A new rule removes the requirement to clear IBOR-based swaps and extends mandatory clearing to swaps on IBOR alternatives.

By Yvette D. Valdez and Adam Bruce Fovent

On August 12, 2022, the US Commodity Futures Trading Commission (CFTC) voted to amend its mandatory clearing requirements for interest rate swaps (the Rule). The vote furthers the CFTC’s  efforts in the global transition away from inter-bank offered rates (IBORs) towards alternative reference rates.

The Rule:

  • removes the requirement to clear swaps referencing the London Interbank Offered Rate (LIBOR) and certain other rates; and
  • imposes mandatory clearing for overnight index swaps (OIS) referencing certain alternative reference rates such as the Secured Overnight Funding Rate (SOFR).

Subject to the compliance timelines set out below and absent an applicable exemption, covered swaps referencing alternative reference rates will need to be submitted for clearing to a derivatives clearing organization.

As the CFTC noted and Commissioner Caroline Pham emphasized in her concurring statement, the Rule is limited in scope to the mandatory clearing requirement. The Rule does not seek to address the application of the CFTC’s trade execution requirement. The extension of mandatory designated contract market / swap execution facility trade execution to swaps referencing alternative reference rates remains subject to the separate “made available to trade” determination process.

Mandatory Clearing for OIS on Alternative Reference Rates

Under the Rule, the following swaps will be subject to mandatory clearing with effect from the compliance dates set out below:

Instrument Compliance Date
OIS denominated in US dollars that reference SOFR as a floating rate index with a stated termination date range of seven days to 50 years October 31, 2022
OIS denominated in Singapore dollars that reference the Singapore Overnight Rate Average (SORA) as a floating rate index with a stated termination date range of seven days to 10 years October 31, 2022
OIS denominated in euros that reference the Euro Short Term Rate (€STR) as a floating rate index with a stated termination date range of seven days to three years 30 days after publication of the Rule in the Federal Register
OIS denominated in Swiss francs that reference the Swiss Average Rate Overnight (SARON) as a floating rate index with a stated termination date range of seven days to 30 years 30 days after publication of the Rule in the Federal Register
OIS denominated in Japanese yen that reference the Tokyo Overnight Average Rate (TONA) as a floating rate index with a stated termination date range of seven days to 30 years 30 days after publication of the Rule in the Federal Register
OIS denominated in British pounds sterling that reference the Sterling Overnight Index Average (SONIA) as a floating rate index with a stated termination date range of seven days to 50 years[1] 30 days after publication of the Rule in the Federal Register


Removal of Mandatory Clearing for IBOR-Based Swaps

Under the Rule, the following swaps will no longer be subject to mandatory clearing with effect from the compliance dates set out below:

Instrument Compliance Date
Swaps denominated in US dollars that reference LIBOR as a floating rate index in each of the fixed-to-floating swap, basis swap, and forward rate agreement classes July 1, 2023
Swaps denominated in Singapore dollars that reference the Singapore Swap Offer Rate (SOR-VWAP) as a floating rate index in the fixed-to-floating swap class July 1, 2023
Swaps denominated in British pounds sterling, Swiss francs, and Japanese yen that reference LIBOR as a floating rate index in each of the fixed-to-floating swap, basis swap, and forward rate agreement classes 30 days after publication of the Rule in the Federal Register
Swaps denominated in euros that reference the Euro Overnight Index Average (EONIA) as a floating rate index in the OIS class 30 days after publication of the Rule in the Federal Register

 

Endnote

[1] OIS that reference SONIA as a floating rate index with a stated termination date range of seven days to three years are already subject to mandatory clearing. The Rule extends the termination date rate from seven days to 50 years.