In response to requests from the Alternative Reference Rates Committee ("ARRC"), CFTC staff provided relief to market participants relating to the transition from swaps referencing LIBOR and other interbank offered rates (collectively, "IBORs").

The relief covers three general categories: (1) requirements applicable to swap dealers, (2) the trade execution requirement and (3) mandatory clearing.

Swap Dealer Requirements.

In CFTC Letter 19-26, the Division of Swap Dealer and Intermediary Oversight ("DSIO") provided relief relating to IBORs and (1) other interest rates the parties reasonably expect to be discontinued or that have lost relevance as reliable benchmarks and (2) reference rates that succeed any of the foregoing rates. DSIO specifically stated the scope is intended to recognize that swaps could be amended more than once. The relief generally refers to amendments that are in scope under the letter as "qualifying amendments." The relief specifically covers:

  • Swap Dealer De Minimis. DSIO provided relief for purposes of excluding swaps that would be required to be counted solely as a result of a qualifying amendment.

  • Uncleared Margin. DSIO provided relief from compliance to the extent it would be required solely as a result of a qualifying amendment. In addition, DSIO provided relief for "basis swaps" that are entered into to achieve "substantially the same effect" as would be obtained by a qualifying amendment, and that do not extend the maturity or increase the notional for the original legacy swap.

  • External Business Conduct. DSIO provided relief failure to comply with external business conduct requirements, other than CFTC Rule 23.431(a) (anti-fraud), solely to the extent compliance would be required as a consequence of a qualifying amendment.

  • Documentation, Confirmations and Reconciliation. DSIO provided relief under Rules 23.501, 23.504, and 23.502(a)(4) and (b)(4), solely to the extent compliance would be required as a consequence of a qualifying amendment.

  • "Hedging"-Related Relief. DSIO provided relief as to whether a transaction will still be considered "hedging" if there is a temporary mismatch as a result of a qualifying amendment to a swap. In particular, the relief addresses (i) uncleared margin requirements for swaps relying on a clearing exception, (ii) status as a "hedging" eligible contract participant under CEA Section 1a(18)(A)(xi) and (iii) end-user exception documentation requirements under CFTC Rule 23.505(a)(4).

Trade Execution Requirement.

In CFTC Letter 19-27, the Division of Market Oversight provided relief from the application of the trade execution requirement under CEA Section 2(h)(8) for swaps modified or created under IBOR transition mechanisms for the sole purpose of accommodating replacement of an IBOR.

Mandatory Clearing.

In CFTC Letter 19-28, the Division of Clearing and Risk ("DCR") provided time-limited relief (until December 31, 2021) from swap clearing requirements under the CEA Section 2(h)(1)(A) and Part 50 of the CFTC rules for a failure to clear a legacy rate swap that is amended by adding a "fallback amendment" for the sole purpose of changing a specified IBOR. In addition, DCR provided relief to persons relying on an exception from mandatory clearing under CFTC Rule 50.50 or 50.51 for failure to clear in certain circumstances relating to IBOR transition.

Commentary

Providing relief from unintended consequences of the transition away from LIBOR is necessary.

The CFTC letters speak to issues raised by the ARRC in a recent letter to the prudential regulators regarding proposed relief from uncleared swap margin requirements. As previously discussed, U.S. prudential regulators should coordinate their approach to these matters.