Rule2022-17736
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
August 24, 2022
Effective
September 23, 2022
Issuing agencies
Commodity Futures Trading Commission
Abstract
The Commodity Futures Trading Commission (Commission or CFTC) is modifying its existing interest rate swap clearing requirement regulations under applicable provisions of the Commodity Exchange Act (CEA) due to 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 amendments update 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) to reflect the market shift away from swaps that reference IBORs to swaps that reference RFRs.
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[Federal Register Volume 87, Number 163 (Wednesday, August 24, 2022)]
[Rules and Regulations]
[Pages 52182-52221]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-17736]
[[Page 52181]]
Vol. 87
Wednesday,
No. 163
August 24, 2022
Part III
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; Final Rule
Federal Register / Vol. 87 , No. 163 / Wednesday, August 24, 2022 /
Rules and Regulations
[[Page 52182]]
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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: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is modifying its existing interest rate swap clearing requirement
regulations under applicable provisions of the Commodity Exchange Act
(CEA) due to 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 amendments update 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) to reflect the market shift away from swaps
that reference IBORs to swaps that reference RFRs.
DATES: This rule is effective September 23, 2022, except for amendatory
instructions 3 and 5, which are effective July 1, 2023. Specific
compliance dates are discussed in the SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Deputy Director,
at 202-418-5684 or <a href="/cdn-cgi/l/email-protection#b9cad3d6cadcc9d1cad6d7f9dadfcdda97ded6cf"><span class="__cf_email__" data-cfemail="a1d2cbced2c4d1c9d2cecfe1c2c7d5c28fc6ced7">[email protected]</span></a>; or Daniel O'Connell, Special
Counsel, at 202-418-5583 or <a href="/cdn-cgi/l/email-protection#21454e424e4f4f444d4d61424755420f464e57"><span class="__cf_email__" data-cfemail="afcbc0ccc0c1c1cac3c3efccc9dbcc81c8c0d9">[email protected]</span></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 Existing Interest Rate Swap Clearing Requirement
B. End of LIBOR
C. Update on Work by DCOs To Support the Transition to RFRs
D. Update on Work by Market Participants To Support the
Transition to RFRs
II. Domestic and International Coordination Efforts
A. Domestic Coordination Efforts
B. International Coordination Efforts
C. Interest Rate Swap Clearing Requirements in Other
Jurisdictions
III. Overview of Comment Letters Received
A. Scope of Amendments--Coverage of OIS and Removal of Existing
Rules
B. Implementation, Cross-Border Coordination, and Operational
Considerations
C. Issues Beyond the Scope of the Rulemaking
IV. Final Amendments to Regulation Sec. 50.4(a)
A. Scope of Amendments--Coverage of OIS and Removal of Existing
Rules
B. Clarification Regarding OIS Product Specifications
C. Swaps Referencing CHF SARON and SGD SORA
D. RFR-IBOR Basis Swaps
V. Determination Analysis for RFR OIS
A. General Description of Information Considered
B. Consistency With DCO Core Principles Under Section 2(h) of
the CEA
C. Conclusions Regarding Consideration of Section 2(h)'s Five
Statutory Factors
VI. Implementation Schedule
A. Overview of Changes to Regulation Sec. 50.26(a)
B. Consideration of Comments on Implementation
C. EUR [euro]STR, GBP SONIA, CHF SARON, and JPY TONA OIS
Implementation
D. USD SOFR and SGD SORA OIS Implementation
E. Removal of Rules for Swaps No Longer Offered for Clearing
F. Removal of USD LIBOR and SGD SOR-VWAP Swap Clearing
Requirement
G. Technical Changes
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
Action
D. Costs and Benefits of the Amendments as Compared to
Alternatives
E. Section 15(a) Factors
VIII. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Antitrust Laws
D. Congressional Review Act
I. Background
A. Commission's Existing Interest Rate 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 determination were
submitted by DCOs pursuant to CEA section 2(h)(2)(B)(i) and
regulation Sec. 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 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
[[Page 52183]]
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 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 required clearing for four classes of
interest rate swaps having six 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 also 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 December 2021, there was an estimated $475 trillion in
outstanding notional of interest rate swaps, which represents
approximately 79% of the total outstanding notional of all over-the-
counter (OTC) derivatives. See BIS, ``Interest rate derivatives,''
Table D7, H2 2021, updated May 12, 2022, 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 market,'' Table D5.1, H2 2021, updated May 12, 2022,
available at <a href="https://stats.bis.org/statx/srs/table/d5.1?f=pdf">https://stats.bis.org/statx/srs/table/d5.1?f=pdf</a>; BIS,
``OTC derivatives statistics at end-December 2021,'' May 12, 2022,
available at <a href="https://www.bis.org/publ/otc_hy2205.htm">https://www.bis.org/publ/otc_hy2205.htm</a>; BIS, ``Global
OTC derivatives market,'' Table D5.2, H2 2021, updated May 12, 2022,
available at <a href="https://stats.bis.org/statx/srs/table/d5.2?f=pdf">https://stats.bis.org/statx/srs/table/d5.2?f=pdf</a>.
\10\ 17 CFR 50.4(a).
\11\ First Determination, 77 FR 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, JPY, and EUR, referencing USD LIBOR,
GBP LIBOR, JPY LIBOR, and the Euro Interbank Offered Rate (EURIBOR),
respectively. The First Determination also included OIS denominated in
EUR referencing the Euro Overnight Index Average (EONIA), as well as
OIS denominated in USD referencing FedFunds and GBP referencing the
Sterling Overnight Index Average (SONIA). The Commission observed that
interest rate swaps referencing those rates had significant outstanding
notional amounts and trading liquidity.\12\ The First Determination was
implemented throughout 2013 by type of market participant pursuant to
regulation Sec. 50.25, in subpart B of part 50 of the Commission's
regulations.
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\12\ Id. at 74309.
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The Commission adopted its second clearing requirement
determination for interest rate swaps (Second Determination) in
2016.\13\ The Second Determination 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), and was implemented between December 2016 and
October 2018 based on the effective dates of analogous clearing
mandates adopted by authorities in non-U.S. jurisdictions.\14\ 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, interest rate swap clearing mandates.\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\
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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 71202-71228.
\15\ Second Determination, 81 FR 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 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 a swap dealer
located in the United States. Id. at 71203.
\16\ Id. at 71205. These IBOR rates also were discussed
specifically in the notice of proposed rulemaking (NPRM). 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, 87 FR
32898 at 32914-32915 (May 31, 2022) (NPRM).
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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 panels 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, one-week, one-month,
two-month, three-month, six-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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Government investigations into LIBOR that occurred nearly a decade
ago, as well as a decline in the volume of interbank lending
transactions that LIBOR was intended to measure, gave rise to concerns
regarding the integrity and reliability of LIBOR and other IBORs.\18\
Although LIBOR was subject to
[[Page 52184]]
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, one-week, two-month, and 12-month
tenors;
(iv) GBP LIBOR in the overnight, one-week, two-month, and 12-month
tenors; and
(v) USD LIBOR in the one-week and two-month tenors.
The FCA further determined that GBP and JPY LIBOR in one-month,
three-month, and six-month tenors would become nonrepresentative after
December 31, 2021.\22\ 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 one-month, three-month, and six-month tenors
would not be representative after that date.\23\ At this time, EUR,
CHF, JPY, and GBP LIBOR in all tenors, and USD LIBOR in the one-week
and two-month tenors, have ceased publication or become
nonrepresentative of the underlying market they are intended to
measure.
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\22\ FCA Announcement on LIBOR Cessation. The FCA stated that
once a LIBOR rate becomes nonrepresentative, its representativeness
will not be restored.
\23\ Id.
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The circumstances surrounding the transition from IBORs to RFRs are
the result of significant private and public sector coordinated
efforts.\24\ 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.\25\ 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) \26\
as its preferred alternative to USD LIBOR.\27\ The ARRC developed a
Paced Transition Plan, which has now been completed, to facilitate an
orderly transition from USD LIBOR to USD SOFR.\28\
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\24\ 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 final
rulemaking to refer to alternative reference rates.
\25\ For additional background information, see generally Swap
Clearing Requirement To Account for the Transition from LIBOR and
Other IBORs to Alternative Reference Rates, 86 FR 66476 at 66480
(Nov. 23, 2021) (Request for Information (RFI)).
\26\ 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 (OFR).
\27\ 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>.
\28\ 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. All steps
in this plan have been completed as of July 29, 2021.
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Table 1 that follows this paragraph contains a non-exhaustive list
of RFRs that have been identified to replace IBORs. Each of these RFRs
is currently being published.\29\
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\29\ 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.
Table 1--RFRs Identified for IBORs
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Currency Index Identified RFR RFR administrator Secured
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AUD..................... Bank Bill Swap Rate Reserve Bank of Reserve Bank of No.
(BBSW). Australia Interbank Australia.
Overnight Cash Rate
(AONIA).
CAD..................... Canadian Dollar Canadian Overnight Bank of Canada....... Yes.
Offered Rate (CDOR). Repo Rate Average
(CORRA).
CHF..................... LIBOR................ Swiss Average Rate SIX Swiss Exchange... Yes.
Overnight (SARON).
EUR..................... LIBOR................ Euro Short-Term Rate European Central Bank No.
([euro]STR). (ECB).
EONIA................ [euro]STR............ ECB.................. No.
EURIBOR.............. [euro]STR............ ECB.................. No.
GBP..................... LIBOR................ SONIA................ Bank of England...... No.
HKD..................... Hong Kong Interbank Hong Kong Dollar Treasury Market No.
Offered Rate (HIBOR). Overnight Index Association.
Average (HONIA).
[[Page 52185]]
JPY..................... LIBOR................ Tokyo Overnight Bank of Japan........ No.
Average Rate (TONA).
MXN..................... Term Interbank Overnight TIIE....... Banco de Mexico...... Yes.
Equilibrium Interest
Rate (TIIE).
SGD..................... SOR.................. Singapore Overnight Association of Banks No.
Rate Average (SORA). in Singapore (ABS).
Singapore Interbank SORA................. ABS.................. No.
Offered Rate (SIBOR).
USD..................... LIBOR................ SOFR................. FRBNY................ Yes.
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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,\30\ and
Commission staff have issued no-action letters to facilitate the
transition.\31\ 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.\32\
SOFR First was implemented in four phases between July 26, 2021 and
December 16, 2021.\33\ SOFR First mirrors similar best practices
adopted in other jurisdictions to increase activity in swaps
referencing RFRs.\34\
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\30\ See, e.g., FSB, FSB Statement Welcoming Smooth Transition
Away from LIBOR, Apr. 5, 2022, available at <a href="https://www.fsb.org/wp-content/uploads/P050422.pdf">https://www.fsb.org/wp-content/uploads/P050422.pdf</a>.
\31\ See, e.g., CFTC Letter Nos. 20-25 and 21-28, available at
<a href="https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm">https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm</a>.
\32\ 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>.
\33\ 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>. SOFR First spurred a significant
shift in liquidity toward USD SOFR, particularly in the interbank
market. See J.P. Morgan, SOFR Takes Over, Mar. 30, 2022, available
at <a href="https://www.jpmorgan.com/solutions/cib/markets/libor-sofr-transition">https://www.jpmorgan.com/solutions/cib/markets/libor-sofr-transition</a>; Chatham Financial, ``LIBOR transition update--2022,''
Apr. 19, 2022, available at <a href="https://www.chathamfinancial.com/insights/libor-transition-update">https://www.chathamfinancial.com/insights/libor-transition-update</a>.
\34\ 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>; European Securities and Markets
Authority (ESMA), ``Recommendations from the Working Group on Euro
Risk-Free Rates on the switch to risk free rates in the interdealer
market,'' July 1, 2021, available at <a href="https://www.esma.europa.eu/sites/default/files/library/esma81-391-73_eur_rfr_wg_statements_on_estr_first_and_ccs.pdf">https://www.esma.europa.eu/sites/default/files/library/esma81-391-73_eur_rfr_wg_statements_on_estr_first_and_ccs.pdf</a>.
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C. Update on Work by DCOs To Support the Transition to RFRs
As explained in the NPRM,\35\ the Chicago Mercantile Exchange Group
(CME),\36\ the London Stock Exchange Group (LSEG),\37\ and Eurex
Clearing AG (Eurex) all operate or are registered DCOs that offer for
clearing RFR swaps subject to this final rule. Japan Securities
Clearing Corporation (JSCC), an exempt DCO, offers JPY TONA swaps for
clearing. OTC Clearing Hong Kong Limited (HKEX), another exempt DCO,
offers USD SOFR and EUR [euro]STR swaps for clearing.\38\ Exempt DCOs,
such as JSCC and HKEX, do not offer customer clearing to U.S.
customers.
