Interest Rate Swap Clearing Requirements Changed by the CFTC

On August 12, 2022, the CFTC issued a final rule amending its clearing requirement for interest rate swaps (“IRS”).

The final rule updates the types of IRS that must be submitted to a registered derivatives clearing organization (“DCO”) for mandatory clearing by:

  • eliminate IRS offset requirements referring to LIBOR and certain other interbank offered rates (“IBOR”); and

  • introducing, in their place, new IRS clearing requirements referring to relevant replacement risk-free rates, such as the Overnight Funding Rate (“SOFR”) in the case of USD LIBOR.

CFTC Chairman Rostin Behnam called the final rule an “important milestone” in the transition from LIBOR and other IBORs, stressing the importance of legal certainty and regulatory transparency to promote financial stability, mitigate systemic risk and ensuring cross-border harmonization in the IRS market.

Background

Title VII of the Dodd-Frank Act amended the Commodities Exchange Act to require that a swap be cleared through a registered (or exempt) DCO if the CFTC determined that the swap (or group, category, type or class of swaps concerned) must be deleted.

Since the enactment of the Dodd-Frank Act, the CFTC has issued IRS netting orders in four categories: fixed-floating swaps, basis swaps, forward rate agreements (FRAs), and overnight index swaps. day (OIS), including an IRS number referencing LIBOR and other IBORs in various currencies.

In recent years, regulators and global standard setters have urged market participants to accelerate their adoption of USD SOFR and other alternative risk-free rates and to stop entering into new swaps referencing LIBOR and other IBORs. As this elimination continues, liquidity has shifted from IBOR swaps to OIS referencing risk-free rates.

In light of this change, the CFTC has determined that the IRS offset requirements must be modified to accommodate the termination (or loss of representativeness) of various IBORs that have been used as benchmarks and market adoption of swaps referencing risk-free rates. .

Final rule

The final rule amends the clearing requirements of CFTC Rule 50.4(a) as follows:

  • Removal of the requirement to offset the IRS referencing USD, GBP, CHF and JPY LIBOR, the Euro Overnight Index Average (EONIA) and the SGD Swap Offer Rate (SOR-VWAP), in each of the fixed- floating, basis swap and forward rate classes of agreement, if any; and

  • Added new requirements to clear the following classes from IRS:

    • USD-denominated IRS referencing SOFR with a stated termination date range of seven days to 50 years;

    • GBP-denominated IRS referencing the Sterling Overnight Index Average (SONIA) with a stated termination date range of seven days to 50 years;

    • JPY-denominated IRS referencing the Tokyo Overnight Average Rate (TONA) as a floating rate index with a stated termination date range of seven days to 30 years;

    • CHF-denominated IRS referencing the Swiss Average Overnight Rate (SARON) as a floating rate index with a stated termination date range of seven days to 30 years;

    • IRS denominated in SGD referring to the Singapore Overnight Rate Average (SORA) with a stated termination date range of seven days to 10 years; and

    • EUR-denominated IRS referencing the Euro Short Term Rate (€STR) with a stated termination date range of seven days to three years.

Although these changes will take effect 30 days after the publication of the final rule in the Federal RegisterIn order to align with the planned timing for the discontinuation of certain LIBORs and to harmonize with foreign regulatory timelines, special implementation dates will apply in the following cases:

  • October 31, 2022 for the new OIS authorization requirements referencing SOFR and SGD SORA; and

  • July 1, 2023 for the removal of IRS clearing requirements referencing USD LIBOR and SGD SOR-VWAP.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 237

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