Client Alert
CFTC Chairman Pledges Support for LIBOR-to-SOFR Transition
December 13, 2019
Joyce Sophia Xu, Michael Spafford, Diona Park, Daren Stanaway, & Matthew Smith
In a December 11, 2019 speech before the Market Risk Advisory Committee,[1] Commodity Futures Trading Commission (“CFTC”) Chairman Heath P. Tarbert urged global market participants to transition away from LIBOR, and gave a stark warning of the potential consequences of failing to do so: “I have a word of caution to anyone hoping that LIBOR will continue into 2022. It is simply this: failing to transition away from LIBOR is source of risk to your individual firm as well as the global financial system.”[2] In the same speech, Chairman Tarbert pledged the CFTC’s support for the conversion of USD LIBOR-based swaps to SOFR-based swaps and elaborated on the CFTC’s plans to facilitate such conversion.
Chairman Tarbert noted that the Alternative Reference Rate Committee (“ARRC”) has requested no-action relief from the CFTC relating to its swap regulations on trade execution, clearing, margin for uncleared swaps, business conduct standards, and confirmations, asking that the CFTC treat amendments to legacy LIBOR swaps the same way as the original swaps for purposes of these regulations. Agreeing with the ARRC’s position, Chairman Tarbert announced that the CFTC expects to publish a series of no-action letters by December 20, 2019, granting such relief for amendments that either (1) add a fallback provision to existing swaps or (2) replace the reference rate to SOFR or another risk-free rate. Chairman Tarbert noted that the CFTC likely will be the first U.S. financial regulator to provide LIBOR-transition relief,[3] ensuring that the CFTC does not penalize market participants as they transition away from LIBOR.[4]
Chairman Tarbert also addressed the potential threat of a “zombie LIBOR”—an unrepresentative LIBOR that continues to be published based on submissions from an insufficient number of panel banks—and the “zombie LIBOR apocalypse” that would ensue, where swaps continue to be priced using a zombie LIBOR that seems alive but is really dead in terms of its integrity as a benchmark. Noting that various proposals are under discussion to avoid such a potential zombie LIBOR apocalypse, including the use of pre-cessation triggers,[5] Chairman Tarbert stated that the CFTC is monitoring these discussions and will respond to any proposals in due course.
As the Chairman remarked, the upcoming year will be crucial for market participants to transition away from LIBOR. Market participants are strongly encouraged to take inventory of their existing contracts referencing LIBOR and implement plans to transition to alternative risk-free rates such as SOFR as soon as possible if they have not already started doing so.
[1] Dr. Heath P. Tarbert, Chairman and Chief Executive of the CFTC, Statement on LIBOR Transition Before the Market Risk Advisory Committee Meeting (Dec. 11, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/ tarbertstatement121119 (hereinafter “Chairman Tarbert’s Statement”).
[2] Id.
[3] U.S. Prudential Regulators have proposed amendments to their margin rules for non-cleared swaps that would preserve the legacy status of non-cleared swaps that are amended to replace certain IBORs, but the proposed amendments have not yet been finalized. For more information on the U.S. Prudential Regulators’ proposed amendments, please see our recent publication, “Proposed Amendments to U.S. Prudential Regulators’ Margin Rule for Non-Cleared Swaps” (available here).
[4] Chairman Tarbert’s Statement.
[5] Letter of the FSB Official Sector Steering Group to the Int’l Swaps and Derivatives Ass’n (Nov. 15, 2019), https://www.fsb.org/2019/11/fsb-letter-to-isda-on-pre-cessation-triggers/ (“[W]e ask ISDA to include a pre-cessation trigger alongside the cessation trigger as standard language in the definitions for new derivatives and in a single protocol, without embedded optionality, for outstanding derivative contracts.”).
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