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\35\ NPRM, 87 FR 32902.
\36\ CME Group is the parent company of CME.
\37\ LSEG has majority ownership of LCH Group, which operates
LCH.
\38\ 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>.
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DCOs played an important role in the transition from IBORs to RFRs
by offering clearing services for RFR swaps and converting cleared EUR
EONIA and GBP, EUR, CHF, and JPY LIBOR swaps to RFR OIS.\39\ These
efforts have helped to facilitate a smooth transition from cleared IBOR
swaps to cleared RFR swaps.
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\39\ 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.
NPRM, 87 FR 32902; see also RFI, 86 FR 66484.
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In responding to the Commission's November 23, 2021 RFI regarding
updates to the clearing requirement to account for the transition to
RFRs, CME, LSEG, and Eurex also discussed plans to convert cleared USD
LIBOR swaps to market standard USD SOFR OIS. In April 2022, LCH
published a consultation on its proposed conversion process.\40\ Having
learned from the conversion process for non-USD LIBOR and EUR EONIA
interest rate swaps at the end of 2021 and received input based on this
consultation, LCH is ``working closely with industry bodies, such as
ARRC and [International Swaps and Derivatives Association (ISDA)], and
with [its] user-base, to ensure clarity around the [USD LIBOR]
transition process.'' \41\ In response to LCH's consultation, market
participants have not raised any operational concerns about the USD
LIBOR swap conversion process.
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\40\ LCH, USD LIBOR Contract Conversion, Apr. 2022, available at
<a href="https://www.lch.com/system/files/media_root/LCH_USD%20LIBOR%20Conversion_Consultation.pdf">https://www.lch.com/system/files/media_root/LCH_USD%20LIBOR%20Conversion_Consultation.pdf</a> (proposing a two-stage
conversion based on product category over two weekends in April and
May 2023).
\41\ LCH, LCH Benchmark Reform Overview, available at <a href="https://www.lch.com/Services/swapclear/benchmark-reform">https://www.lch.com/Services/swapclear/benchmark-reform</a>.
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Since the publication of the NPRM, CME and Eurex published more
detailed information regarding their plans to convert cleared USD LIBOR
contracts to USD SOFR OIS, ahead of the June 30, 2023 end date for USD
LIBOR.\42\ Additionally, JSCC converted all its JPY LIBOR interest rate
swaps into JPY TONA swaps pursuant to plans announced in 2021.\43\
Finally, HKEX implemented RFR fallback rates identified by the ISDA in
its IBOR Fallbacks Supplement for the interest rate swaps it offers for
clearing.\44\
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\42\ CME, CME Conversion for USD LIBOR Cleared Swaps, June 2022,
available at <a href="https://www.cmegroup.com/trading/interest-rates/files/cme-conversion-for-usd-libor-cleared-swaps.pdf">https://www.cmegroup.com/trading/interest-rates/files/cme-conversion-for-usd-libor-cleared-swaps.pdf</a> (proposing a two-
stage conversion (based on product category) occurring on two dates
in May and July 2023); Eurex, ``Eurex Clearing Readiness Newsflash:
EurexOTC Clear: Details on OTCClear transition plan for transactions
referencing the USD Libor benchmark,'' June 8, 2022, available at
<a href="https://www.eurex.com/ec-en/find/circulars/Eurex-Clearing-Readiness-Newsflash-EurexOTC-Clear-Details-on-OTCClear-transition-plan-for-transactions-referencing-the-USD-Libor-benchmark-3103098">https://www.eurex.com/ec-en/find/circulars/Eurex-Clearing-Readiness-Newsflash-EurexOTC-Clear-Details-on-OTCClear-transition-plan-for-transactions-referencing-the-USD-Libor-benchmark-3103098</a> (proposing
a conversion on a single date ahead of June 30, 2023).
\43\ This conversion process is discussed in JSCC's response to
the RFI, available at <a href="https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx">https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx</a>.
\44\ HKEX, Benchmark Reform, Feb. 4, 2021, available at <a href="https://www.hkex.com.hk/Services/Clearing/OTC-Clear/Special-Topics/Benchmark-Reform?sc_lang=en">https://www.hkex.com.hk/Services/Clearing/OTC-Clear/Special-Topics/Benchmark-Reform?sc_lang=en</a>. For further discussion of ISDA's
fallbacks, see RFI, 86 FR 66483-66484.
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[[Page 52186]]
To be clear, these final rules apply only to swaps entered into on
or after the implementation dates discussed below. As was in the case
with the First Determination in 2012 and the Second Determination in
2016, only these new swaps are required to be cleared. Market
participants may wish to clear other interest rate swaps in their
portfolios on a voluntary basis, as has been the case with a majority
of RFR OIS. As reflected in the data presented below, the overwhelming
majority of RFR OIS are being voluntarily cleared already.
D. Update on Work by Market Participants To Support the Transition to
RFRs
Market participants also play a critical role in the transition
from reliance on IBORs to the adoption of RFRs through engagement with
RFR working groups, such as ARRC, and the provision of trading
liquidity in interest rate swaps referencing RFRs.\45\ As explained in
the NPRM, many RFR swaps are now voluntarily cleared by market
participants in large proportions.\46\ In its recent public
announcements, ISDA reported that the proportion of cleared OTC and
exchange-traded interest rate derivatives denominated in USD and
referencing SOFR climbed to a record high of more than 50% in May
2022.\47\
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\45\ ISDA 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, 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 66483-66484 (discussing ISDA's IBOR fallbacks
protocol and supplement).
\46\ NPRM, 87 FR 32903.
\47\ ISDA, ISDA-Clarus RFR Adoption Indicator, May 2022,
available at <a href="https://www.isda.org/a/AlWgE/ISDA-Clarus-RFR-Adoption-Indicator-May-2022.pdf?_zs=gOSgP1&_zl=PRxk6">https://www.isda.org/a/AlWgE/ISDA-Clarus-RFR-Adoption-Indicator-May-2022.pdf?_zs=gOSgP1&_zl=PRxk6</a>. See also ISDA,
SwapsInfo, Interest Rate and Credit Derivatives Weekly Trading
Volume: Week Ending June 10, 2022, June 13, 2022, available at
<a href="http://analysis.swapsinfo.org/2022/06/interest-rate-and-credit-derivatives-weekly-trading-volume-week-ending-june-10-2022/">http://analysis.swapsinfo.org/2022/06/interest-rate-and-credit-derivatives-weekly-trading-volume-week-ending-june-10-2022/</a> (showing
for the week ending June 10, 2022 a year-to-date increase over 2021
of 258% in traded notional and 364% in trade count for OIS, versus a
2% increase in traded notional and 16% decrease in trade count for
fixed-to-floating swaps).
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II. Domestic and International Coordination Efforts
The global shift from IBORs to RFRs represents a historic effort by
international bodies such as IOSCO and FSB, regulators, cross-
jurisdictional working groups, market infrastructure providers, market
participants, and others, to move the global interest rate swap market
toward more reliable benchmarks.\48\ 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 makes changes to the swap clearing requirement. As
with prior clearing requirement determinations, the Commission engaged
in ongoing consultation and coordination with regulatory authorities
and with market participants.
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\48\ See generally NPRM, 87 FR 32903-32904; and RFI, 86 FR
66478-66482.
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A. Domestic Coordination Efforts
The Commission is committed to working with domestic authorities,
such as the FRB, FRBNY, and the Securities and Exchange Commission, to
ensure transparency in its efforts and, to the greatest extent
possible, consistency in the transition from IBORs to RFRs. For
example, the Commission sought input from domestic authorities through
this rulemaking process and continued its participation in relevant
coordinating committees. Commission staff also shared a draft of this
final rulemaking with certain domestic authorities.
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.\49\ 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.\50\ 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 (1)
promote regulatory consistency and certainty and (2) prevent the
evasion of clearing requirements.\51\
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\49\ Section 752 can be found in Title VII of the Dodd-Frank
Wall Street Reform and Consumer Protection Act. This section is not
codified in the CEA.
\50\ Second Determination, 81 FR 71203.
\51\ E.g., Second Determination, 81 FR 71223 (noting that ``the
interest rate swaps market is global and market participants are
interconnected''); First Determination, 77 FR 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.'').
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In particular, as part of the ongoing regulatory dialogue among
authorities, Commission staff consulted with counterparts, including
those at Australian Securities and Investments Commission (ASIC), Bank
of England, ESMA, Hong Kong Securities and Futures Commission
(HKSFC),\52\ Japanese Financial Services Agency (JFSA), Monetary
Authority of Singapore (MAS), and Swiss Financial Market Supervisory
Authority (FINMA). This type of dialogue reflects an effort to ensure
consistency in interest rate swap clearing requirements across
jurisdictions.
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\52\ In Hong Kong, clearing rules are issued by HKSFC in
consultation with the Hong Kong Monetary Authority (HKMA). For
further information please see the FAQs issued by Hong Kong
authorities, available at <a href="https://www.sfc.hk/-/media/EN/files/SOM/OTC/FAQ-CLearing-Rules-20220103-FINAL.pdf">https://www.sfc.hk/-/media/EN/files/SOM/OTC/FAQ-CLearing-Rules-20220103-FINAL.pdf</a>.
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The discussion below sets forth relevant updates and coordination
efforts among international authorities. As part of this rulemaking
process, the Commission sought input from overseas counterparts 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 and shared information regarding this final rulemaking
with international counterparts.\53\
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\53\ Commission staff also participate in a number of
international groups, including FSB Official Sector Steering Group,
that work on IBOR transition issues.
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C. Interest Rate Swap Clearing Requirements in Other Jurisdictions
Regulators and public-private working groups have been working to
identify, develop, and encourage market uptake of interest rate swaps
referencing RFRs to replace interest rate swaps referencing IBORs. As
relevant to these amendments, RFRs identified as alternatives for
IBORs, in addition to SOFR for USD, include: (i) SONIA for GBP; (ii)
SARON for CHF; (iii) TONA for JPY; and (iv) [euro]STR for EUR.
In finalizing these amendments, the Commission considered relevant
changes to clearing requirements in other jurisdictions. As noted in
the NPRM, the Commission sought to
[[Page 52187]]
harmonize these part 50 amendments to the greatest extent possible with
those adopted by international counterparts. This goal is consistent
with the Commission's approach in the Second Determination and the
views of commenters on both the NPRM and the RFI. The discussion that
follows addresses specific IBOR swap reform efforts by jurisdiction.
1. Australia
On December 6, 2021, ASIC published a consultation proposing
changes to its interest rate swap clearing requirement. The
consultation proposed (i) removing contracts referencing EUR EONIA from
the OIS class and replacing them with OIS referencing EUR [euro]STR
with a termination date range of seven days to two years; (ii) removing
contracts referencing JPY LIBOR from the fixed-to-floating swap, basis
swap, and FRA classes and replacing them with OIS referencing JPY TONA
with a termination date range of seven days to 30 years; and (iii)
removing contracts referencing GBP LIBOR from the fixed-to-floating
swap, basis swap, and FRA classes, and extending the termination date
range for OIS referencing GBP SONIA to include seven days to 50
years.\54\
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\54\ ASIC, Consultation Paper 353, ``Proposed amendments to the
ASIC Derivative Transaction Rules (Clearing) 2015,'' Dec. 6, 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>.
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On May 12, 2022, Australia finalized changes to its clearing
requirement. There was only one change from the proposal: the
termination date range for EUR-denominated [euro]STR OIS required to be
cleared was expanded from two years to three years, in line with final
European Union (EU) rules.\55\ In its explanatory statement, ASIC
referenced the Commission's NPRM and suggested ASIC may be waiting for
final rule changes to part 50 before updating its USD-denominated
interest rate swap clearing obligation.\56\
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\55\ ASIC Derivative Transaction Rules (Clearing) Amendment
Instrument 2022/224, May 12, 2022 (ASIC Derivative Transaction
Rules), available at <a href="https://www.legislation.gov.au/Details/F2022L00697">https://www.legislation.gov.au/Details/F2022L00697</a>. ASIC's adopted termination date range for EUR [euro]STR
OIS is consistent with changes adopted in the UK and EU and proposed
in Switzerland. It is also consistent with the termination date
range established for EUR [euro]STR OIS in this final rulemaking.
