f4869a8649f15b54a1e86bf635c63c/data/cpss-iosco-pfmi_assessment_2020_en.pdf</a>.
---------------------------------------------------------------------------

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.
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 DCOs, such as JSCC and HKEX, are subject to
oversight by their home country regulators, along with regulations
regarding risk management. For instance, JSCC is subject to the
supervision of JFSA. JSCC, Principles for Financial Market
Infrastructures Disclosure, Mar. 31, 2021, at 19, available at
<a href="https://www.jpx.co.jp/jscc/en/company/cimhll0000000osu-att/JSCC_PFMI_Disclosure_20210331_EN.pdf">https://www.jpx.co.jp/jscc/en/company/cimhll0000000osu-att/JSCC_PFMI_Disclosure_20210331_EN.pdf</a>. In granting JSCC's order of
exemption, the Commission determined that JSCC is subject to
comparable, comprehensive supervision and regulation by its home
country regulator. See JSCC Order of Exemption from Registration,
Oct. 26, 2015, at 1, available at <a href="http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf">http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf</a>;
JSCC Amended Order of Exemption from Registration, May 15, 2017, at
1, available at <a href="https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf">https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf</a>.
Among other requirements, JSCC must provide the Commission with an
annual certification that it continues to observe the PFMI in all
material respects, and the Commission must receive annually, at
JSCC's request, a certification from JFSA that JSCC is in good
regulatory standing. Likewise, HKEX is overseen by HKMA, which
provides ongoing supervision, and must meet the same requirements
for registration as an exempt DCO as JSCC. See HKFE Clearing
Corporation Limited, Principles for Financial Market Infrastructures
Disclosure, Feb. 2021, available at <a href="https://www.hkex.com.hk/-/media/HKEX-Market/Services/Clearing/Listed-Derivatives/PFMI/HKCC_PFMI_Disclosure_Feb2021.pdf?la=en">https://www.hkex.com.hk/-/media/HKEX-Market/Services/Clearing/Listed-Derivatives/PFMI/HKCC_PFMI_Disclosure_Feb2021.pdf?la=en</a>.
---------------------------------------------------------------------------

Each registered DCO monitors and manages credit risk exposure by
asset class, clearing member, account, or individual customer. They
manage credit risk by establishing position and concentration limits
based on product type or counterparty. These limits reduce potential
market risks so that DCOs are better able to withstand stressed market
conditions. Each of the registered DCOs monitors exposure
concentrations and may require additional margin deposits for clearing
members with weak credit scores, with large or concentrated positions,
with positions that are illiquid or exhibit correlation with the member
itself, and/or where the member has particularly

[[Page 32922]]

large exposures under stress scenarios. Registered DCOs also can call
for additional margin, on top of collecting initial and variation
margin, to meet the current DCO exposure and protect against stressed
market conditions.\99\
---------------------------------------------------------------------------

\99\ As a general matter, any DCO offering RFR OIS for clearing,
including exempt DCOs, would follow this risk management approach
with regard to offering these products for clearing.
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In support of its ability to clear the RFR OIS subject to this
proposal, CME's regulation Sec. 39.5(b) submissions cite to its
rulebook to demonstrate the availability of rule framework, capacity,
operational expertise and resources, and credit support infrastructure
to clear interest rate swap contracts on terms that are consistent with
the material terms and trading conventions on which the contracts are
traded. LCH's submissions state that it has a well-developed rule
framework and support infrastructure for clearing interest rate swaps,
which it leverages to offer clearing services for the RFR OIS subject
to this proposal. Eurex's submissions state that Eurex has a well-
developed rule framework and support infrastructure for clearing the
RFR OIS that are subject to this proposal. Eurex further states that it
has the appropriate risk management, operations, and technology
capabilities to ensure that it is able to liquidate positions in such
swaps in an orderly manner in the event of a clearing member default,
and that the RFR OIS are subject to margin and clearing fund
requirements set forth in Eurex's FCM Regulations and Clearing
Conditions.
For all of these reasons, the Commission has preliminarily
determined that the application of DCO risk management practices to the
RFR OIS subject to this proposed clearing requirement determination
should ensure that the swaps subject to this proposal can be cleared
safely, even during times of market stress. For additional information
related to this factor, please see public disclosures made CME, LCH,
and Eurex.\100\
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\100\ CME, CME Clearing: Principles for Financial Market
Infrastructures Disclosure, Nov. 30, 2021, available at <a href="https://www.cmegroup.com/clearing/risk-management/files/cme-clearing-principles-for-financial-market-infrastructures-disclosure.pdf">https://www.cmegroup.com/clearing/risk-management/files/cme-clearing-principles-for-financial-market-infrastructures-disclosure.pdf</a>; LCH
Ltd., CPMI--IOSCO Self-Assessment 2020, Mar. 31, 2020, available at
<a href="https://www.lch.com/system/files/media_root/CPMI%20IOSCO%20Self%20Qualitative%20Assessment%20of%20LCH%20LTD_1.pdf">https://www.lch.com/system/files/media_root/CPMI%20IOSCO%20Self%20Qualitative%20Assessment%20of%20LCH%20LTD_1.pdf</a>
; Eurex, ``Assessment of Eurex Clearing AG's compliance against the
CPMI-IOSCO Principles for financial market infrastructures (PFMI)
and the disclosure framework associated to the PFMIs,'' Feb. 28,
2022, available at <a href="https://www.eurex.com/resource/blob/2973806/422b675a412d96e3c8cf97a570b899a2/data/cpss-iosco-pfmi_assessment_2021_en.pdf">https://www.eurex.com/resource/blob/2973806/422b675a412d96e3c8cf97a570b899a2/data/cpss-iosco-pfmi_assessment_2021_en.pdf</a>. As explained above, similar disclosures
are available for JSCC and HKEX.
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Request for Comment
The Commission requests comments concerning all aspects of this
factor, including whether commenters agree that DCOs offering to clear
the RFR OIS subject to this proposed clearing requirement determination
can satisfy the factor's requirements.
3. Factor (III)--Effect on the Mitigation of Systemic Risk
Section 2(h)(2)(D)(ii)(III) of the CEA requires the Commission to
consider the effect of the clearing requirement on the mitigation of
systemic risk, taking into account the size of the market for such
contract and the resources of the DCO available to clear the contract.
As presented in the data and discussion above, the Commission believes
that the market for each RFR OIS subject to this proposed determination
is significant and mitigating counterparty credit risk through clearing
likely would reduce systemic risk in the interest rate swap market
generally. While not every individual RFR OIS market has large
outstanding notional exposures, each such market is important, and as
liquidity shifts from IBOR swaps to RFR OIS, continuity of clearing for
RFR OIS serves to reduce systemic risk.
In its regulation Sec. 39.5(b) submissions, CME explains the
benefits of centralized clearing, including freer counterparty credit
lines, enhanced risk management, operational efficiencies, and ease of
offsetting risk exposures. LCH's submissions note that clearing avoids
complex bilateral relationships, provides for default management, and
enhances transparency into the risks posed by swap positions. Eurex's
submissions highlight the benefits of reduction of counterparty risk,
margin and collateral efficiencies, protections for customer assets,
and legal certainty. Each DCO's submissions indicate that they maintain
adequate resources to clear the swaps that are the subject of this
proposal. Additionally, in responding to the RFI, JSCC noted that it
has been clearing JPY TONA OIS since 2014 ``without facing any
challenge from a governance, rule framework, operational, resourcing,
or credit support infrastructure perspective.'' \101\
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\101\ JSCC Letter.
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In responding to the RFI, CME noted that mitigation of systemic
risk is one of the key advantages of centralized clearing over
bilateral arrangements.\102\ LSEG stated that ``a clearing requirement
will mitigate systemic risk, making sure that USD SOFR risk moves from
the bilateral space to the cleared market to the necessary extent.''
\103\ Additionally, Citadel noted that ``[a]pplying a clearing
requirement to OTC derivatives referencing SOFR will ensure these
markets develop as centrally-cleared markets,'' and further noted that
``central clearing provides greater systemic risk mitigation than
bilateral margining for uncleared swaps.'' \104\ TD Bank agreed that a
clearing requirement for USD SOFR swaps ``might increase the clearing
rate and therefore mitigate[] systemic risk even more,'' but TD Bank
also noted that the ``bulk'' of USD SOFR swaps are already voluntarily
cleared.\105\
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\102\ CMEG Letter.
\103\ LSEG Letter.
\104\ Citadel Letter.
\105\ TD Bank Letter. See also Tradeweb Letter (``The swap
clearing and execution requirements under Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act have increased
investor protections, improved market liquidity, and reduced
systemic risk, especially in the dealer-to-customer market. It will
be critical for the CFTC to maintain these market improvements as
new swap transactions increasingly utilize alternative risk-free
reference rates . . . .'').
---------------------------------------------------------------------------

