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.

As a major LIBOR transition milestone approaches, a Staff Statement provides key considerations for market participants regarding their obligations.

By Laura N. Ferrell, Marlon Q. Paz, Zach Lippman, and Deric Behar

On December 7, 2021, the Staff of the Securities and Exchange Commission (SEC) issued a statement (the Statement) on the transition away from the London Interbank Offered Rate (LIBOR). The transition away from LIBOR is reaching an inflection point as the publication of the USD LIBOR benchmark for the 1-week and 2-month USD LIBOR maturities and many non-USD LIBOR maturities cease immediately after December 31, 2021.[1] The SEC, like other regulators around the world, continues to emphasize its expectation that market participants understand the risks associated with LIBOR transition and take appropriate action to move to alternative rates in a manner that protects customers, counterparties, the firm itself, and the capital markets more broadly.

As the countdown to the LIBOR sunset enters its final six months, the CFTC staff is trying to help the market transition.

By Yvette D. Valdez and Deric Behar

With less than six months to go before the London Interbank Offered Rate (LIBOR) expires on December 31, 2021, regulators around the world have been amplifying already loud calls for market participants to switch to alternative reference rates. In many cases, those calls have been accompanied by significant regulatory efforts and policy shifts to ween the market off reliance on LIBOR. In particular, the US Commodity Futures Trading Commission (CFTC) has been focused on helping the trillion-dollar USD LIBOR interest rate swap market navigate the transition.

Along with other regulatory authorities such as the Federal Reserve Board, the Financial Stability Board, the International Organization of Securities Commissions, the Alternative Reference Rates Committee (ARRC), and the International Swaps and Derivatives Association, the CFTC has been working to steer the derivatives market to safety before the LIBOR clock runs down. On July 13, 2021, the CFTC’s Market Risk Advisory Committee (MRAC) adopted SOFR First, a market best practice recommendation developed by MRAC’s Interest Rate Benchmark Reform Subcommittee. The Subcommittee previously recommended SOFR First on June 8, 2021, and provided an informative set of frequently asked questions.

By Becky Critchley and Anna Lewis-Martinez

On 5 March 2021, the UK’s Financial Conduct Authority (FCA) formally announced the dates for the cessation of all London Interbank Offered Rate (LIBOR) benchmark settings currently published by ICE Benchmark Administration (IBA). The FCA also confirmed that where a “synthetic” LIBOR is available after the cessation dates, the synthetic LIBOR will not in any event be considered to be representative as of the cessation dates. This is an important step towards the end of LIBOR, providing market participants with a fixed timeline for LIBOR’s cessation. The announcement also adds pressure on market participants to complete their transition plans by the end of 2021.

The FCA’s announcement follows the IBA’s notification to the FCA — following its consultation and notices of future departure received from the majority of the panel banks for each LIBOR setting — that it intends to cease providing all LIBOR settings for all currencies, subject to any rights of the FCA to compel IBA to continue publication.

The launch of the Protocol and the Supplement represents a key landmark in the transition away from IBORs but is not a one-stop solution.

By Yvette D. Valdez, Becky Critchley, Adam Bruce Fovent, J. Ashley Weeks, Deric Behar, and Anna Lewis-Martinez

On October 23, 2020, the International Swaps and Derivatives Association, Inc. (ISDA) published its IBOR Fallbacks Protocol (Protocol) and Supplement to the 2006 ISDA Definitions (Supplement) in anticipation of the expected discontinuation of the London Interbank Offered Rate (LIBOR) at the end of 2021. ISDA has also published a related set of Frequently Asked Questions, as well as a User Guide to IBOR Fallbacks and RFRs, to assist market participants in navigating the Protocol and the Supplement.

The Protocol and the Supplement, which take effect on January 25, 2021, provide robust fallback provisions to be applied upon the permanent cessation of a relevant IBOR or a pre-cessation announcement made with respect to LIBOR. The Protocol provides an efficient amendment mechanism for mutually adhering counterparties to incorporate these fallback provisions into legacy contracts. However, the Protocol and the Supplement do not themselves modify the terms of underlying floating rate exposures or ensure such exposures transition in the same manner as any interest rate derivatives entered into to hedge those exposures.