\56\ Id. (noting ASIC would revisit the removal and replacement
of swaps referencing USD LIBOR ``once the US authorities settled
their approach'').
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2. European Union
In the EU, the Working Group on Euro Risk-Free Rates, convened in
2018 by the ECB in connection with Belgian Financial Services, ESMA,
and European Commission (EC), identified EUR [euro]STR as its preferred
alternative to EUR EONIA, which ceased publication on January 3,
2022.\57\
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\57\ 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>.
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In 2021, ESMA published a consultation proposing to (i) remove
swaps referencing EUR EONIA from the OIS class and replace them with
swaps referencing EUR [euro]STR with a termination date range of seven
days to three years; (ii) remove swaps referencing GBP LIBOR from the
fixed-to-floating swap, basis swap, and FRA classes and extend the
termination date range for OIS referencing GBP SONIA to include seven
days to 50 years; (iii) remove swaps referencing JPY LIBOR from the
fixed-to-floating and basis swap classes; and (iv) add swaps
referencing USD SOFR to the OIS class with a termination date range of
seven days to three years.\58\ The changes were proposed to come into
force on the later of January 3, 2022, or 20 days after publication in
the Official Journal of the European Union.
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\58\ ESMA, Consultation Paper, ``On the clearing and derivative
trading obligations in view of the benchmark transition,'' July 9,
2021, at 37-39, 58-59, available at <a href="https://www.esma.europa.eu/sites/default/files/library/consultation_paper_on_the_co_and_dto_for_swaps_referencing_rfrs.pdf">https://www.esma.europa.eu/sites/default/files/library/consultation_paper_on_the_co_and_dto_for_swaps_referencing_rfrs.pdf</a>.
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On February 8, 2022, ESMA adopted final regulatory technical
standards (RTS), which also removed swaps referencing USD LIBOR from
the fixed-to-floating swap, basis swap, and FRA classes.\59\ These RTS
changes were approved by the EC and published on May 17, 2022.
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\59\ Commission Delegated Regulation (EU) 2022/750 of 8 February
2022 amending the regulatory technical standards laid down in
Delegated Regulation (EU) 2015/2205 as regards the transition to new
benchmarks referenced in certain OTC derivative contracts (Text with
EEA relevance), May 17, 2022, available at <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32022R0750&qid=1654283051240">https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32022R0750&qid=1654283051240</a>. See also 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 31 (ESMA Final Report), 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>.
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On July 11, 2022, ESMA proposed adding OIS referencing JPY TONA
(seven days to 30 years) to its clearing obligation, as well as
expanding the termination date range for OIS referencing USD SOFR to
include seven days to 50 years.\60\ ESMA noted trading activity
increased for USD SOFR activity up to and including 50 years. In terms
of implementation timing, ESMA considered it unnecessary to provide a
specific implementation date. Rather, ESMA proposed that its modified
clearing obligation for USD SOFR OIS, and its new clearing obligation
for JPY TONA OIS, would take effect on the twentieth day following
publication of the final RTS, as per common practice. ESMA also
indicated that it will analyze the feedback received on its
consultation and to publish final rules by the end of 2022 or beginning
of 2023.
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\60\ ESMA, Consultation Paper, ``On the clearing and derivative
trading obligations in view of the 2022 status of the benchmark
transition,'' July 11, 2022, available at <a href="https://www.esma.europa.eu/file/124582/download?token=rnNMa9ak">https://www.esma.europa.eu/file/124582/download?token=rnNMa9ak</a>.
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3. Hong Kong
HKSFC and HKMA have jurisdiction over the clearing obligation in
Hong Kong. As of September 1, 2016, clearing mandate rules promulgated
jointly by HKSFC and HKMA require that swaps between certain local and
foreign-incorporated entities covering fixed-to-floating and basis
swaps denominated in USD, GBP, and JPY each referencing LIBOR, fixed-
to-floating and basis swaps denominated in EUR referencing EURIBOR, and
fixed-to-floating and basis swaps denominated in HKD referencing HIBOR
be cleared.\61\ The same mandate requires that OIS denominated in USD
referencing Fed Funds, EUR referencing EONIA, and GBP referencing SONIA
be cleared.
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\61\ The Securities and Futures (OTC Derivative Transactions--
Clearing and Record Keeping Obligations and Designation of Central
Counterparties) Rules impose a clearing obligation on transactions
between prescribed persons, including local and foreign (i) licensed
corporations, (ii) authorized financial institutions, and (iii)
approved money brokers, that have reached the clearing threshold of
USD $20 billion during the applicable three-month calculation
period. In addition, any transactions between such a prescribed
person and a financial services provider must be cleared. Financial
services providers are designated by HKSFC, with the consent of
HKMA. Securities and Futures (OTC Derivative Transactions--Clearing
and Record Keeping Obligations and Designation of Central
Counterparties) Rules, The Government of the Hong Kong Special
Administrative Region Gazette, available at <a href="http://www.gld.gov.hk/egazette/pdf/20162005/es22016200528.pdf">http://www.gld.gov.hk/egazette/pdf/20162005/es22016200528.pdf</a>.
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A recent publication of frequently asked questions indicated that
``certain indexes may not be relevant if they are no longer maintained.
For example, we do not expect HIBOR-ISDC will be used as it is no
longer maintained by [ISDA]. The list of indexes may evolve over time
but changes will be subject to consultation and the industry will be
given time to make necessary arrangement before changes are
implemented.'' \62\ The list of designated
[[Page 52188]]
central counterparties (CCPs) in Hong Kong includes CME, JSCC, LCH, and
HKEX.
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\62\ Frequently Asked Questions on the Implementation and
Operation of the Mandatory Clearing Regime, January 2022, available
at <a href="https://www.sfc.hk/en/faqs/OTC-derivatives">https://www.sfc.hk/en/faqs/OTC-derivatives</a>. However, HKMA
recently noted that there is no plan to discontinue HIBOR. HKMA,
Reform of Interest Rate Benchmarks, Feb. 2, 2022, available at
<a href="https://www.hkma.gov/hk/eng/key-functions/banking/banking-regulatory-and-supervisory-regime/reform-of-interest-rate-benchmarks/">https://www.hkma.gov/hk/eng/key-functions/banking/banking-regulatory-and-supervisory-regime/reform-of-interest-rate-benchmarks/</a>.
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4. Japan
On December 6, 2021, proposed changes to JFSA's clearing rules
became effective.\63\ The changes removed contracts referencing three-
month and six-month JPY LIBOR from the fixed-to-floating swap class and
replaced them with OIS referencing JPY TONA with a termination date
range of seven days to 40 years.\64\ In a May 2022 report, Bank of
Japan stated that a smooth transition from JPY LIBOR has been achieved
due to JFSA and Bank of Japan support of efforts by financial
institutions and market participants.\65\ The report went on to
indicate that ``[f]uture challenges include the transition from USD
LIBOR, for which the publication of some of the tenor settings will be
ceased at the end of June 2023, and the development of infrastructure
to facilitate the smooth use of JPY interest rate benchmarks to replace
LIBOR.'' \66\
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\63\ Prior to implementation of the changes, Bank of Japan urged
market participants to cease entering new JPY LIBOR transactions by
the end of September 2021 and announced that JPY TONA would become
the primary replacement RFR for JPY LIBOR interest rate swaps. Bank
of Japan, ``Preparations for the discontinuation of LIBOR in the JPY
interest rate swaps market,'' Mar. 26, 2021, available at <a href="https://www.boj.or.jp/en/paym/market/jpy_cmte/cmt210326c.pdf">https://www.boj.or.jp/en/paym/market/jpy_cmte/cmt210326c.pdf</a>.
\64\ Although JFSA does not clearly prescribe a termination date
range in its public notice regarding its JPY TONA clearing
requirement, JSCC rules provide for the clearing of JPY TONA OIS
with a termination date range of seven 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>.
\65\ Review of JPY LIBOR Transition and Future Initiatives, Bank
of Japan Review, May 2022, available at <a href="http://www.fsa.go.jp">www.fsa.go.jp</a>.
\66\ Id.
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Japanese authorities accomplished the smooth transition from swaps
referencing JPY LIBOR to JPY TONA OIS in coordination with JSCC. As
JSCC explains in its comment letter,\67\ the conversion of JPY IRS
referencing LIBOR was completed without any issue and market liquidity
has now completely shifted to JPY TONA OIS. JSCC no longer accepts
clearing of any new JPY interest rate swaps referencing LIBOR. As
discussed further below, JSCC now clears increased volumes of JPY TONA
OIS.\68\
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\67\ A complete discussion of comment letters received in
response to the NPRM is found in section III.
\68\ It is the Commission's understanding that under Japanese
law, all swaps entered into by two Japanese entities must be cleared
through a CCP located in Japan.
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5. Singapore
With regard to SGD denominated interest rate swaps, MAS established
the Steering Committee for SOR & SIBOR Transition to SORA. This group
has been working to oversee a transition from SGD SOR-VWAP to SGD
SORA.\69\ SGD SOR-VWAP relies on USD LIBOR as an input and is expected
to be discontinued across all tenors after June 30, 2023.\70\
Commission staff updated MAS regarding the status of IBOR OIS
conversion efforts as part of this rulemaking process and staff
identified no major concerns. Additional discussion of SGD SORA OIS is
included below.
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\69\ ABS, 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>.
\70\ Steering Committee for SOR & SIBOR Transition to SORA,
Update to the SORA Market Compendium: Transition from SOR to SORA,
Nov. 17, 2021, at 4, available at <a href="https://www.abs.org.sg/docs/library/sora-market-compendium-on-the-transition-from-sor-to-sora-version-1-1.pdf">https://www.abs.org.sg/docs/library/sora-market-compendium-on-the-transition-from-sor-to-sora-version-1-1.pdf</a>.
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6. Switzerland
On May 9, 2022, FINMA launched a consultation on amendments to its
Financial Market Infrastructure Ordinance to, among other things,
update the list of interest rate swaps subject to mandatory clearing.
The consultation closed on July 5, 2022. In relevant part, the proposal
would require clearing of the following OIS: (i) EUR [euro]STR OIS for
a termination date range of seven days to three years; (ii) GBP SONIA
OIS for a termination date range of seven days to 50 years; and (iii)
USD SOFR OIS for a termination date range of seven days to three
years.\71\
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\71\ Ordinance of the Federal Financial Market Supervisory
Authority on the Financial Market Infrastructure and Market Behavior
in Securities and Derivatives Trading, May 9, 2022, available at
https://www.finma.ch/~/media/finma/dokumente/dokumentencenter/
anhoerungen/laufende-anhoerungen/20220509-
finanzmarktinfrastrukturverordnung/
20220509_finfrav_finma_anhoerung_verordnung.pdf?sc_lang=de&hash=17383
BC6490B694C7CC2D82354100AFB (translated from original German).
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The publicly available English language documents state that
proposed changes to FINMA's clearing mandate ``will be adjusted in line
with foreign legal developments to the altered market conditions
resulting from benchmark reform,'' and that, more specifically, FINMA
will ``align[ ] itself closely with EU law.'' \72\ The consultation
states that adoption of the revised ordinance is planned for the third
quarter of 2022, with an effective date in early 2023.
---------------------------------------------------------------------------
\72\ FINMA, ``FINMA Financial Market Infrastructure Ordinance--
partial revision,'' Key Points, May 9, 2022, available at https://
www.finma.ch/~/media/finma/dokumente/dokumentencenter/anhoerungen/
abgeschlossene-anhoerungen/20220509-
finanzmarktinfrastrukturverordnung/
20220509_finfrav_finma_anhoerung_kernpunkte.pdf?sc_lang=en&hash=39645
D542F56C608D72C1A8C4D408580; FINMA, Press Release, ``FINMA to adjust
FinMIO-FINMA,'' May 9, 2022, available at https://www.finma.ch/~/
media/finma/dokumente/dokumentencenter/8news/medienmitteilungen/
2022/05/20220509-mm-anhoerung-finfrav-
de.pdf?sc_lang=en&hash=08F6A2BB006408179809E99958977762.