Centrally clearing the RFR OIS subject to this proposal through a
registered or exempt DCO should reduce systemic risk by providing
counterparties with daily mark-to-market valuations upon which to
exchange variation margin pursuant to the DCO's risk management
framework and requiring posting of initial margin to cover potential
future exposures in the event of a default. In addition, swaps
transacted through a DCO are secured by the DCO's guaranty fund and
other available financial resources, which are intended to cover
extraordinary losses that would not be covered by initial margin.
Central clearing was developed and designed to handle significant
concentration of risk. Each of the DCOs that clears the RFR OIS covered
by this proposal has a procedure for closing out and/or transferring a
defaulting clearing member's positions and collateral.\106\
Transferring customer positions to solvent clearing members in the
event of a default is critical to reducing systemic risk. DCOs are
designed to withstand defaulting positions and to prevent a defaulting
clearing member's loss from spreading further and triggering additional
defaults. To the extent that introduction of an RFR OIS clearing
requirement increases the number of clearing members and market
participants in the interest rate swap market, then DCOs may find it
easier to transfer positions from defaulting

[[Page 32923]]

clearing members if there is a larger pool of potential clearing
members to receive the positions.\107\
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\106\ For further discussion of treatment of customer and swap
counterparty positions, funds, and property in the event of the
insolvency of a DCO or one or more of its clearing members, please
see Factor (V)--Legal certainty in the event of insolvency, section
V.C below.
\107\ The Commission recognizes that with high rates of
voluntary clearing RFR OIS at this time, the prospect of adding
additional clearing members and market participants in these swaps
is limited.
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Each DCO has experience risk managing interest rate swaps, and the
Commission believes that the DCOs have the necessary financial
resources available to clear the RFR OIS that are the subject of this
proposal. Accordingly, the Commission believes that these DCOs would be
able to manage the risk posed by clearing the new RFR OIS that would be
required to be cleared by virtue of this proposal.
In addition, the Commission believes that the central clearing of
the RFR OIS that are to be added under this proposal should serve to
mitigate counterparty credit risk, thereby potentially reducing
systemic risk. Having considered the likely effect on the mitigation of
systemic risk, the Commission is proposing to add these RFR OIS to the
clearing requirement.
Request for Comment
The Commission requests comments concerning the proposal to add
these RFR OIS to the clearing requirement, with regard to the possible
reduction of systemic risk.
How, if at all, should the Commission consider the ongoing
implementation of uncleared swap margin requirements for swap dealers
in assessing this factor?
4. Factor (IV)--Effect on Competition
Section 2(h)(2)(D)(ii)(IV) of the CEA requires the Commission to
take into account the effect on competition, including appropriate fees
and charges applied to clearing. Of particular concern to the
Commission is whether this proposed determination would harm
competition by creating, enhancing, or entrenching market power in an
affected product or service market, or facilitating the exercise of
market power.\108\ Market power is viewed as the ability to raise
prices, including clearing fees and charges, reduce output, diminish
innovation, or otherwise harm customers as a result of diminished
competitive constraints or incentives.\109\
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\108\ First Determination, 77 FR at 74313; Second Determination,
81 FR at 71220.
\109\ First Determination, 77 FR at 74313 (discussing market
power as described under U.S. Department of Justice guidelines). See
generally U.S. Department of Justice and the Federal Trade
Commission, Horizontal Merger Guidelines (Horizontal Merger
Guidelines) at section 1 (Aug. 19, 2010), available at <a href="https://www.justice.gov/sites/default/files/atr/legacy/2010/08/19/hmg-2010.pdf">https://www.justice.gov/sites/default/files/atr/legacy/2010/08/19/hmg-2010.pdf</a>.
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The Commission has identified one putative service market as
potentially affected by this proposed clearing determination: A DCO
service market encompassing those clearinghouses that currently clear
the RFR OIS subject to this proposal.\110\ The Commission recognizes
that this proposed clearing requirement potentially could impact
competition within the affected market. Of particular importance to
whether any such impact is positive or negative, is: (1) Whether the
demand for these clearing services and swaps is sufficiently elastic
that a small but significant price increase above competitive levels
would prove unprofitable because users of the interest rate swap
products and DCO clearing services would substitute other clearing
services coexisting in the same market(s); and (2) the potential for
new entry into this market. The availability of substitute clearing
services to compete with those encompassed by this proposed
determination, and the likelihood of timely, sufficient new entry in
the event prices do increase above competitive levels, each operate
independently to constrain anticompetitive behavior.
---------------------------------------------------------------------------

\110\ First Determination, 77 FR at 74298; Second Determination,
81 FR at 71220. The DCO service market includes the registered and
exempt DCOs that currently offer RFR OIS for clearing.
---------------------------------------------------------------------------

