On August 12, 2022, the Commodity Futures Trading Commission issued a final rule modifying its clearing requirement for interest rate swaps. The final rule updates the types of interest rate swaps required to be submitted to a registered derivatives clearinghouse for mandatory clearing by eliminating the requirements to clear interest rate swaps referencing the London Interbank Offered Rate (LIBOR) and certain other interbank offered rates (IBORs) and imposing mandatory clearing for overnight index swaps referencing certain alternative reference rates, such as the Secured Overnight Funding Rate (SOFR).

Under the final rule, effective as of:

September 23, 2022:

• mandatory clearing will no longer be applicable to GBP LIBOR,¹ CHF LIBOR,² JPY LIBOR,³ and EONIA⁴ in each of fixed-to-floating swap, basis swap, forward rate agreement (FRA)⁵ and overnight index swap classes;
• overnight index swaps referencing SARON,⁶ TONA⁷ (each with range of 7 days to 30 years) and ESTR⁸ (7 days to 3 years) are subject to mandatory clearing;
• the termination date range for SONIA⁹ overnight index swaps is expanded to 50 years;

October 31, 2022:

• overnight index swaps referencing SOFR (7 days to 50 years) and SORA¹⁰ (7 days to 10 years) are required to be cleared;

July 1, 2023:

• mandatory clearing is no longer applicable for swaps referencing USD LIBOR and SOR-VWAP¹¹ in fixed-to floating swap, basis swap, and FRA classes.

In recent years, regulators have been urging market participants to accelerate their adoption of USD SOFR and other replacement risk-free rates and to cease entering into new swaps referencing LIBOR and other IBORs. As this phaseout continues, liquidity has shifted away from IBOR swaps and into overnight index swaps referencing the risk-free rates. In light of this shift, the CFTC has determined that the interest rate swap clearing requirements must be modified to address the cessation (or loss of representativeness) of various IBORs that have been used as reference rates and the market’s adoption of swaps referencing the risk-free rates.

CFTC Chairman Rostin Behnam called the final rule an “important milestone” in the transition away from LIBOR and other IBORs, noting the importance of legal certainty and regulatory transparency in promoting financial stability, mitigating systemic risk and ensuring cross-border harmonization in the interest rate swap market.

The final rule is available here.

(1) GBP LIBOR refers to the British pound sterling LIBOR interest rate.

(2) CHF LIBOR refers to the Swiss franc LIBOR interest rate.

(3) JPY LIBOR refers to the Japanese yen LIBOR interest rate.

(4) EONIA refers to the Euro Overnight Index Average, which is computed as a weighted average of all overnight unsecured lending transactions in the interbank market undertaken in the European Union and European Free Trade Association countries.

(5) A forward rate agreement is a cash for difference derivative contract between two parties, benchmarked against an interest rate index.

(6) SARON refers to the Swiss Average Rate Overnight, representing the overnight interest rate of the secured money market for Swiss francs. SARON is published by SIX Swiss Exchange, Switzerland’s principal stock exchange. SARON is an alternative to CHF LIBOR.

(7) TONA refers to the Tokyo Overnight Average Rate, an interest rate benchmark that is administered and published by the Bank of Japan. It is a measure of the cost of borrowing in the Japanese yen unsecured overnight money market and is the near risk-free rate for Japanese yen markets. TONA is an alternative to JPY LIBOR.

(8) ESTR refers to the Euro Short-Term Rate, an interest rate benchmark that reflects the overnight borrowing costs of banks within the eurozone. The rate is calculated and published by the European Central Bank. ESTR is an alternative to EONIA.

(9) SONIA refers to the Sterling Overnight Index Average, an interest rate published by the Bank of England. SONIA is an alternative to GBP LIBOR.

(10) SORA refers to the Singapore Overnight Rate Average, the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore. SORA is administered by the Monetary Authority of Singapore.

(11) SOR refers to the Singapore Swap Offer Rate. SORA has been identified as the alternative interest rate benchmark to SOR.