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As explained in the NPRM, following the Commission's action in
2016, FINMA did not require clearing of swaps referencing CHF LIBOR,
and to date no jurisdiction has implemented mandatory clearing for
swaps referencing CHF SARON.\73\ Commission staff updated FINMA
regarding the status of IBOR OIS conversion efforts as part of this
rulemaking process and identified no major concerns regarding the
transition process. Additional discussion of CHF SARON OIS is included
below.
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\73\ NPRM, 87 FR 32914.
---------------------------------------------------------------------------
7. United Kingdom
On May 20, 2021, Bank of England proposed to (i) effective October
18, 2021, remove contracts referencing EUR EONIA from the OIS class and
replace them with contracts referencing EUR [euro]STR with a
termination date range of seven days to three years; and (ii) effective
December 20, 2021, remove contracts referencing GBP LIBOR from the
fixed-to-floating swap, basis swap, and FRA classes, and extend the
termination date range for OIS referencing GBP SONIA to include seven
days to 50 years.\74\ Additionally, on September 29, 2021, Bank of
England proposed to remove contracts referencing JPY LIBOR from the
fixed-to-floating and basis swap classes and replace them with OIS
referencing JPY TONA with a termination date range of seven days to 40
years, effective December 6, 2021.\75\ On December 3, 2021, Bank of
England updated the effective date for its new JPY TONA clearing
requirement to be January 31, 2022, rather than December 6, 2021.\76\
[[Page 52189]]
These changes went into effect as proposed.
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\74\ 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.
\75\ 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>.
\76\ 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-ps">https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-introduction-of-contracts-referencing-tona-ps</a>. Bank of England noted that the change
was designed to ``provide firms with more time to complete their
preparations without . . . posing a risk to UK financial
stability.'' Id. There were no changes to the date for removing Bank
of England's JPY LIBOR clearing requirement.
---------------------------------------------------------------------------
On June 9, 2022, Bank of England published a proposal to remove
contracts referencing USD LIBOR from the fixed-to-floating swap, basis
swap, and FRA classes, that would come into force ``around the same
time as a number of CCPs contractually convert these contracts and
remove them from their list of contracts eligible for clearing,'' and
add OIS referencing USD SOFR effective October 31, 2022.\77\
---------------------------------------------------------------------------
\77\ Bank of England, Derivatives clearing obligation--
modifications to reflect USD interest rate benchmark reform:
Amendments to BTS 2015/2205, June 9, 2022 (Bank of England SOFR
Proposal), available at <a href="https://www.bankofengland.co.uk/paper/2022/derivatives-clearing-obligation-modifications-reflect-usd-interest-rate-benchmark-reform-amendment">https://www.bankofengland.co.uk/paper/2022/derivatives-clearing-obligation-modifications-reflect-usd-interest-rate-benchmark-reform-amendment</a>.
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This proposal, and the proposed implementation approach, are
largely aligned with the Commission's proposal.\78\ The proposal for
mandatory clearing of USD SOFR OIS is for an identical termination date
range of seven days to 50 years. As discussed further below, Bank of
England's proposed implementation timing of October 31, 2022, would
align with Commission action.
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\78\ Id. (``In the light of the changes in market activity
observed since [2021], and aligning with the Commodity Futures
Trading Commission's (CFTC's) recent announcements, the Bank is now
proposing to add OIS contracts referencing SOFR to the clearing
obligation and remove contracts referencing USD Libor.'')
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III. Overview of Comment Letters Received
The interest rate swap market 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. In
issuing this final rule, the Commission further facilitates this
transition by amending its interest rate swap clearing requirement to
reflect the cessation or loss of representativeness of certain IBORs
and the market adoption of swaps referencing RFRs.
On May 31, 2022, the Commission published an NPRM seeking public
input regarding how it should amend the interest rate swap clearing
requirement to address the cessation or loss of representativeness of
IBORs that have been used as benchmark reference rates and the market
adoption of swaps that reference RFRs. The NPRM was preceded by an RFI
that the Commission issued on November 23, 2021.\79\ Both these efforts
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.
---------------------------------------------------------------------------
\79\ RFI, 86 FR 66486-66488. The following 14 entities responded
to the RFI: Alternative Investment Management Association (AIMA),
American Council of Life Insurers (ACLI), Bloomberg L.P., CCP12,
Citadel, CME, Eurex, ISDA, Investment Company Institute (ICI), JSCC,
LSEG, Managed Funds Association (MFA), Toronto-Dominion Bank (TD
Bank), and Tradeweb Markets LLC (Tradeweb), available at <a href="https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx">https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx</a>.
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The NPRM proposed amending regulation Sec. 50.4(a) to remove from
the clearing requirement interest rate swaps in all classes referencing
LIBOR (USD, GBP, CHF, and JPY), EUR EONIA, and SGD SOR-VWAP, as
applicable. The NPRM also proposed updating the clearing requirement to
include OIS referencing USD SOFR (seven days to 50 years), CHF SARON
(seven days to 30 years), JPY TONA (seven days to 30 years), EUR
[euro]STR (seven days to three years), and SGD SORA (seven days to 10
years), as well as extending the termination date range of GBP SONIA
OIS to include seven days to 50 years. The NPRM proposed an
implementation date of 30 days after publication of final rules in the
Federal Register for nearly all the amendments. The one exception
proposed was an implementation date of July 1, 2023, for removing the
requirement to clear interest rate swaps referencing USD LIBOR and SGD
SOR-VWAP.
The Commission received 12 comments on its NPRM from a variety of
market infrastructure providers, market participants, and industry
organizations.\80\ All NPRM comment letters, as well as the RFI
response letters, are available on the CFTC's Comments Portal. Most
commenters largely supported the Commission's proposal and offered
specific responses to questions posed in the NPRM. Several commenters
asked for clarification regarding certain issues. These matters are
addressed in the discussion and analysis below.
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\80\ Comments were submitted by: AIMA, ACLI, CCP12, Citadel,
CME, ISDA, ICI, JSCC, MFA, and SOFR Academy. In addition to these
ten responses from institutional entities, two individuals submitted
responses to the NPRM. All letters related to this rulemaking 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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A. Scope of Amendments--Coverage of OIS and Removal of Existing Rules
Nearly all of the commenters expressed support for the scope of the
OIS covered under the Commission's proposal, and many agreed with the
Commission's analysis that an updated swap clearing requirement would
enhance financial stability by reducing systemic risk, improving market
integrity, and increasing transparency in the interest rate swap
market.\81\ Commenters also noted the important role played by the
Commission throughout the IBOR transition process.\82\
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\81\ Comments from AIMA, ACLI, CCP12, Citadel, CME, ISDA, ICI,
JSCC, MFA, and one of the individual commenters were largely
supportive of the Commission's proposal. Several raised additional
issues, questions, and/or requests that will be discussed further
below. SOFR Academy and the other individual commenter requested
clarification regarding SOFR.
\82\ See, e.g., comment letters from CCP12, ISDA, ICI, and MFA.
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1. Importance of Harmonization
Commenters, including CCP12, CME, Citadel, ISDA, JSCC, and MFA
supported the Commission's goal of harmonizing its clearing requirement
with those of non-U.S. jurisdictions. CCP12 stated such coordination
with counterparts would allow the U.S. to align its interest rate swap
clearing requirement with other major jurisdictions in a manner that
promotes legal certainty, regulatory transparency, and the preservation
of liquidity in cleared swaps. CME stated its support for adding the
RFR OIS covered by the NPRM to the clearing requirement in light of
rapid market adoption of voluntary clearing of RFR OIS and the
objective of harmonizing global clearing requirements to the extent
possible. CME also noted the Commission's commitment to coordination,
transparency, and consistency in engaging with domestic authorities.
JSCC stated support for the inclusion of JPY TONA OIS in the
modifications to regulation Sec. 50.4(a) because such action would
harmonize the Commission's interest rate swap clearing requirement with
those of other jurisdictions. JSCC stated that this harmonization, in
turn, would lower the operational and compliance burden for market
participants active across multiple jurisdictions. Market participants
including those represented by ISDA, MFA, and others stated their
support for global harmonization efforts as well.
2. DCOs' Ability To Clear OIS
CCP12 highlighted the work done by CCPs to support the transition
to RFRs. CCP12 stated that CCPs offered clearing for new RFR swaps,
which has encouraged participation, growth, and liquidity in these
products, and enabled a smooth conversion of certain cleared
[[Page 52190]]
IBOR swaps to RFR OIS at the end of 2021. CCP12 stated that DCOs are
required to ensure that they have sufficient resources and liquidity,
adequate pricing data, and risk management practices and capabilities
in terms of default management with respect to the swaps covered by the
NPRM.
This point is consistent with comments submitted by both CME and
JSCC, among others. For example, CME stated that with the expected
increase in the number of transactions, it is prepared to continue
clearing RFR OIS. JSCC stated that requiring JPY TONA OIS to be cleared
would not affect the ability of DCOs to comply with the CEA or the
relevant legal and regulatory regime of any other jurisdiction.
3. Inclusion of CHF-Denominated OIS Referencing SARON
ISDA recommended that the Commission delay the issuance of a
clearing requirement for CHF-denominated interest rate swaps
referencing SARON that would take the place of an existing Commission
clearing requirement for interest rate swaps referencing LIBOR, until
such time as the Swiss authorities adopt a clearing requirement for
interest rate swaps referencing CHF SARON.\83\ No other commenter
responded to the NPRM's question on this topic.
---------------------------------------------------------------------------
\83\ In the alternative, ISDA suggests that the Commission delay
the effective date of its CHF SARON OIS clearing requirement until
three months after the effective date of any Swiss clearing mandate.
---------------------------------------------------------------------------
4. Inclusion of USD SOFR-USD LIBOR Basis Swaps
ACLI stated its support for the Commission's decision not to
include USD SOFR-USD LIBOR basis swaps in the interest rate swap
clearing requirement. ACLI pointed to the limited and dwindling use
cases for these swaps, along with low liquidity and limitations on the
ability to electronically execute such basis swaps. No other commenter
responded to the NPRM's question on this topic.
5. Effect of Margin Rules for Uncleared Swaps
ACLI stated that because both the cleared swaps framework and
uncleared swap margin rules reduce risk, life insurers should be free
to weigh the pros and cons of cleared versus uncleared swaps and choose
a regime that provides the most flexibility in allocating
collateral.\84\ ACLI stated that central clearing provides market
participants with numerous advantages over bilateral arrangements,
including increased safety, transparency, and customer protection.
However, ACLI stated that mandatory clearing elevates concentration of
risk in CCPs and futures commission merchants (FCMs).\85\ ACLI also
stated that central clearing's risk mitigation benefits are decreased
by the Commission's rules that require swap dealers to margin their
uncleared swaps with certain counterparties.\86\
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\84\ The ability to choose not to clear swaps subject to the
clearing requirement is reserved for those entities that are
eligible to elect an exception or exemption from the swap clearing
requirement under subpart C of part 50 of the Commission's
regulations. Section 2(h)(7)(C)(i)(VIII) excludes certain financial
entities from such eligibility by defining financial entity as ``a
person predominantly engaged in activities that are in the business
of banking, or in activities that are financial in nature,'' as
defined in section 4(k) of the Bank Holding Company Act of 1956, 12
U.S.C. 1843(k). Section 4(k) of the Bank Holding Company Act defines
such activities to include the activities of life insurers and
certain related entities. 12 U.S.C. 1843(k)(4)(B), (H)(ii)(II), and
(I)(ii)-(iii).
\85\ ACLI stated that (1) when large FCMs face financial
difficulties, their clients will face elevated credit risk; (2) if
an FCM were to default, the FCM's clients may have difficulty
porting their swap positions on short notice; (3) the process of
negotiating new FCM arrangements, completing operational setup, and
porting positions from one FCM to another takes significant time and
is operationally burdensome; and (4) some smaller life insurers have
difficulty finding FCMs who will take on their business at
competitive costs.
\86\ ACLI stated that practical solutions to allow end-users to
clear directly at CCPs do not currently exist, and there are
significant operational and regulatory hurdles to their creation.
This issue is beyond the scope of this rulemaking.
---------------------------------------------------------------------------
No other commenter raised these issues.\87\
---------------------------------------------------------------------------
\87\ ACLI's comment is discussed further in the Cost Benefit
Considerations section VII.