Any competitive import likely would stem from the fact that the
proposed determination and regulations would remove the alternative of
not clearing for RFR OIS subject to this proposal. The proposed
determination would not specify who may or may not compete to provide
clearing services for the RFR OIS subject to this proposal, as well as
those not required to be cleared.
Removing the choice to enter into a swap without submitting it for
clearing under this proposed rulemaking is not determinative of
negative competitive impact. Other factors, including the availability
of other substitutes within the market or potential for new entry into
the market, may constrain market power. The Commission does not foresee
that the proposed determination constructs barriers that would deter or
impede new entry into a clearing services market,\111\ and the
Commission anticipates that a determination to modify the clearing
requirement for interest rate swaps could foster an environment
conducive to new entry. For example, the proposed clearing
determination is likely to reinforce, if not encourage, growth in
demand for clearing services. Demand growth, in turn, can enhance the
sales opportunity, a condition hospitable to new entry.\112\ Moreover,
to the extent that there are high rates of voluntary clearing in the
RFR OIS subject to this proposed determination already, a regulatory
requirement to clear such swaps would provide additional certainty that
those high rates of clearing would remain constant.
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\111\ That said, the Commission recognizes that (1) to the
extent the clearing services market for the interest rate swaps
identified in this proposal, after foreclosing uncleared swaps,
would be limited to a concentrated few participants with highly
aligned incentives, and (2) the clearing services market is
insulated from new competitive entry through barriers (e.g., high
sunk capital cost requirements, high switching costs to transition
from embedded incumbents, and access restrictions), the proposed
determination could have a negative competitive impact by increasing
market concentration.
\112\ See, e.g., Horizontal Merger Guidelines, section 9.2
(entry likely if it would be profitable which is in part a function
of ``the output level the entrant is likely to obtain'').
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Respondents to the RFI who provided feedback regarding the
potential effect on competition due to a modified clearing requirement
did not identify any potential negative effects. For instance, Citadel
stated that applying a clearing requirement to OTC derivatives
referencing USD SOFR would increase liquidity and competition, citing,
among other research, a study that found that ``the Commission's
clearing and trading reforms led to a significant reduction in
execution costs in the USD interest rate swap market, with market
participants saving as much as $20 million-$40 million per day.'' \113\
LSEG, Eurex, JSCC, and TD Bank also did not identify potential
competition-related concerns.\114\
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\113\ Citadel Letter (citing Staff Working Paper No. 580
``Centralized trading, transparency and interest rate swap market
liquidity: evidence from the implementation of the Dodd-Frank Act,''
Bank of England, Jan. 2016, available at <a href="http://www.bankofengland.co.uk/research/Documents/workingpapers/2016/swp580.pdf">http://www.bankofengland.co.uk/research/Documents/workingpapers/2016/swp580.pdf</a>).
\114\ LSEG Letter (``LCH does not believe that adopting a
clearing requirement for a new product that references an
alternative reference rate, or expanding the scope of an existing
clearing requirement to cover additional maturities would create
conditions that increase or facilitate an exercise of market power
over clearing services by any DCO. Any clearing requirement that
applies equally to all DCOs that provide clearing services for a
product would not adversely affect competition.''); Eurex Letter
(``Eurex Clearing believes there is healthy competition currently in
the market for the clearing of swaps referencing the RFRs and,
previously, the LIBORs. Eurex Clearing does not believe that
adopting a clearing requirement for a new product that references an
RFR or expanding the scope of the Clearing Requirement to cover
additionally maturities would cause [adverse effects related to
competition or an increase in the cost of clearing services].'');
JSCC Letter (``In relation to TONA OIS, it has been accepted for
clearing at 3 registered DCOs . . . . Therefore, we believe that
replacing JPY-LIBOR with TONA OIS would not change (i) the existing
competition for clearing services of JPY swaps nor (ii) the cost of
clearing services, in any regard.''); and TD Bank Letter (``We do
not perceive these issues [related to adverse competitive effects or
increasing costs of clearing services] to come'' as a result of a
clearing requirement for a new product that references an
alternative reference rate or expanding the scope of the clearing
requirement to cover additional maturities).

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[[Page 32924]]

Request for Comment
The Commission requests comment on the extent to which: (1) Entry
barriers currently do or do not exist with respect to a clearing
services market for the RFR OIS to be added to the clearing requirement
under this proposal; (2) the proposed determination may lessen or
increase these barriers; and (3) the proposed determination otherwise
may encourage, discourage, facilitate, and/or dampen new entry into the
market. In addition to what is noted above, the Commission requests
comment, and quantifiable data, on whether the required clearing of any
or all of the RFR OIS to be added to the clearing requirement under
this proposal will generate conditions that create, increase, or
facilitate an exercise of: (1) Clearing services market power in CME,
LCH, Eurex, and/or any other clearing service market participant,
including conditions that would dampen competition for clearing
services and/or increase the cost of clearing services, and/or (2)
market power in any product markets for interest rate swaps, including
conditions that would dampen competition for these product markets and/
or increase the cost of RFR OIS to be added to the clearing requirement
under this proposal. The Commission seeks comment, and quantifiable
data, on the likely cost increases associated with clearing,
particularly those fees and charges imposed by DCOs, and the effects of
such increases on counterparties currently participating in the market.
The Commission also requests comment regarding whether commenters
have any concerns regarding access to clearing services in the market
for any RFR OIS subject to this proposed determination.
5. Factor (V)--Legal Certainty in the Event of Insolvency
Section 2(h)(2)(D)(ii)(V) of the CEA requires the Commission to
take into account the existence of reasonable legal certainty in the
event of the insolvency of the relevant DCO or one or more of its
clearing members with regard to the treatment of customer and swap
counterparty positions, funds, and property. The Commission is
proposing this clearing requirement determination based on its view
that there is reasonable legal certainty with regard to the treatment
of customer and swap counterparty positions, funds, and property in
connection with cleared swaps, including the RFR OIS subject to this
proposal, in the event of the insolvency of the relevant DCO or one or
more of the DCO's clearing members.
The Commission believes that, in the case of a clearing member
insolvency at CME, where the clearing member is the subject of a
proceeding under the U.S. Bankruptcy Code, subchapter IV of Chapter 7
of the U.S. Bankruptcy Code (11 U.S.C. 761-767) along with parts 22 and
190 of the Commission's regulations would govern the treatment of
customer positions.\115\ Pursuant to section 4d(f) of the CEA, 7 U.S.C.
4d(f), a clearing member accepting funds from a customer to margin a
cleared swap must be a registered futures commission merchant (FCM).
Pursuant to 11 U.S.C. 761-767 and part 190 of the Commission's
regulations, the customer's interest rate swap positions, carried by an
insolvent FCM, would be deemed ``commodity contracts.'' \116\ As a
result, neither a clearing member's bankruptcy nor any order of a
bankruptcy court could prevent CME from closing out/liquidating such
positions. However, customers of clearing members would have priority
over all other claimants with respect to customer funds that had been
held by the defaulting clearing member to margin swaps, such as the RFR
OIS subject to this proposal.\117\ Thus, customer claims would have
priority over proprietary claims and general creditor claims. Customer
funds would be distributed to swap customers, including interest rate
swap customers, in accordance with Commission regulations and section
766(h) of the Bankruptcy Code. Moreover, the Bankruptcy Code and the
Commission's rules thereunder (in particular 11 U.S.C. 764(b) and 17
CFR 190.07) permit the transfer of customer positions and collateral to
solvent clearing members.
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\115\ An FCM or DCO also may be subject to resolution under
Title II of the Dodd-Frank Act to the extent it would qualify as a
covered financial company (as defined in section 201(a)(8) of the
Dodd-Frank Act). Under Title II, different rules would apply to the
resolution of an FCM or DCO. Discussion in this section relating to
what might occur in the event an FCM or DCO defaults or becomes
insolvent describes procedures and powers that exist in the absence
of a Title II receivership.
\116\ If an FCM is registered as a broker-dealer, certain issues
related to its insolvency proceeding would be governed by the
Securities Investor Protection Act, as well.
\117\ Claims seeking payment for the administration of customer
property would share this priority.
---------------------------------------------------------------------------