Regulators and industry groups strongly encourage market participants to adopt ISDA’s much-anticipated IBOR Fallbacks Protocol and Definitions Supplement.

By Yvette D. Valdez, Becky Critchley, Deric Behar, and Anna Lewis-Martinez

The International Swaps and Derivatives Association (ISDA) has published a statement from its Board of Directors confirming that on October 23, 2020 it will launch its IBOR (interbank offered rates) Fallbacks Protocol (the Protocol) and IBOR Fallbacks Supplement to the 2006 ISDA Definitions (the Supplement). The Supplement and the Protocol’s amendments will take effect on January 25, 2021.

According to ISDA’s October 9 announcement, all new derivatives contracts that incorporate the 2006 ISDA Definitions and reference one of the covered IBORs will contain the new fallbacks as of January 25, 2021. Derivatives contracts existing as of this date will also incorporate the new fallbacks if both counterparties have adhered to the Protocol or otherwise bilaterally agreed to include the new fallbacks in their contracts.

The relief removes regulatory obstacles and provides additional flexibility for market participants.

By Yvette D. Valdez, Adam Bruce Fovent, and J. Ashley Weeks

On August 31, 2020, three divisions of the US Commodity Futures Trading Commission (CFTC) issued revised no-action letters providing additional relief to swap dealers, end users, and other market participants from registration requirements; business conduct standards; uncleared swap margin requirements; and mandatory clearing and trade execution requirements as a result of the looming discontinuation of the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) and the transition to risk-free rates (RFRs).

In anticipation of LIBOR discontinuation, the SEC will begin examining transition progress.

By Vicki E. Marmorstein, Jane Summers, Yvette D. Valdez, Stephen P. Wink, Douglas K. Yatter, and Deric Behar

Nearly a year after the US Securities and Exchange Commission’s (SEC’s) release of a Staff Statement on LIBOR Transition, the SEC’s Office of Compliance Inspections and Examinations (OCIE) appears ready to shift from passively monitoring LIBOR-transition risks to actively testing SEC-registered firms on their progress. OCIE previously mentioned LIBOR transition as an area to watch in its 2020 Examination Priorities, noting that “OCIE will be reviewing firms’ preparations and disclosures regarding their readiness, particularly in relation to the transition’s effects on investors.”

OCIE released its latest Risk Alert on June 18, 2020 (Examination Initiative: LIBOR Transition Preparedness). The Alert provides registrants with specific information about the scope and content of OCIE’s upcoming LIBOR-transition examinations and information requests. SEC registrants, including investment advisers, broker-dealers, investment companies, municipal advisors, transfer agents, and clearing agencies, may find the Alert helpful in reviewing and formulating their own plans and priorities.

The proposals enhance the FCA’s powers to ensure an orderly wind-down of critical benchmarks and to deal with “tough legacy” contracts that cannot transition from LIBOR.

By Nicola Higgs and Ella McGinn

On 23 June 2020, the FCA published a statement welcoming HM Treasury’s announcement that the Treasury intends to bring forward legislation to amend the onshored UK version of the EU Benchmarks Regulation (UK BMR). Under the proposed changes, the FCA would have enhanced powers to ensure an orderly wind-down of critical benchmarks where the FCA has found that the benchmark’s representativeness will not be restored. These changes will be particularly helpful in the context of the LIBOR transition.

The FCA, the Bank of England, and members of the Working Group on Sterling Risk-Free Reference Rates have stated that firms should still plan for the transition away from LIBOR at the end of 2021.

By Becky Critchley, Jonathan Ritson-Candler, and Anna Lewis-Martinez

On 25 March 2020, the Financial Conduct Authority (FCA), after discussions with the Bank of England and the Working Group on Sterling Risk-Free Reference Rates, published a statement confirming that “[t]he central assumption that