---------------------------------------------------------------------------
6. Clarification Regarding USD SOFR
In its comment letter, SOFR Academy recommended that the Commission
clarify the definition of USD SOFR OIS in the final rule to avoid
potential confusion in the event a market develops for OIS referencing
a new index that combines USD SOFR as administered and published by
FRBNY with a credit spread supplement.\88\ Similarly, an individual
commenter requested that the Commission clarify which version of USD
SOFR is referenced by the swaps to which its USD SOFR OIS clearing
requirement would apply.\89\ The individual asked the Commission to
confirm that the proposed determination (i) would not apply to swaps
using a CME term USD SOFR rate; and (ii) would apply to swaps using
both compounded USD SOFR and daily simple USD SOFR.
---------------------------------------------------------------------------
\88\ According to SOFR Academy, such ``all-in'' benchmark rates
combine across-the-curve credit spreads with variations of USD SOFR
that are administered and published by FRBNY.
\89\ The commenter sought clarification regarding whether such
swaps reference term USD SOFR, compounded USD SOFR, or daily simple
USD SOFR. This commenter also requested that the Commission clarify
whether the Commission intends its USD SOFR OIS clearing requirement
to apply retroactively to existing USD SOFR OIS that were executed
before implementation but not voluntarily cleared. Consistent with
its past clearing requirement determinations, this final clearing
requirement determination will not apply retroactively. It will
apply to swaps executed on or after the implementation dates
discussed below.
---------------------------------------------------------------------------
In its comment letter, CME referred to the ongoing industry
transition of swaps referencing LIBOR to the relevant nominated
successor RFRs and noted that market participants have demonstrated a
preference for transition to market standard RFR OIS.
B. Implementation, Cross-Border Coordination, and Operational
Considerations
Commenters expressed a number of views with regard to the
implementation schedule for the RFR OIS clearing requirement and the
removal of the existing clearing requirement for LIBOR, EUR EONIA, and
SGD SOR-VWAP interest rate swaps.
1. Immediate Implementation of RFR OIS Clearing Requirement
A majority of commenters favored the Commission's proposed approach
of implementing the RFR OIS clearing requirement 30 days after
publication of this final rulemaking in the Federal Register. For
example, CCP12 supported this approach because the market has already
gravitated toward central clearing of RFR OIS (including USD SOFR OIS)
to a significant degree, and 30 days would provide market participants
with sufficient time to comply with the new determination. CCP12 stated
that the new determination would not lead to a material change in
operations for a majority of market participants. Likewise, Citadel and
MFA stated that the Commission's proposed 30-day compliance date is
appropriate as almost all USD SOFR OIS transactions are cleared
voluntarily. AIMA stated that the Commission should expedite its
consideration of a final rule, consistent with the NPRM, and update the
clearing requirement as quickly as possible. Finally, CME and JSCC
agreed with the Commission's proposal to adopt a single compliance date
that would be 30 days after the publication of the final rule in the
Federal Register.
2. Harmonizing Implementation Timing With International Counterparts
ISDA recommended that the implementation date for the RFR OIS
[[Page 52191]]
clearing requirement be October 31, 2022, which would align with Bank
of England's proposed effective date for its USD SOFR OIS clearing
obligation. According to ISDA, this alignment of implementation dates
would reduce operational burdens for clearing members and their
clients. ISDA stated that a shorter deadline might require ISDA members
to adopt tactical solutions and place unnecessary strain on resources,
preventing an efficient implementation.\90\
---------------------------------------------------------------------------
\90\ ISDA noted that compliance with new clearing requirements
requires ISDA members to adapt systems, create and run internal
trainings, and issue client communications; develop and implement
control frameworks and internal governance; and address unique
jurisdictional requirements. For example, ISDA noted that in some
jurisdictions such as Germany, creation and delivery of job-related
training which introduces changes to working practices such as
clearing requirements require review with and sign-off by workers'
representatives.
---------------------------------------------------------------------------
No other commenter expressly recommended October 31, 2022, as an
implementation date for all RFR OIS. However, despite supporting the
Commission's 30-day implementation approach, CCP12 stated that a
harmonized approach to timing would reduce the potential operational
burden for clearing members and clients of having to comply with the
same, or very similar, clearing mandates at different times and in
different jurisdictions.
3. Delay Implementation Until June 30, 2023
ACLI stated that the Commission should postpone the inclusion of
USD SOFR OIS in the clearing requirement until June 30, 2023, which
would coincide with the date USD LIBOR swaps are removed from the
clearing requirement and create an incentive for market participants
concerned about clearing trades to move from USD LIBOR to USD SOFR
swaps. ACLI stated that the Commission and other regulators have
offered significant relief to smooth the transition from USD LIBOR to
USD SOFR, and that postponing implementation of the USD SOFR OIS
clearing requirement would be consistent with that approach. No other
commenter supported this view.
4. Removal of Existing USD LIBOR Clearing Requirement
AIMA supported the Commission's proposal, particularly the proposal
to require USD SOFR OIS clearing out to 50 years, and to maintain the
USD LIBOR clearing requirement until July 1, 2023. Likewise, Citadel
agreed with the Commission's proposal to maintain the current clearing
requirement for USD LIBOR swaps until July 1, 2023, in light of
continued significant trading activity in USD LIBOR swaps. Citadel
stated that this would provide the Commission with flexibility to
continue evaluating market developments for specific tenors and adjust
requirements as necessary.
CME supported the Commission's proposal to retain its USD LIBOR
swap clearing requirement because USD LIBOR is widely expected to
continue until June 30, 2023, and clearing services are expected to
continue to be offered up to or shortly before that date. CME stated
that retaining the USD LIBOR swap clearing requirement until CCPs cease
to provide clearing services and/or convert swaps would provide clarity
and certainty for market participants.
ISDA proposed March 6, 2023, as the implementation date for
removing rules requiring clearing interest rate swaps referencing USD
LIBOR. ISDA stated that the removal date for USD LIBOR swaps should be
no earlier than any CCP conversion date because a later removal date
would be inconsistent with Commission objectives. ISDA stated that
because CCPs are unlikely to convert simultaneously, there will be
confusion when one converts and others do not.\91\ In the alternative,
ISDA suggested the removal date be the earlier of July 1, 2023, or the
first conversion date at any registered or exempt DCO clearing USD
LIBOR swaps. However, as ISDA noted, this could result in uncertainty
if a clearinghouse were to change its proposed conversion date on short
notice.
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\91\ ISDA raised the possibility that market participants could
be required to establish new clearing relationships to comply with a
USD LIBOR swap clearing requirement that may be months or days away
from ceasing to be effective or opt to continue unhedged until the
expiration of the clearing requirement if the IBOR clearing
requirement remains in place beyond the initiation of a conversion
at any one CCP.
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MFA stated that the Commission's proposal to maintain its USD LIBOR
interest rate swap clearing requirement until July 1, 2023, is
appropriate, as liquidity in swaps denominated in USD that reference
LIBOR in the fixed-to-floating swap, basis swap, and FRA classes is
sufficient to continue to support required clearing.\92\ Other
commenters, including Citadel and CME, generally supported this view.
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\92\ MFA also suggested that if before July 1, 2023, concerns
arise regarding the sufficiency of outstanding notional, liquidity,
or pricing data to support required clearing, the Commission could
take appropriate action that expires on June 30, 2023, to facilitate
the IBOR transition.
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C. Issues Beyond the Scope of the Rulemaking
Commenters raised the following two issues that are related to the
IBOR transition. They are presented for the sake of a complete
consideration of comments submitted, but the Commission observes that,
as discussed below, they are beyond the scope of this rulemaking.
1. Trade Execution Requirement
ICI supported the proposed modifications to the interest rate swap
clearing requirement, but urged the Commission to recognize the
separate nature of the trade execution requirement. ICI commented that
the Commission should not approve or allow certification of a
subsequent made-available-to-trade (MAT) determination solely on the
basis of the swap being subject to a clearing requirement. ICI stated
that the MAT process is especially important with respect to longer-
dated swaps proposed to be cleared, which are less liquid. ISDA also
stated that a corresponding MAT determination alongside or closely
following a clearing mandate could challenge a smooth and orderly IBOR
transition, and ISDA requested that the Commission consider changes to
its MAT determination process to ensure that any MAT determination in
new RFRs occur at the appropriate time and in line with overall policy
objectives.
Pursuant to section 2(h)(8) of the CEA and Commission regulations
Sec. Sec. 37.10 and 38.12, a trade execution requirement could, in the
future, apply to some or all of the interest rate swaps covered by this
rulemaking. The process for determining which swaps are subject to the
trade execution requirement is separate from the clearing requirement
determination process. Therefore, it is beyond the scope of this
rulemaking for the Commission to address the suitability of particular
swaps for a trade execution requirement or to address issues related to
the MAT process.
2. Post-Trade Risk Reduction
ISDA stated that currently swap dealers are able to book OIS into
their cleared or uncleared portfolios to match changes in risk as part
of portfolio compression exercises. According to ISDA, a clearing
requirement for RFR OIS would impair swap dealers' ability to manage
their uncleared portfolios. ISDA requested that the Commission consider
an exemptive order or staff no-action from the clearing requirement for
RFR swaps where the trades result from post-trade risk reduction (PTRR)
exercises.
By contrast, Citadel stated that the Commission should continue to
reject requests for additional exemptions, including for PTRR services,
when updating the clearing requirement.
[[Page 52192]]
Citadel stated that existing no-action relief for multilateral
portfolio compression exercises provides market participants with
adequate flexibility to reduce exposures in uncleared portfolios while
ensuring swaps subject to the clearing requirement are cleared. Citadel
also stated that a broader exemption risks circumventing the clearing
requirement, increasing trading activity in uncleared OTC derivatives,
and increasing systemic risk.
No other commenters raised this issue.
In 2013, Commission staff issued a no-action letter regarding PTRR
services.\93\ This letter explained that compression is an important
tool to facilitate post-trade risk reduction. Prior Commissions have
declined to codify this no-action letter, and this matter is beyond the
scope of this rulemaking.
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\93\ Staff No-Action Letter Re: Relief from Required Clearing
for Swaps Resulting from Multilateral Portfolio Compression
Exercises, CFTC Letter No. 13-01, Mar. 18, 2013, available at
<a href="https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm">https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm</a>.
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IV. Final Amendments to Regulation Sec. 50.4(a)
The Commission is finalizing amendments to regulation Sec. 50.4(a)
to remove certain IBORs and EUR EONIA interest rate swap clearing
requirements and add requirements to clear corresponding RFR OIS. The
IBOR swaps for which clearing requirements are being 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.\94\ The RFR swaps that the Commission is adding to the clearing
requirement are all OIS.\95\ 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).
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\94\ Beyond the IBOR swaps that will be removed from regulation
Sec. 50.4 and replaced with RFR swaps pursuant to this
determination, regulation Sec. 50.4 contains requirements to clear
a number of swaps referencing IBORs that have not yet been
discontinued. In the future the Commission may consider further
modifications to the interest rate swap clearing requirement in
regulation Sec. 50.4 to address the cessation of additional IBORs
and market adoption of corresponding RFRs. But no further
modifications are necessary at this time.
\95\ GBP SONIA OIS are already required to be cleared.
Regulation Sec. 50.4(a) Table 2.
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A. Scope of Amendments--Coverage of OIS and Removal of Existing Rules
These amendments to the interest rate swap clearing requirement are
the first rule changes that the Commission has issued to facilitate the
transition from IBORs to RFRs. The amendments update the existing
clearing requirement. In effect, the amendments replace the requirement
to clear certain 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. Accordingly,
pursuant to this final rulemaking, the following swaps will no longer
be required to be cleared:
<bullet> Swaps denominated in USD, GBP, CHF, and JPY that reference
LIBOR as a floating rate index in each of the fixed-to-floating swap,
basis swap, and FRA classes, as applicable.
<bullet> Swaps denominated in EUR that reference EONIA as a
floating rate index in the OIS class.
<bullet> Swaps denominated in SGD that reference SOR-VWAP as a
floating rate index in the fixed-to-floating swap class.
The Commission is amending the OIS class of interest rate swaps
under regulation Sec. 50.4(a) that are required to be cleared to
include the following:
<bullet> Swaps denominated in USD that reference SOFR as a floating
rate index with a stated termination date range of seven days to 50
years,
<bullet> Swaps denominated in EUR that reference [euro]STR as a
floating rate index with a stated termination date range of seven days
to three years,
<bullet> Swaps denominated in CHF that reference SARON as a
floating rate index with a stated termination date range of seven days
to 30 years,
<bullet> Swaps denominated in JPY that reference TONA as a floating
rate index with a stated termination date range of seven days to 30
years, and
<bullet> Swaps denominated in SGD that reference SORA as a floating
rate index with a stated termination date range of seven days to 10
years.