Similarly, 11 U.S.C. 761-767 and part 190 would govern the
bankruptcy of a DCO where the DCO is the subject of a proceeding under
the U.S. Bankruptcy Code, in conjunction with DCO rules providing for
the termination of outstanding contracts and/or return of remaining
clearing member and customer property to clearing members.
With regard to LCH, the Commission understands that in general the
default of an LCH clearing member would be governed by LCH's rules, and
LCH would be permitted to close out and/or transfer positions of a
defaulting clearing member. The Commission further understands that,
under applicable law, LCH's rules governing a clearing member default
would supersede insolvency laws in the clearing member's jurisdiction.
For an FCM based in the United States and clearing at LCH, the
applicable law as a general matter, would be the U.S. Bankruptcy Code
and part 190 of the Commission's regulations. According to LCH's
regulation Sec. 39.5(b) submissions, the insolvency of LCH itself
would be governed by English insolvency law, which protects the
enforceability of the default-related provisions of LCH's rulebook,
including in respect of compliance with applicable provisions of the
U.S. Bankruptcy Code and part 190 of the Commission's regulations. LCH
has obtained, and made available to the Commission, legal opinions that
support the existence of such legal certainty in relation to the
protection of customer and swap counterparty positions, funds, and
property in the event of the insolvency of one or more of its clearing
members.\118\
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\118\ Letters of counsel on file with the Commission.
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On December 20, 2018, the Commission issued permission for Eurex to
begin clearing swap transactions on behalf of customers of FCMs.\119\
According to Eurex's regulation Sec. 39.5(b) submissions, Eurex
observes the PFMI. Eurex represented that in February 2015, it
published an assessment of its compliance with the PFMI, which was
reviewed and validated by an independent outside auditor. The
assessment concluded that Eurex fully complies with the PFMI, and
Eurex's default management

[[Page 32925]]

procedures were assessed to be certain in the event of its or a
clearing member's insolvency with regard to the treatment of customer
and counterparty positions and collateral. Such certainty continues to
be reflected in Eurex's most recent PFMI assessment.\120\ According to
Eurex's regulation Sec. 39.5(b) submissions, a potential insolvency of
Eurex Clearing, and the operation of default management procedures
under Eurex's Clearing Conditions, would be governed by German law,
with the exception of certain FCM Regulations and Clearing Conditions
that relate to cleared swaps customer collateral that are governed by
U.S. law.\121\
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\119\ Commission Letter Nos. 18-30, 18-31, and 18-32.
Additionally, in responding to the RFI, Eurex noted that, with
respect to Eurex clearing members that are FCMs and that clear swaps
under Eurex's U.S. regulatory framework, Eurex's FCM Regulations
``foresee a clear process for a potential porting of client-related
transactions to a replacement clearing member following the
termination of a clearing member.'' Eurex Letter. In the event that
the termination is based on an Insolvency Termination Event, as
defined in Eurex's FCM Regulations, Eurex will seek to coordinate
with the CFTC and bankruptcy trustee with respect to porting the
positions. This procedure applies to all cleared products. However,
Eurex noted that following IBOR conversion events, it no longer
clears any trades where obtaining new GBP LIBOR, JPY LIBOR, or CHF
LIBOR fixings (or reliance on the relevant fallback provisions)
would be necessary. Id.
\120\ Eurex Clearing AG, Assessment of Eurex Clearing AG's
compliance against the PFMI and disclosure framework associated to
the PFMI, available at <a href="https://www.eurex.com/resource/blob/2446522/22f4869a8649f15b54a1e86bf635c63c/data/cpss-iosco-pfmi_assessment_2020_en.pdf">https://www.eurex.com/resource/blob/2446522/22f4869a8649f15b54a1e86bf635c63c/data/cpss-iosco-pfmi_assessment_2020_en.pdf</a>.
\121\ For example, in the case of an insolvency termination
event, as defined in Eurex's Clearing Conditions, the relevant FCM
clearing member would be subject to an insolvency proceeding
pursuant to applicable U.S. law, and Eurex would seek to coordinate
with the Commission and the bankruptcy trustee (or comparable person
responsible for administering the proceeding) with respect to the
transfer of FCM client transactions and eligible margin assets
allocated to the relevant FCM client. Id. at 100.
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Finally, as exempt DCOs, JSCC and HKEX demonstrate they are subject
to ongoing comparable, comprehensive supervision by their home country
regulator with regard to legal certainty in the event of
insolvency.\122\ Both exempt DCOs maintain disclosures discussing the
ways in which they comply with the PFMI, including principles related
to legal certainty in the event of insolvency.\123\ Principle 1 of the
PFMI provides that a CCP should have a well-founded, clear,
transparent, and enforceable legal basis for each material aspect of
its activities, in all relevant jurisdictions.\124\ Among other key
considerations for this factor, ``[t]he legal basis should provide a
high degree of certainty for each material aspect of an FMI's
activities in all relevant jurisdictions.'' \125\ The PFMI also provide
that a CCP should have effective and clearly defined rules and
procedures to manage a participant default.\126\ JSCC's and HKEX's PFMI
disclosures provide, among other information, a discussion of the
applicable law and legal basis for their clearing activities, as well
as the way in which their rules address insolvency events.\127\
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\122\ Exempt DCOs are not permitted to clear swaps for U.S.
customers pursuant to regulation Sec. 39.6(b)(1). Accordingly, this
discussion of JSCC's and HKEX's insolvency regimes does not address
issues related to U.S. customer clearing.
\123\ JSCC, Principles for Financial Market Infrastructures
Disclosure, Mar. 31, 2021, available at <a href="https://www.jpx.co.jp/jscc/en/company/cimhll0000000osu-att/JSCC_PFMI_Disclosure_20210331_EN.pdf">https://www.jpx.co.jp/jscc/en/company/cimhll0000000osu-att/JSCC_PFMI_Disclosure_20210331_EN.pdf</a>; and HKFE Clearing Corporation
Limited, Principles for Financial Market Infrastructures Disclosure,
Feb. 2021, available at <a href="https://www.hkex.com.hk/-/media/HKEX-Market/Services/Clearing/Listed-Derivatives/PFMI/HKCC_PFMI_Disclosure_Feb2021.pdf?la=en">https://www.hkex.com.hk/-/media/HKEX-Market/Services/Clearing/Listed-Derivatives/PFMI/HKCC_PFMI_Disclosure_Feb2021.pdf?la=en</a>.
\124\ PFMI, Principle 1.
\125\ PFMI, Principle 1, Key consideration 1.
\126\ PFMI, Principle 13.
\127\ JSCC, Principles for Financial Market Infrastructures
Disclosure, Mar. 31, 2021, at 19-24, 83-91, available at <a href="https://www.jpx.co.jp/jscc/en/company/cimhll0000000osu-att/JSCC_PFMI_Disclosure_20210331_EN.pdf">https://www.jpx.co.jp/jscc/en/company/cimhll0000000osu-att/JSCC_PFMI_Disclosure_20210331_EN.pdf</a>; and HKFE Clearing Corporation
Limited, Principles for Financial Market Infrastructures Disclosure,
Feb. 2021, at 20-21, 58-60, available at <a href="https://www.hkex.com.hk/-/media/HKEX-Market/Services/Clearing/Listed-Derivatives/PFMI/HKCC_PFMI_Disclosure_Feb2021.pdf?la=en">https://www.hkex.com.hk/-/media/HKEX-Market/Services/Clearing/Listed-Derivatives/PFMI/HKCC_PFMI_Disclosure_Feb2021.pdf?la=en</a>.
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Lastly, JSCC has provided information regarding how it would
address a default by a clearing member under its rules,\128\ including
information regarding the treatment of certain RFR swaps for default
management purposes. Specifically, in its responses to the RFI, JSCC
described the process by which it offered TIBOR-TONA basis swaps as a
way to transition away from IBOR swaps without incident.\129\
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\128\ See JSCC's relevant PFMI disclosures.
\129\ JSCC Letter (stating that, for default management
purposes, TIBOR-TONA basis swaps will be treated in the same manner
as cleared JPY TONA OIS. JSCC noted that creation of these basis
swaps was a temporary measure and the basis swaps will expire at the
settlement of the rates that were fixed prior to the end of 2021).
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Request for Comment
The Commission requests comment regarding all aspects of this
factor, including whether there is reasonable legal certainty, in the
event of an insolvency of CME, LCH, Eurex, or one or more of any of
these DCOs' clearing members, with regard to the treatment of customer
and swap counterparty positions, funds, and property.
The Commission requests comment on whether U.S. swap counterparties
have concerns about the applicability of any non-U.S. jurisdiction's
law to U.S. persons clearing swaps at DCOs located outside of the
United States.
The Commission requests comment regarding legal certainty with
respect to an event of an insolvency for an exempt DCO, such as JSCC or
HKEX, particularly with regard to the treatment of swap counterparty
positions, funds, and property.