<bullet> Swaps denominated in GBP that reference SONIA as a
floating rate index with a stated termination date range of seven days
to 50 years.\96\
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\96\ For GBP SONIA OIS, these amendments expand the existing
maximum termination date range to 50 years, for a new termination
date range of seven days to 50 years.
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While these amendments are legally effective 30 days after
publication of the final rule in the Federal Register, they will be
implemented according to a schedule discussed in detail below.\97\
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\97\ Specific implementation timing is set forth in section VI.
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B. Clarification Regarding OIS Product Specifications
SOFR Academy and one of the individual commenters requested
clarification regarding the product specifications subject to this
rulemaking. These commenters asked which interest rates apply to the
USD-denominated OIS referencing SOFR.
The final rules apply to the USD SOFR OIS that are offered for
clearing at registered and exempt DCOs. These DCOs' product
specifications provide that the USD SOFR OIS that they clear reference
USD-SOFR-COMPOUND under the 2006 ISDA Definitions and USD-SOFR-OIS
Compound under the 2021 ISDA Definitions. Similarly, GBP SONIA, CHF
SARON, JPY TONA, SGD SORA, and EUR [euro]STR OIS clearing requirements
refer to the GBP SONIA, CHF SARON, JPY TONA, SGD SORA, and EUR
[euro]STR OIS that are offered for clearing at registered and exempt
DCOs. Each of these rates reference compound RFR indexes as defined in
ISDA Definitions.\98\
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\98\ See generally CME, Product Scope, available at <a href="https://www.cmegroup.com/trading/interest-rates/cleared-otc.html">https://www.cmegroup.com/trading/interest-rates/cleared-otc.html</a>; LCH,
Product Specific Contract Terms and Eligibility Criteria Manual,
June 20, 2022, at 36-44, available at <a href="https://www.lch.com/system/files/media_root/220620%20-%20Product%20Specific%20Contract%20Terms%20-%20SGD%20SORA.pdf">https://www.lch.com/system/files/media_root/220620%20-%20Product%20Specific%20Contract%20Terms%20-%20SGD%20SORA.pdf</a>;
Eurex, EurexOTC Clear Product List, available at <a href="https://www.eurex.com/ec-en/clear/eurex-otc-clear/interest-rate-swaps">https://www.eurex.com/ec-en/clear/eurex-otc-clear/interest-rate-swaps</a>; JSCC,
List of Clearing 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>; HKEX, 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>. Some DCOs' product specifications reference both
the 2021 and 2006 ISDA Definitions whereas other DCOs' product
specifications refer only to the 2021 ISDA Definitions (or reference
both only with respect to certain swaps).
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C. Swaps Referencing CHF SARON and SGD SORA
The Commission is the only authority to require CHF LIBOR swaps be
submitted for clearing. In 2016, FINMA considered adopting a clearing
mandate for swaps referencing CHF LIBOR, but after the Commission's
final rules that included CHF LIBOR swaps went into effect, FINMA did
not adopt a similar mandate.\99\ To date, FINMA has not adopted a
clearing mandate for CHF SARON OIS. However, as explained above, FINMA
may adjust its clearing obligation in line with international
authorities and altered market conditions resulting from benchmark
reform.
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\99\ The Commission provided an opportunity for comment prior to
adopting its requirement to clear CHF-denominated interest rate
swaps. Clearing Requirement Determination Under Section 2(h) of the
CEA for Interest Rate Swaps, 81 FR 39506 at 39508 (June 16, 2016);
see also Second Determination, 81 FR 71205.
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Likewise, 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
[[Page 52193]]
SOR-VWAP swaps in 2016.\100\ At this time, MAS has not yet implemented
mandatory clearing for SGD SORA OIS.
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\100\ Second Determination, 81 FR 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>.
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1. Data Analysis
Against this regulatory backdrop, clearing rates for CHF SARON OIS
and SGD SORA OIS are already high. The Commission estimates that more
than 97% of notional transacted in these rates each month between
November 2021 and April 2022 was cleared.\101\
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\101\ The data referenced is from Commission's weekly swaps
report data. In the NPRM, the Commission estimated that more than
98% of notional transacted in these rates in each of November 2021,
December 2021, and January 2022 was cleared. NPRM, 87 FR 32914-
32915.
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Furthermore, the Commission estimates that, as of April 29, 2022,
there was $1,497 billion in outstanding notional in CHF SARON OIS,
whereas there was $282 billion in outstanding notional in CHF LIBOR
fixed-to-floating swaps.\102\ Similarly, the Commission estimates that,
as of April 29, 2022, there was $558 billion in outstanding notional in
SGD SORA OIS, and $248 billion in outstanding notional in SGD SOR-VWAP
fixed-to-floating swaps.\103\ In comparison, as of January 28, 2022,
there was $1,730 billion in outstanding notional in CHF SARON OIS and
$686 billion in outstanding notional in CHF LIBOR fixed-to-floating
swaps.\104\ Further, estimates as of the same date indicate 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.\105\
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\102\ 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
rulemaking.
\103\ Id.
\104\ NPRM, 87 FR 32915.
\105\ Id.
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Comparing the January and April 2022 month-end estimates, there is
a slight decline in outstanding notional in CHF SARON OIS, but a steep
decline in outstanding notional for CHF LIBOR fixed-to-floating swaps.
With respect to the SGD rates, there is a decline in outstanding
notional for SGD SOR-VWAP fixed-to-floating swaps roughly proportional
to the increase in outstanding notional for SGD SORA OIS. The
Commission believes these numbers demonstrate that CHF LIBOR and SGD
SOR-VWAP are steadily being replaced by their corresponding RFRs.
Based on this data, it would appear that, since the time the
Commission issued its NPRM, the CHF interest rate swap market has moved
from comprising roughly one-half LIBOR swaps to only approximately one-
fifth LIBOR swaps. Additionally, while SGD SOR-VWAP is anticipated to
continue until June 30, 2023, the transition to SGD SORA is well
underway. Data presented in tables 2 and 3 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 April 2022, there were no CHF LIBOR fixed-to-
floating swap transactions, and 39 SGD SOR-VWAP fixed-to-floating swap
transactions (comprising $2 billion notional). The Commission also
estimates that, in April 2022, there were 1,913 CHF SARON OIS
transactions (comprising $91 billion notional) and 3,277 SGD SORA OIS
transactions (comprising $124 billion notional).
2. Consideration of Comments
In response to the NPRM, ISDA commented that the Commission should
delay the update of the CHF-denominated interest rate swap clearing
requirement until such time as the Swiss authorities issue a clearing
mandate. The requirement to clear interest rate swaps denominated in
Swiss francs has been in place under U.S. law since 2016.
With regard to SGD-denominated interest rate swaps, the Commission
did not receive any comments. Nor is the Commission aware of any
concerns on the part of its fellow authorities with regard to update
the clearing requirement to include SGD SORA OIS. The requirement to
clear interest rate swaps denominated in SGD has been in place under
U.S. law since 2016.
3. Inclusion of CHF SARON OIS and SGD SORA OIS
The Commission is unaware of any risk-related or operational
concerns that have arisen with regard to this requirement. In addition,
to delay updating the Commission's existing interest rate swap clearing
requirement for swaps denominated in these two currencies would limit
the scope of the Commission's existing clearing requirement. It also
would risk introducing unnecessary market confusion by unexpectedly
changing the scope of the interest rate swap market that is required to
be cleared.
Swiss and European authorities generally have indicated that they
are reviewing this matter and may act to require clearing of CHF SARON
OIS under the laws of their respective jurisdictions at some point in
the future. The Commission proceeded in 2016 under the Second
Determination and now updates those regulations to further the
extensive work pursuant to a public-private partnership that has taken
place to prepare the interest rate swap markets for IBOR conversions.
While Singaporean authorities have not yet amended their regulations, a
similar justification exists with regard to updating the SGD-
denominated interest rate swap clearing requirement.
D. RFR-IBOR Basis Swaps
Based on responses to the RFI, as well as ACLI's comment, the
Commission is not adding any new requirements to clear RFR-linked basis
swaps at this time. These swaps are used primarily to move out of IBOR
swap positions and into RFR swap positions.\106\ The Commission
recognizes the added flexibility RFR-linked basis swaps offer market
participants, but will continue to monitor their use as the IBOR
transition process reaches its conclusion. Such monitoring will focus
on volumes of RFR-linked basis swaps after the date on which IBOR rates
cease publication.
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\106\ RFR-linked basis swaps offered for clearing are generally
RFR-IBOR basis swaps. See ACLI's RFI response 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's RFI response letter (``Due to low liquidity, we
think SOFR-LIBOR basis swaps should not be subject to mandatory
clearing.''). RFI response letters are available at <a href="https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx">https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx</a>.
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V. Determination Analysis for RFR OIS
The Commission is amending 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 has considered 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)
[[Page 52194]]
submissions relating to RFR OIS.\107\ 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 through public comment.
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\107\ 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.
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This 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.\108\ As a result, and in
light of the quick pace of market adoption and DCOs' willingness to
provide clearing for a wide variety of RFR swaps, the RFR interest rate
swap markets are prepared for this clearing requirement determination.
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\108\ A discussion of the costs and benefits of this rulemaking
appears in section VII below.
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B. Consistency With DCO Core Principles Under Section 2(h) of the CEA
Section 2(h)(2)(D)(i) of the CEA requires the Commission to
determine whether a clearing requirement determination is consistent
with core principles for DCOs set forth in section 5b(c)(2) of the
CEA.\109\ CME, LCH, and Eurex are registered DCOs, and currently clear
the RFR OIS subject to this rulemaking. CME, LCH, and Eurex are
required to comply with the DCO core principles (and applicable
Commission regulations) with respect to the RFR OIS subject to this
determination. These DCOs also are subject to the Commission's
examination and risk surveillance programs.
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\109\ 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.
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The Commission believes that CME, LCH, and Eurex will be able to
maintain compliance with the DCO core principles and applicable
Commission regulations following adoption of this clearing requirement
determination. For the reasons discussed below, the Commission has
determined that subjecting any of the RFR OIS to required clearing is
unlikely to impair CME's, LCH's, or Eurex's ability to comply with the
DCO core principles, along with applicable Commission regulations.\110\
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\110\ In their public comments, each DCO stated that requiring
clearing of USD SOFR and other RFR OIS would not negatively affect
their ability to comply with the DCO core principles and applicable
Commission regulations. See RFI response letters from CME, LSEG, and
Eurex, and NPRM comment letter from CME.
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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.\111\ With regard to the two exempt DCOs that offer RFR OIS
for clearing, namely, JSCC and HKEX, the Commission expects that both
DCOs will continue to comply with their home country law and
regulations for purposes of this clearing requirement determination for
RFR OIS.
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\111\ 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 with 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>.
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As outlined in the summary of comments, the Commission's
conclusions regarding the DCOs' ability to remain in compliance with
applicable regulations, as well as sound risk management practices, is
supported by commenters.\112\ No commenter raised any concern regarding
a registered or an exempt DCO maintaining its ability to clear the
interest rate swaps that it offers for clearing. The Commission also
notes the importance of its ongoing examination and risk surveillance
programs for all registered DCOs, as well as its ability to work with
fellow authorities to ensure DCOs located outside the United States
remain in compliance with the highest standards. In 2016, the
Commission explained the rigor of the DCO registration and exemption
processes, along with subsequent examination and risk surveillance
scrutiny that DCOs receive. These processes remain in place and have
been enhanced over the intervening years.\113\
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\112\ See, e.g., comment letters from CME, CCP12, Citadel, ISDA,
JSCC, and MFA.
\113\ Second Determination, 81 FR 71207-71208. In particular,
Commission staff monitors the risks posed to and by DCOs, clearing
members, and market participants, including market risk, liquidity
risk, credit risk, and concentration risk with the objective (1) to
identify positions in cleared products subject to the Commission's
jurisdiction that pose significant financial risk; and (2) to
confirm that these risks are being appropriately managed.
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Clearing the RFR OIS swaps subject to this determination does not
pose financial or legal risks that are materially distinguishable from
those posed by the IBOR interest rate swaps that the Commission
required to be cleared in 2012 and 2016 and that DCOs have been
offering for clearing for over a decade. For additional information
regarding the ability of DCOs and exempt DCOs to clear these swaps, see
the discussion of Factor II in the Commission's determination analysis
below.
C. Conclusions Regarding Consideration of Section 2(h)'s 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 all OIS being added to the interest rate swap clearing requirement,
which includes 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.\114\
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\114\ The Commission is conducting this analysis only with
respect to the swaps that are being added to the clearing
requirement under this determination. Removing swaps that are no
longer offered for clearing from Commission regulation Sec. 50.4 is
not considered in this analysis.
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[[Page 52195]]
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].'' \115\ 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 rulemaking, the Commission
principally considered notional exposures and trading liquidity based
on the Commission's own collected data.
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\115\ 7 U.S.C. 2(h)(2)(D)(ii).
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a. Outstanding Notional Exposures and Trading Liquidity
The Commission reviewed 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. The data presented in the NPRM and below
indicates that there is sufficient outstanding notional exposure and
trading liquidity in RFR OIS to support a clearing requirement
determination.\116\ Specifically, the data 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 2-5 below from transaction
data collected under part 45 of the Commission's regulations.\117\ This
analysis also supports a DCO's ability to adequately risk manage the
swap.
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\116\ Data considered includes all material presented in the
NPRM along with updated information presented in this final rule.
\117\ 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>.
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In Table 2 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 April 30, 2022. The data in Table 2 generally indicates
significant, and relatively steady or increasing, amounts of notional
transacted in RFR OIS from November 2021 through April 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 publication or became nonrepresentative
in December 2021 and January 2022.
Significant amounts of notional were transacted in USD LIBOR fixed-
to-floating swaps. In the NPRM, the Commission observed 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.
However, as shown below, in April 2022, notional transacted in USD SOFR
OIS outpaced notional transacted in USD LIBOR fixed-to-floating swaps.
Thus, while the transition of liquidity from USD LIBOR fixed-to-
floating swaps to USD SOFR OIS is not yet complete, it is well
underway.
Table 2--Estimated Notional Transacted
[USD billions] \118\
----------------------------------------------------------------------------------------------------------------
November December January February
Product 2021 2021 2022 2022 March 2022 April 2022
----------------------------------------------------------------------------------------------------------------
USD SOFR OIS...................... $2,384 $2,011 $3,918 $5,008 $6,439 $4,807
USD LIBOR Fixed-to-Floating Swaps. 6,674 4,409 9,598 6,708 6,480 4,470
USD LIBOR-LIBOR Basis Swaps....... 1,049 602 292 476 626 490
EUR [euro]STR OIS................. 3,394 2,022 3,488 7,716 7,706 7,371
EUR EONIA OIS..................... 2 8 0 5 0 7
CHF SARON OIS..................... 208 108 130 152 164 91
CHF LIBOR Fixed-to-Floating Swaps. 62 0 0 0 0 0
GBP SONIA OIS..................... 5,852 3,151 4,149 4,956 4,458 2,629
GBP LIBOR Fixed-to-Floating Swaps. 340 205 2 2 1 0
JPY TONA OIS...................... 425 360 377 434 576 1,372
JPY LIBOR Fixed-to-Floating Swaps. 45 15 0 2 2 1
SGD SORA OIS...................... 74 41 119 97 156 124
SGD SOR Fixed-to-Floating Swaps... 8 3 5 9 5 2
----------------------------------------------------------------------------------------------------------------
Table 3 that follows this paragraph provides estimates of trade
counts for the same categories of RFR and IBOR swaps during the same
six-month period. The data in Table 3 indicates that, with regard to
RFR OIS, monthly trade count generally increased or was relatively
steady between November 2021 and April 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
precipitously by January 2022. While there were still a significant
number of USD LIBOR fixed-to-floating swap transactions during the six-
month period that Table 3 measures, the monthly trade count for such
transactions declined significantly during that period. Similarly, the
monthly trade count for SGD SOR-VWAP fixed-to-floating swaps declined
significantly between November 2021 and April 2022.
---------------------------------------------------------------------------
\118\ The data in Table 2 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.
[[Page 52196]]
Table 3--Estimated Trade Count \119\
----------------------------------------------------------------------------------------------------------------
November December January February
Product 2021 2021 2022 2022 March 2022 April 2022
----------------------------------------------------------------------------------------------------------------
USD SOFR OIS...................... 18,484 19,110 41,728 45,696 66,644 54,439
USD LIBOR Fixed-to-Floating Swaps. 48,245 29,309 30,749 25,061 27,284 20,184
USD LIBOR-LIBOR Basis Swaps....... 1,025 831 329 384 690 477
EUR [euro]STR OIS................. 8,415 5,420 8,962 14,222 16,957 12,341
EUR EONIA OIS..................... 7 1 0 3 0 3
CHF SARON OIS..................... 2,698 1,574 2,283 2,775 3,380 1,913
CHF LIBOR Fixed-to-Floating Swaps. 390 19 0 0 0 0
GBP SONIA OIS..................... 24,275 12,913 17,654 21,139 21,396 14,656
GBP LIBOR Fixed-to-Floating Swaps. 2,061 1,286 12 33 5 2
JPY TONA OIS...................... 5,311 4,639 5,141 6,227 7,859 6,692
JPY LIBOR Fixed-to-Floating Swaps. 577 69 9 26 22 17
SGD SORA OIS...................... 2,422 1,846 3,794 3,715 4,652 3,277
SGD SOR Fixed-to-Floating Swaps... 197 94 69 143 77 39
----------------------------------------------------------------------------------------------------------------
Table 4 that follows this paragraph presents estimates of the
percentage of notional cleared for the RFR OIS subject to this
determination, based on notional transacted by month during the period
beginning November 1, 2021, and ending April 30, 2022. The data in
Table 4 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
April 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.
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\119\ The data in Table 3 is based on the Commission's weekly
swaps report data.
\120\ The data in Table 4 is based on the Commission's weekly
swaps report data.
Table 4--Estimated Percentage of Notional Cleared
[Based on notional transacted by month] \120\
--------------------------------------------------------------------------------------------------------------------------------------------------------
November 2021 December 2021 January 2022 February 2022
OIS (%) (%) (%) (%) March 2022 (%) April 2022 (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
USD SOFR................................................ 96.3 94.9 95.1 96.0 95.3 96.2
GBP SONIA............................................... 98.8 98.7 97.8 98.1 98.2 97.6
EUR [euro]STR........................................... 99.0 99.2 97.6 99.0 98.4 98.9
CHF SARON............................................... 99.6 98.1 99.2 98.9 99.7 98.4
JPY TONA................................................ 96.6 98.7 98.0 98.1 98.5 99.3
SGD SORA................................................ 98.2 98.6 98.7 97.9 98.0 98.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 5 that follows this paragraph presents a breakdown of
notional transacted and trade count for the period beginning April 1,
2022 and ending April 30, 2022, by tenor, for the relevant RFR OIS.
Table 5 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 three months and 15 years. However,
with respect to USD SOFR and GBP SONIA OIS in particular, there is also
significant clearing activity in swaps dated 15 years or greater.
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\121\ The data in Table 5 is based on the Commission's weekly
swaps report data. Tenor length is approximate. In Table 5, a
notional figure of $0 billion USD indicates that the notional
transacted during a given time period was less than $1 billion.
Table 5--Estimated Cleared Notional and Trade Count by Tenor
[April 2022 transaction data] \121\
----------------------------------------------------------------------------------------------------------------
Notional cleared
OIS Tenor (USD billions) Trade count
----------------------------------------------------------------------------------------------------------------
USD SOFR.................................... 7 days-3 months............... $282 384
3-6 months.................... 230 463
6 months-1 year............... 211 853
1-5 years..................... 1,900 13,507
5-15 years.................... 1,736 27,698
>15 years..................... 264 8,752
GBP SONIA................................... 7 days-3 months............... 548 351
3-6 months.................... 624 391
6 months-1 year............... 509 364
1-5 years..................... 407 3,101
5-15 years.................... 410 7,508
>15 years..................... 66 2,600
EUR [euro]STR............................... 7 days-3 months............... 735 364
3-6 months.................... 3,128 1,491
[[Page 52197]]
6 months-1 year............... 2,300 1,318
1-5 years..................... 831 4,440
5-15 years.................... 260 3,652
>15 years..................... 33 817
CHF SARON................................... 7 days-3 months............... 5 3
3-6 months.................... 6 7
6 months-1 year............... 10 29
1-5 years..................... 27 417
5-15 years.................... 40 1,298
>15 year...................... 2 146
JPY TONA.................................... 7 days-3 months............... 3 3
3-6 months.................... 14 25
6 months-1 year............... 10 30
1-5 years..................... 121 944
5-15 years.................... 1,182 3,646
>15 years..................... 33 1,887
SGD SORA.................................... 7 days-3 months............... 6 29
3-6 months.................... 4 20
6 months-1 year............... 12 86
1-5 years..................... 75 1,383
5-15 years.................... 26 1,720
>15 years..................... 0 5
----------------------------------------------------------------------------------------------------------------
In addition to this transaction-level data, Table 6 that follows
this paragraph presents open swaps data illustrating outstanding
notional in the RFR OIS subject to this determination.
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\122\ The data in Table 6 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 6--Outstanding Notional as of April 29, 2022 \122\
------------------------------------------------------------------------
Outstanding notional
OIS (USD billions)
------------------------------------------------------------------------
USD SOFR....................................... $16,104
GBP SONIA...................................... 21,885
EUR [euro]STR.................................. 16,099
CHF SARON...................................... 1,497
JPY TONA....................................... 4,035
SGD SORA....................................... 558
------------------------------------------------------------------------
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 7 that follows this paragraph reflects
the total volumes of cleared outstanding notional by tenor for USD
LIBOR fixed-to-floating swaps and USD SOFR OIS. The Commission has
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 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 rulemaking, and as discussed in detail below, the Commission is
basing this determination on its ongoing supervision of DCOs and its
monitoring of the cleared interest rate swap market for purposes of
risk surveillance.
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\123\ The data in Table 7 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 7--Outstanding Notional as of April 26, 2022 \123\
------------------------------------------------------------------------
Notional cleared
Swap class Tenor (USD billions)
------------------------------------------------------------------------
USD LIBOR Fixed-to-Floating 0-1 months........ $67
Swaps.
>1 month to 3 247
months.
>3 months to 1 901
year.
>1-3 years........ 1,674
>3-5 years........ 703
[[Page 52198]]
>5-7 years........ 439
>7-10 years....... 379
>10-15 years...... 233
>15-25 years...... 276
>25-35 years...... 124
>35 years......... 14
USD SOFR OIS.................... 0-1 months........ 12
>1 month to 3 121
months.
>3 months to 1 807
year.
>1-3 years........ 1,274
>3-5 years........ 282
>5-7 years........ 123
>7-10 years....... 149
>10-15 years...... 59
>15-25 years...... 62
>25-35 years...... 44
>35 years......... 5
------------------------------------------------------------------------
b. Pricing Data
The Commission regularly reviews pricing data for the RFR OIS
subject to this 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.\124\ Because of the
stability of access to pricing data from these markets, the pricing
data for the OIS that are the subject of this determination is
generally viewed as being reliable. Based on this information, the
Commission has determined that there is adequate pricing data to
support required clearing of RFR OIS.
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\124\ 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 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).
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In addition, as part of their regulation Sec. 39.5(b) submissions,
the registered DCOs that clear the RFR OIS subject to this
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.
c. Comments Received Regarding Factor (I)
Commenters provided support for the conclusion that sufficient
liquidity and pricing data exists in RFR OIS markets to withstand
stressed market conditions. Commenters also supported the DCOs'
representations that adequate pricing data exists for DCO risk and
default management of swaps referencing RFRs. CCP12 noted that SOFR
liquidity improved materially in the past 12 months as a function of
SOFR First and subsequent restrictions on new USD LIBOR activity that
began on January 1, 2022. Citadel agreed that the data in the NPRM
clearly demonstrates that there are significant outstanding notional
amounts in USD SOFR OIS, and that trading in USD SOFR OIS continues to
increase. Citadel also cited more recent data demonstrating that
trading in USD SOFR OIS has steadily increase since January 2022,
noting that over half of the USD interest rate derivatives market
references SOFR as of May 2022. Citadel stated that this data
demonstrates that significant outstanding notional exposures, trading
liquidity, and adequate pricing data are present in the USD SOFR OIS
market to support a clearing requirement determination.