VI. Proposed Implementation Schedule and Compliance Dates

The Commission phased in compliance with the First Determination
according to the schedule contained in regulation Sec. 50.25.\130\
Under this schedule, compliance was phased in by the type of market
participant entering into a swap subject to the First Determination.
The phase-in occurred over a 270-day period following publication of
the final rule in the Federal Register. The Commission also phased in
compliance with the Second Determination according to the schedule
contained in regulation Sec. 50.26. However, the Commission decided to
adopt one compliance date for all market participant types, because
many market participants were already clearing the products subject to
the determination and the Commission had already adopted a clearing
requirement determination for the interest rate swap class.\131\ The
Commission decided to tie the compliance date for each product to the
first compliance date for a market participant in a non-U.S.
jurisdiction.\132\
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\130\ Swap Transaction Compliance and Implementation Schedule:
Clearing Requirement Under Section 2(h) of the CEA, 77 FR 44441
(July 30, 2012).
\131\ Second Determination, 81 FR at 71227.
\132\ Id. at 71227--71228.
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Importantly, DCOs have largely completed IBOR swap conversions.
Many market participants already clear the RFR OIS subject to this
proposed determination. Several other jurisdictions are requiring, or
are anticipated to soon require, clearing of these swaps. While some
responses to the RFI recommended that the Commission proceed through an
interim final rule process,\133\ other responses asked for longer
periods of time for market participants to comment on proposed rules,
and come into compliance with proposed rule changes.\134\ LSEG
recommended that the effective date be set ``not too far from the
completion of the Commission's review'' in order to ``reduce
uncertainty in the market and limit the risk of bifurcation of
liquidity between the cleared and uncleared market for the LIBOR rates
that ceased on December 31, 2021 and their respective replacement
rates.'' \135\
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\133\ E.g., Tradeweb Letter; Citadel Letter.
\134\ ICI Letter (requesting a 90-day comment period); ISDA
Letter (``Members request a minimum of 6 months' notice to implement
new [clearing requirement]''); ACLI Letter (``To ensure a smooth
implementation of any expanded clearing requirement, a minimum of
six months should be provided between the adoption of an expanded
clearing requirement and the effective date of the requirement, to
give market participants time to ready systems and processes.'').
\135\ LSEG Letter.
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Recognizing all these factors, the Commission proposes to adopt one
compliance date for all market participant types and amend regulation
Sec. 50.26 to reflect that the compliance date shall be 30 days after
publication of the final rule in the Federal Register.

[[Page 32926]]

If the clearing requirement compliance date falls on a Saturday,
Sunday, or U.S. Federal public holiday, the compliance date will be the
next available business day. No compliance date will be set on a day
when markets are not open in the United States.
As a technical amendment, because the Commission is proposing to
remove certain interest rate swaps from regulation Sec. 50.4, it is
also proposing to remove those same swaps from regulation Sec. 50.26.
The Commission is proposing this change for consistency and to
eliminate any confusion that might arise if different swap products are
included in Sec. Sec. 50.4 and 50.26. Additionally, the Commission
proposes technical revisions related to the formatting of the table of
compliance dates for required clearing of credit default swaps in
regulation Sec. 50.26.
Request for Comment
The Commission requests comment on whether setting a compliance
date 30 days after publication of the final rule in the Federal
Register provides market participants with sufficient notice and
opportunity to comply with this proposed determination.

VII. Cost Benefit Considerations

A. Statutory and Regulatory Background

Proposed revised regulation Sec. 50.4(a) identifies certain swaps
that would be required to be cleared under section 2(h)(1)(A) of the
CEA in addition to those currently required to be cleared by existing
regulations Sec. Sec. 50.2 and 50.4(a), and removes certain other
swaps currently required to be cleared from the clearing requirement.
The proposed clearing requirement amendments are designed to update the
Commission's regulations in light of the interest rate swap market's
move away from use of swaps referencing IBORs to swaps referencing
RFRs. At the current time, most RFR OIS are being cleared voluntarily
so the proposed regulation largely serves to ensure that the swap
market under the Commission's jurisdiction continues to clear all RFR
OIS subject to this proposal. The continued central clearing of RFR OIS
may limit the counterparty risk associated with such swaps, thereby
mitigating the possibility of such risks having a systemic impact,
which might cause or exacerbate instability in the financial system. In
addition, required clearing of RFR OIS would reflect the global effort
to rely on benchmark rates that are less susceptible to manipulation.
The Commission believes this proposal is consistent with the
principle that the use of central clearing can reduce systemic risk,
which was one of the fundamental premises of the Dodd-Frank Act and the
2009 commitments by the G20 nations. The following discussion is a
consideration of the costs and benefits of the Commission's proposed
actions pursuant to the regulatory requirements discussed above.

B. Overview of Swap Clearing

. How Clearing Reduces Risk
When a bilateral swap is cleared, the DCO becomes the counterparty
to each original swap counterparty. This arrangement mitigates
counterparty risk to the extent that the DCO may be a more creditworthy
counterparty than the original swap counterparties. Central clearing
reduces the interconnectedness of market participants' swap positions
because the DCO, an independent third party that takes no market risk,
guarantees the collateralization of swap counterparties' exposures.
DCOs have demonstrated resilience in the face of past market stress.
The Commission anticipates that DCOs will continue to be some of
the most creditworthy swap counterparties because, among other things,
they are able to monitor and manage counterparty risk effectively
through (1) collection of initial and variation margin associated with
outstanding swap positions; (2) marking positions to market regularly,
usually multiple times per day, and issuing margin calls when the
margin in a customer's account has dropped below predetermined levels
that the DCO sets; (3) adjusting the amount of margin that is required
to be held against swap positions in light of changing market
circumstances, such as increased volatility in the underlying product;
and (4) closing out swap positions if margin calls are not met within a
specified period of time.
2. The Clearing Requirement and Role of the Commission
With the passage of the Dodd-Frank Act, Congress gave the
Commission the responsibility for determining which swaps would be
required to be cleared pursuant to section 2(h)(1)(A) of the CEA. Since
2012, there is ample evidence that the interest rate swap market has
been moving toward increased use of central clearing in response to
both market incentives and clearing requirements.\136\ Now with the
IBOR transition completed for most LIBOR rates and with most RFR OIS
already being voluntarily cleared, as discussed further below, it is
possible that the effect of this proposal will be limited to ensuring
that market participants continue to clear the RFR OIS subject to the
proposal.\137\ The Commission has preliminarily determined that the
costs and benefits related to the required clearing of the RFR OIS to
be added under this proposal are attributable, in part to (1)
Congress's stated goal of reducing systemic risk by, among other
things, requiring clearing of swaps; and (2) the Commission's exercise
of its discretion in selecting swaps or classes of swaps to achieve
those ends.
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\136\ Second Determination, 81 FR at 71210; BIS, ``Statistical
release: OTC derivatives at end-December 2020,'' May 12, 2021, at 4,
Graph 4, available at <a href="https://www.bis.org/publ/otc_hy2105.pdf">https://www.bis.org/publ/otc_hy2105.pdf</a>
(charting central clearing rates for interest rate swaps from 2012
to 2020 and noting a particularly significant rise during the 2012-
2015 period). See also CMEG Letter (discussing adoption of central
clearing); CCP12 Letter (same).
\137\ It is possible that some market participants would respond
to the requirement that RFR OIS be cleared by decreasing their use
of such swaps, particularly if the cost of clearing increases in the
future relative to the cost of not clearing. Thus, there is some
uncertainty regarding how the proposed rule will affect the quantity
of swaps that are cleared.
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C. Consideration of the Costs and Benefits of the Commission's Actions

1. CEA Section 15(a)
Section 15(a) of the CEA requires the Commission to ``consider the
costs and benefits'' of its actions before promulgating a regulation
under the CEA or issuing certain orders.\138\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness and
financial integrity; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations (collectively
referred to herein as the Section 15(a) Factors). Accordingly, the
Commission considers the costs and benefits associated with the
proposed determination in light of the Section 15(a) Factors. In the
sections that follow, the Commission considers: (1) The costs and
benefits of required clearing for the RFR OIS to be added under this
proposed rule as well as the costs and benefits of removing certain
swaps from required clearing; (2) the alternatives contemplated by the
Commission and their costs and benefits; and (3) the impact of required
clearing for the proposed swaps on the Section 15(a) Factors.
---------------------------------------------------------------------------

\138\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

The Commission is considering these costs and benefits against a
baseline of

[[Page 32927]]

the current set of interest rates swaps subject to the clearing
requirement adopted under regulation Sec. 50.4. This proposed
determination would add certain RFR OIS to the clearing requirement and
it would remove certain swaps referencing IBORs from the clearing
requirement. In most cases, this would be a simultaneous exchange: As
an IBOR swap is withdrawn from the clearing requirement, an RFR swap is
added. However, in a few cases, there may be a delay, or even an
overlap during which products referencing the IBOR rate and the RFR are
both subject to the clearing requirement (e.g., if the Commission
adopts a clearing requirement for USD SOFR swaps 30 days after the
publication of the final rule in the Federal Register and does not
remove the clearing requirement for USD LIBOR swaps until July 1, 2023,
then requirements to clear USD LIBOR swaps, including USD LIBOR fixed-
to-floating swaps, would for a period of time coexist with requirements
to clear USD SOFR OIS). As seen in Table 6 above, almost all
transactions in interest rate swaps that would be subject to the
proposed clearing requirement are cleared voluntarily today, so that
the percentage of such swaps that would be cleared following
implementation of the rule is unlikely to increase materially. The
Commission's analysis below compares amendments in this proposed
determination to the clearing requirement in effect today. The costs
discussed recognize the current industry practice of high levels of RFR
OIS clearing.
The Commission understands that the swap market functions
internationally with (i) transactions that involve U.S. firms and DCOs
occurring across different international jurisdictions; (ii) some
entities organized outside of the United States that are, or may
become, Commission registrants or registered entities; and (iii) some
entities that typically operate both within and outside the United
States and that follow substantially similar business practices
wherever located. Where the Commission does not specifically refer to
matters of location, this discussion of costs and benefits refers to
the effects of the proposed regulations on all relevant swaps activity,
whether based on their actual occurrence in the United States or on
their connection with activities in, or effect on, commerce of the
United States, pursuant to section 2(i) of the CEA.\139\
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\139\ Pursuant to section 2(i) of the CEA, activities outside of
the United States are not subject to the swap provisions of the CEA,
including any rules prescribed or regulations promulgated
thereunder, unless those activities either ``have a direct and
significant connection with activities in, or effect on, commerce of
the United States''; or contravene any rule or regulation
established to prevent evasion of a CEA provision enacted under the
Dodd-Frank Act. 7 U.S.C. 2(i).
---------------------------------------------------------------------------