CME stated that adequate pricing data for risk and default
management purposes is available across all stated termination date
ranges, and stated that CME is capable of offering uninterrupted
clearing services for all instruments it clears even during times of
market stress.
JSCC likewise noted that the JPY swaps market has now fully
transitioned away from JPY LIBOR interest rate swaps and that as of the
end of April 2022, JPY TONA OIS accounted for 97% of DV01 traded in the
under two-year tenor category, in the interest rate derivatives market.
Additionally, JSCC stated that, because the JPY swaps market has fully
migrated from JPY LIBOR interest rate swaps to JPY TONA OIS, JSCC
believes there is adequate pricing data in a liquid market across
different tenors for DCO risk and default management of JPY TONA OIS.
JSCC also regularly holds default management fire drills to verify that
its default management process is robust and would be capable of
managing a default in stressed market conditions.
Based on the data presented and analyzed above, and in light of the
comments received, the Commission has determined that there are
sufficient outstanding notional exposures, trading liquidity, and
pricing information for the RFR OIS subject to this rulemaking to
support a clearing requirement determination.
[[Page 52199]]
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
consider the availability of rule framework, capacity, operational
expertise and resources, and credit support infrastructure to clear the
classes of swaps on terms that are consistent with current material
terms and trading conventions. Based on their regulation Sec. 39.5(b)
submissions, as well as ongoing oversight, the Commission has
determined 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 rulemaking, 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.\125\
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\125\ 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 RFR OIS clearing 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.\126\ 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.
---------------------------------------------------------------------------
\126\ 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 CME, 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>.
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The registered DCOs clearing the RFR OIS subject to this
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.\127\ 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.\128\
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\127\ 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.
\128\ 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 swaps for clearing provides the
registered DCOs with greater certainty that their offerings will be
risk-managed appropriately. The process of stress testing and back
testing also gives DCOs practice incorporating new swaps 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.\129\
---------------------------------------------------------------------------
\129\ 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 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 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 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 large exposures under stress scenarios. 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.\130\
---------------------------------------------------------------------------
\130\ 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 swaps for clearing.
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[[Page 52200]]
In support of its ability to clear RFR OIS subject to this
determination, 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 RFR OIS. Eurex's
submissions state that Eurex has a well-developed rule framework and
support infrastructure for clearing RFR OIS. 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.
Commenters supported these positions. In particular, Citadel
commented that it is clear that market participants, including FCMs,
have the operational and technological infrastructure in place to
support the clearing of USD SOFR OIS, pointing out that almost all USD
SOFR OIS transactions are cleared. Citadel stated that this significant
voluntary clearing activity demonstrates that market participants are
confident in current DCO offerings.
For all of these reasons, the Commission has determined that there
are available rule frameworks, capacity, operational expertise and
resources, and credit support infrastructures, consistent with material
terms and trading conventions, to support the required clearing of the
RFR OIS subject to this clearing requirement determination. The
application of DCO risk management practices to the RFR OIS subject to
this clearing requirement determination should ensure that the swaps
subject to this rulemaking can be cleared safely, even during times of
market stress.\131\
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\131\ For additional information related to this factor, please
see the public disclosures made by CME, Eurex and LCH. 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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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 in light of 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 has concluded that the
market for each RFR OIS subject to this determination is significant,
and mitigating counterparty credit risk through clearing likely will
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
rulemaking. Additionally, 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.'' \132\
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\132\ JSCC Comment Letter.
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CME commented on the RFI that mitigation of systemic risk is one of
the key advantages of centralized clearing over bilateral
arrangements.\133\ Similarly, 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.''
\134\ In its RFI response, 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.'' \135\ 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.\136\
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\133\ CME RFI Letter.
\134\ LSEG RFI Letter.
\135\ Citadel RFI Letter.
\136\ TD Bank RFI Letter. See also Tradeweb RFI 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 . . . .'').
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Commenters on the NPRM further supported these positions. CME,
Citadel, ISDA, and MFA each described the importance of central
clearing as a means of mitigating systemic risk. ACLI also noted the
importance of central clearing.\137\ CME stated that the significant
and rapid adoption of voluntary clearing of RFR OIS demonstrates the
beneficial effects on mitigation of systemic risk in these products,
noting that high levels of voluntary clearing mean that there is
already a wide range of clearing members supporting clearing of these
products. CME stated that it has sufficient diversity in clearing
members, as well as the capability to default manage RFR OIS
portfolios, regardless of the introduction of a clearing requirement.
JSCC stated that amendments to the current interest rate swap clearing
requirement to include swaps with RFRs would maintain the momentum in
the shift from bilateral to cleared markets, which would enhance safety
and transparency, and result in a reduction of systemic risk.
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\137\ ACLI's concerns about use of FCMs and allocation of
capital for purposes of margin are discussed below.
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Centrally clearing the RFR OIS subject to this rulemaking 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
[[Page 52201]]
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 rulemaking has a procedure for closing out and/or transferring
a defaulting clearing member's positions and collateral.\138\
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 clearing members if there
is a larger pool of potential clearing members to receive the
positions.\139\
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\138\ 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, in
section V.C below.
\139\ The Commission recognizes that with high rates of
voluntary clearing RFR OIS at this time, the likelihood 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
determination. In addition, the application of DCO risk management
practices to the RFR OIS subject to this clearing requirement
determination should ensure that the swaps subject to this rulemaking
can be cleared safely.
The RFR OIS data presented in this rulemaking indicates varying
levels of activity, measured by outstanding notional amounts and trade
counts. The Commission acknowledges that the data comes from various,
limited periods of time that do not explicitly include periods of
market stress. However, the Commission concludes that the data
demonstrates sufficient regular trading activity and outstanding
notional exposures in these RFR OIS to provide the liquidity necessary
for DCOs to successfully risk manage these products and to support the
adoption of a clearing requirement.
Accordingly, the Commission determines that these DCOs would be
able to manage the risk posed by clearing the RFR OIS required to be
cleared pursuant to this determination. In addition, the central
clearing of the RFR OIS that are added under this rulemaking serves to
mitigate counterparty credit risk, thereby potentially reducing
systemic risk. Having considered the comments and the likely effect on
the mitigation of systemic risk, the Commission is issuing this
determination to add these RFR OIS to the clearing requirement.
4. Factor (IV)--Effect on Competition
Section 2(h)(2)(D)(ii)(IV) of the CEA requires the Commission to
consider the effect on competition, including appropriate fees and
charges applied to clearing. Of particular concern to the Commission is
whether this 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.\140\
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.\141\
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\140\ First Determination, 77 FR 74313; Second Determination, 81
FR 71220.
\141\ First Determination, 77 FR 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 clearing determination: a DCO service
market encompassing those clearinghouses that currently clear the RFR
OIS subject to this determination.\142\ This 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 determination, and the likelihood of timely,
sufficient new entry in the event prices do increase above competitive
levels, each operate independently to constrain anti-competitive
behavior.
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\142\ First Determination, 77 FR 74298; Second Determination, 81
FR 71220. The DCO service market includes the registered and exempt
DCOs that currently offer RFR OIS for clearing.
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Any competitive import likely would stem from the fact that the
determination and regulations would remove the alternative of not
clearing for RFR OIS subject to this rulemaking. The determination does
not specify who may or may not compete to provide clearing services for
the RFR OIS subject to this rulemaking, as well as those not required
to be cleared.
Removing the choice to enter into a swap without submitting it for
clearing under this 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 determination constructs barriers that would deter or impede
new entry into a clearing services market,\143\ and the Commission
anticipates this determination might foster an environment conducive to
new entry. For example, the clearing determination may 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.\144\ Moreover, to the extent that there are high rates of
voluntary clearing in the RFR OIS subject to this determination
already, a regulatory requirement to clear such swaps provides
additional certainty that those high rates of clearing remain constant.
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\143\ However, the Commission recognizes that (1) to the extent
the clearing services market for the interest rate swaps identified
in this rulemaking, 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 determination could have a
negative competitive impact by increasing market concentration.
\144\ 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. To the contrary,
Citadel stated that applying a clearing requirement to OTC derivatives
referencing USD SOFR would increase liquidity and competition, citing,
among
[[Page 52202]]
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.'' \145\ RFI response letters
from LSEG, Eurex, JSCC, and TD Bank similarly stated that they did not
identify potential competition-related concerns.\146\
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\145\ Citadel RFI response letter.
\146\ LSEG RFI 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 RFI 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 RFI 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 RFI 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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For the reasons described above and in light of the comments
received, the Commission concludes that it has considered the effect of
the updated clearing requirement on competition and found that it
potentially could impact competition within the affected market, but
anticompetitive behavior is likely to be constrained and demand for
clearing services is expected to grow. Accordingly, the Commission
reaffirms its conclusion stated in the NPRM that its consideration of
competitiveness is sufficient to modify the existing interest rate swap
clearing requirement to include the RFR OIS subject to this rulemaking.
5. Factor (V)--Legal Certainty in the Event of Insolvency
Section 2(h)(2)(D)(ii)(V) of the CEA requires the Commission to
consider 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 issuing this clearing
requirement determination based on its view that there is reasonable
legal certainty regarding the treatment of customer and swap
counterparty positions, funds, and property in connection with cleared
swaps, including RFR OIS, 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.\147\ 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 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.'' \148\ 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 determination.\149\
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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\147\ 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.
\148\ 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.
\149\ Claims seeking payment for the administration of customer
property would share this priority.
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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.\150\
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\150\ 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.\151\
According to Eurex's regulation Sec. 39.5(b) submissions, Eurex
observes the PFMI. Eurex represented
[[Page 52203]]
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 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.\152\ 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.\153\
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\151\ 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 RFI 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.
\152\ 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>.
\153\ 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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In response to the NPRM, CME stated that the legal framework on
which it operates complies with DCO Core Principle R and regulation
Sec. 39.27(b) (requiring legal certainty of clearing arrangements).
CME stated that its legal framework is sound, tested, and provides a
high degree of assurance that it will be able to conduct its clearing
and settlement activities on an ongoing basis, including managing a
clearing member default, and that its legal framework also provides
arrangements for the failure of a DCO. CME stated that the U.S.
Bankruptcy Code and part 190 of the Commission's regulations provide
safe harbors that protect a DCO's right to immediately enforce its
interest in the collateral it holds to margin positions and to
guarantee performance of its clearing members' obligations.
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.\154\ 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.\155\ 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.\156\ 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.'' \157\ The PFMI also provide
that a CCP should have effective and clearly defined rules and
procedures to manage a participant default.\158\ 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.\159\
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\154\ 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.
\155\ 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>.
\156\ PFMI, Principle 1.
\157\ PFMI, Principle 1, Key consideration 1.
\158\ PFMI, Principle 13.
\159\ 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 provided information regarding how it would address a
default by a clearing member under its rules,\160\ including
information regarding the treatment of certain RFR swaps for default
management purposes. Specifically, JSCC described the process by which
it offered JPY TIBOR-TONA basis swaps as a way to transition away from
IBOR swaps without incident.\161\ JSCC's comment supported the
Commission's conclusions regarding the bankruptcy regime under Japanese
law, as well as customer protection through global bankruptcy regimes
for exempt DCOs.
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\160\ See JSCC's relevant PFMI disclosures.
\161\ JSCC RFI letter (stating that, for default management
purposes, JPY 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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JSCC's comment also recommended that the Commission reconsider its
restrictions on exempt DCOs offering clearing services for U.S.
customers in order to allow U.S. customers access non-U.S. swap
markets. The Commission issued JSCC an order of exemption from
registration as a DCO in 2015.\162\ This order remains in place, and
JSCC is providing non-client clearing services to U.S.-based entities
pursuant to this order. As exempt DCOs, both JSCC and HKEX are not
permitted to offer clearing services for U.S. customers. JSCC's
additional comments regarding exempt DCOs and client clearing are
beyond the scope of this rulemaking.\163\
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\162\ The order was amended in 2017.
\163\ JSCC's interest in providing clearing services for U.S.
customers would be considered by the Commission as a separate matter
of DCO registration. As the Commission explained in the Second
Determination, exempt DCOs ``could apply to the Commission for DCO
registration in order to clear for U.S. customer accounts should
they decide to pursue that line of business at any time in the
future.'' Second Determination, 81 FR 71221. Section VII contains
additional discussion of JSCC's comment regarding the benefits of
exempt DCOs offering client clearing.
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The Commission received no other comm
[…truncated; see source link]Indexed from Federal Register on August 24, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.