2. Costs and Benefits of Required Clearing Under the Proposed
Determination
Market participants may incur certain costs in order to clear the
RFR OIS to be added to the clearing requirement in the proposed rule.
For example, to the extent that there are market participants entering
into RFR OIS that are not already clearing interest rate swaps
voluntarily or pursuant to the Commission's prior clearing requirement
determinations, such market participants may incur certain startup and
ongoing costs related to developing technology and infrastructure,
updating or creating new legal agreements, service provider fees, and
collateralization of the cleared positions.\140\ The costs of
collateralization, on the other hand, are likely to vary depending on
whether an entity is subject to the margin requirements for uncleared
swaps \141\ and capital requirements, and the differential between the
cost of capital for the assets they use as collateral and the returns
realized on those assets.
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\140\ These per-entity costs would vary widely depending on the
needs of such market participants. Costs likely would be lower for
market participants who already clear interest rate swaps covered by
the Commission's prior clearing requirement determinations. The
opposite would be true for market participants that start clearing
because of the proposed determination. However, given the high rates
of voluntary clearing, there are likely to be few, if any, new
participants.
\141\ The Commission's margin requirements for uncleared swaps
are codified in subpart E of part 23 of the Commission's
regulations.
---------------------------------------------------------------------------

As noted in Table 6 above, almost all RFR OIS subject to this
proposed determination are already cleared voluntarily, and market
participants currently clearing RFR OIS already realize the benefits of
clearing. Adoption of the proposed determination would ensure that the
percentage of RFR OIS that are cleared would remain high in the future
and that these benefits would continue to be realized. These benefits
include reduced and standardized counterparty credit risk, increased
transparency, and easier swap market access for market participants who
are required to clear. Together, these benefits contribute
significantly to the stability and efficiency of the financial system,
but they are difficult to quantify with any degree of precision.
While there may be a benefit to removing certain swaps from
required clearing, such as fewer costs to market participants who no
longer have to submit such swaps to clearinghouses, in this instance,
the reason the Commission is removing certain swaps referencing IBORs
from the clearing requirement is because they are, with limited
exceptions, no longer offered for clearing. The swap rates that the
Commission is proposing to remove from the clearing requirement, other
than USD LIBOR and SGD SOR-VWAP, should no longer be available or used
by market participants, pursuant to broad international consensus and
industry progress, as described above.\142\ Therefore, the Commission
preliminarily believes that removing these swaps referencing IBORs from
the clearing requirement would not impose additional costs on market
participants and would result in the benefit of market and regulatory
certainty. There may be no meaningful benefit to market participants
from this removal because they generally cannot clear these swaps
today. However, there may be benefits associated with the effort to
reach broad consensus around the transition away from IBORs.
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\142\ Indeed, as noted above, regulators in the United States
have called on market participants to cease new USD LIBOR activity.
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The Commission notes that any potential costs associated with the
proposed determination should be viewed in light of the fact that each
new swap that would be required to be cleared would stand in the place
of a swap that is already subject to required clearing and that almost
all of these swaps are cleared voluntarily.\143\ Liquidity tied to
IBORs has shifted, and will continue to shift, to RFRs as those IBORs
are discontinued or become nonrepresentative. That shift has occurred,
and continues to occur, as a result of numerous market events,
including DCO conversions of IBOR swaps to RFR swaps, the operation of
contractual fallbacks, and new use of RFRs in parallel with declining
liquidity in IBOR swaps. The RFR OIS subject to this proposal are
already widely cleared so that the costs associated with clearing these
swaps are already being incurred.\144\ Accordingly, the Commission
anticipates that the additional cost of compliance for market
participants would be de minimis.
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\143\ As noted above, while the Commission proposes to require
clearing of USD SOFR and SGD SORA swaps effective 30 days after
publication of the final rule in the Federal Register, the
Commission proposes to remove USD LIBOR and SGD SOR-VWAP clearing
requirements on a delayed basis, effective July 1, 2023.
\144\ See section V.C above.
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Request for Comment
The Commission requests comment concerning the costs of clearing

[[Page 32928]]

described above for various market participants and the extent to which
they are already being incurred. The Commission requests comment from
both U.S. and non-U.S. swap counterparties that may be affected by the
proposed determination.
a. Technology, Infrastructure, and Legal Costs
Market participants already clearing swaps may incur costs in
making necessary changes to technology systems to support the clearing
required by the proposed rule if they are not yet clearing RFR OIS. To
the extent that there are market participants who are not currently
clearing RFR OIS, such market participants may incur costs if they need
to implement technology to connect to FCMs that will clear their
transactions.\145\ The costs are likely to depend on the specific
business needs of each entity and therefore would vary widely among
market participants. As a general matter, given that most market
participants already will have undertaken the steps necessary to move
away from the use of IBOR swaps in the cleared interest rate swap
market, the burden associated with required clearing of RFR OIS should
be minimal.\146\
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\145\ The Commission does not have the information necessary to
determine either the costs associated with entities that need to
establish relationships with one or more FCMs or the costs
associated with entities that already have relationships with one or
more FCMs but need to revise their agreements. Commenters are
requested to provide the necessary data where available.
\146\ E.g., Tradeweb Letter (``In effect, the CFTC is not
expanding the existing clearing determinations, rather it will be
applying the existing IBOR determinations to contracts based on the
new RFRs.''); Citadel Letter (``As noted above, OTC derivatives
referencing SOFR are currently being cleared by DCOs in material
volumes, demonstrating that the rule frameworks and operational
infrastructure already exist to support a clearing requirement.
Significant voluntary clearing demonstrates the confidence market
participants have in the current DCO offerings.''); Eurex Letter
(``Eurex Clearing does not believe that adopting a clearing
requirement for swaps referencing SOFR would be any hindrance to
trading activity in those swaps. Any such clearing requirements for
the RFRs, if adopted, were already in effect for the IBOR-based
rates being replaced.'').
---------------------------------------------------------------------------

With regard to costs, market participants who do not currently have
established clearing relationships with an FCM will have to set up and
maintain such a relationship in order to clear swaps that are required
to be cleared. Market participants who transact a limited number of
swaps per year likely will be required to pay monthly or annual fees
that FCMs charge to maintain both the relationship and outstanding swap
positions belonging to the customer. In addition, the FCM is likely to
pass along fees charged by the DCO for establishing and maintaining
open positions. It is likely that most market participants already will
have had experience complying with prior clearing requirements and that
the incremental burdens associated with clearing any of the new RFR OIS
should be minimal, especially given that these products are intended to
replace already widely cleared products.\147\
---------------------------------------------------------------------------

\147\ In responding to the RFI, TD Bank noted that the
implementation of new clearing requirements to address the
transition from IBORs to RFRs ``should not materially increase
costs'' (but should be ``forecasted appropriately to allow firms to
become operationally ready''). TD Bank Letter. JSCC noted that
``DCOs and market participants have already incurred significant
costs to transition LIBOR swaps denominated in non-USD currencies to
alternative reference rates'' and stated that JSCC ``[does] not
believe there would be any additional costs to be borne by DCOs and
market participants if the CFTC includes alternative reference
rates, such as TONA OIS, in the Clearing Requirement.'' JSCC Letter.
ISDA stated that ``[w]hile the changes in [the clearing requirement]
will have a cost attached . . . these costs are part of the overall
cost of LIBOR transition and spread across multiple jurisdictions.''
ISDA Letter. ISDA noted that for institutional clients, additional
costs ``will be incremental as opposed to something completely new
and potentially prohibitive,'' but also noted that ``[f]or smaller
less sophisticated counterparties who do not have to currently
clear, [a new clearing requirement] could be a significant cost that
could deter them from hedging using swaps.'' Id. ISDA requested that
the Commission ``not enact a [clearing requirement] . . . in a way
that increases cost, for instance by providing [a] short notice
period that would require the implementation of tactical solutions
to meet short deadlines.'' Id. ACLI encouraged the Commission to
``consider whether the marginal risk mitigation benefits of an
expanded clearing requirement outweigh the costs of compliance'' in
light of uncleared swap margin rules. ACLI Letter.
---------------------------------------------------------------------------

Request for Comment
The Commission requests comment, including any quantifiable data
and analysis, on the changes that market participants will have to make
to their technological and legal infrastructures in order to clear the
RFR OIS that are subject to the proposed determination. In particular,
the Commission requests comment concerning how many market
participants, if any, may have to establish new relationships with
FCMs, or significantly upgrade those relationships based on the
inclusion of these new products to the clearing requirement.
b. Ongoing Costs Related to FCMs and Other Service Providers
In addition to costs associated with technological and legal
infrastructures, market participants transacting in RFR OIS subject to
the proposed determination will face ongoing costs associated with fees
charged by FCMs. DCOs typically charge FCMs an initial transaction fee
for each cleared interest rate swap its customers enter, as well as an
annual maintenance fee for each open position. The Commission
understands that customers that occasionally transact in swaps are
typically required to pay a monthly or annual fee to each FCM.\148\ As
noted, most RFR OIS transactions are already cleared, so that these
costs are largely being incurred by market participants.
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\148\ The Commission does not have current information regarding
such fees; commenters are requested to provide the necessary data
where available.
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As discussed above, it is difficult to predict precisely how the
proposed requirement to clear RFR OIS will promote the use of swap
clearing, as compared to the use of clearing that would occur in the
absence of the requirement. However, as presented in the data above,
the use of voluntary clearing is so high that the percentage of swaps
that would be cleared following adoption of the rule is unlikely to
increase materially. Some RFR OIS will continue to be uncleared
pursuant the exceptions and exemptions set out in subpart C of part 50
of the Commission's regulations. According to Table 6, the percentage
of swaps that are cleared in USD SOFR is about 95 to 96 percent. The
Commission estimates that about 96 percent of non-inter-affiliate
trades in USD LIBOR fixed-to-floating IRS were cleared as of January
2022.\149\ The Commission anticipates that a similar percentage of RFR
OIS subject to this proposal would continue to be cleared following the
determination given that subpart C of part 50 has not changed. Because
the clearing percentages in Table 6 for non-USD RFR OIS are even higher
than for SOFR OIS, the increase in clearing as a result of this rule
also will likely be de minimis. Any increase in the use of clearing due
to the proposed determination would lead in most cases to an
incremental increase in the transaction costs noted above. However,
because most market participants already will have undertaken the steps
necessary to accommodate the clearing of swaps subject to required
clearing, the Commission anticipates that the burden associated with
clearing RFR OIS should be minimal.
---------------------------------------------------------------------------

\149\ This estimate is based on swaps transacted after the most
recent revisions to subpart C of part 50 went into effect (on or
after December 30, 2020) so it captures all applicable exemptions
from the swap clearing requirement.
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Request for Comment
The Commission requests comment regarding the fee structures of
FCMs in general, and in particular as they relate to the clearing of
the types of RFR OIS covered by the proposed rule.

[[Page 32929]]

c. Costs Related to Collateralization of Cleared Swap Positions
Market participants that enter into RFR OIS subject to the proposed
rule will be required to post initial margin at a DCO. The Commission
understands that the RFR OIS subject to this proposal are already being
widely cleared on a voluntary basis, and so any additional amounts of
initial margin that market participants would be required to post to a
DCO as a result of the proposed determination likely would be
relatively small. In reaching this preliminary view, the Commission
considered situations where (1) uncleared RFR OIS may be otherwise
collateralized; \150\ (2) uncleared RFR OIS between certain SDs and
``financial end-users'' are, or will be, subject to initial and
variation margin requirements under the Commission's margin regulations
for uncleared swaps; \151\ (3) the pricing of certain uncleared swaps
may account for implicit contingent liabilities and counterparty risk;
(4) not all RFR OIS will necessarily be eligible for clearing if they
have terms that prevent them from being cleared; \152\ and (5) certain
entities may elect an exception or exemption from the clearing
requirement.\153\
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\150\ E.g., under the terms of a credit support annex.
\151\ Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016); Margin
Requirements for Uncleared Swaps for Swap Dealers and Major Swap
Participants, 85 FR 71246 (Nov. 9, 2020).
\152\ For example, if such swaps do not meet the specifications
set forth in proposed revised regulation Sec. 50.4(a).
\153\ See subpart C of part 50 (Exceptions and Exemptions to the
Clearing Requirement).
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The Commission acknowledges that market participants who are not
clearing voluntarily and not otherwise required to post margin or
collateral may incur costs related to funding collateral once they are
required to clear. The greater the funding cost relative to the rate of
return on the asset used as initial margin, the greater the cost of
procuring collateral.\154\ Quantifying this cost with any precision is
challenging because different entities may have different funding costs
and may choose assets with different rates of return.
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\154\ Certain entities, such as pension funds and asset
managers, may use as initial margin assets that they already own. In
such cases, market participants would not incur funding costs in
order to post initial margin.
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Request for Comment
The Commission requests comments on all aspects of quantifying the
cost of funding initial margin that would be required to be posted to a
DCO pursuant to this proposed rule. In particular, the Commission
requests comment on funding costs that market participants may face due
to interest rates on bonds issued by a sovereign nation that also
issues the currency in which the RFR OIS subject to this proposed
determination is denominated. CME, LCH, and Eurex accept as initial
margin bonds issued by several sovereigns, and market participants may
post such bonds as initial

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