Statement of Acting Chairman Rostin Behnam at the Open Session of the Meeting of the Financial Stability Oversight Council
June 11, 2021
I wish to thank Secretary Yellen and FSOC members for the opportunity to provide some brief remarks. I’d also like to thank Vice Chair Quarles for his remarks and for his and the Federal Reserve’s work on the transition away from LIBOR. Earlier this week, I spoke at length at the SOFR Symposium—sponsored by the Alternative Reference Rates Committee (or ARRC) and the NY FED—about the history of LIBOR, its regression on several fronts, and the general observation that, as a market regulator, it would be indefensible to stand by and allow market participants to mechanically continue down LIBOR’s road to obsolescence when a sustainable path is clearly in sight.
As admonished by my fellow regulators, hope is not a solution, and the days of LIBOR are limited. I wholeheartedly agree with my colleague’s statement that shepherding the LIBOR transition is a key element of safeguarding the stability of the financial system.
It has been over a decade since the first allegations of benchmark manipulation surfaced, and nine years since the CFTC began levying sanctions for LIBOR-related misconduct, resulting in the collection of more than $3.3 billion.
By the numbers, around the time that Governor Andrew Bailey, then the Chief Executive of the UK Financial Conduct Authority (FCA)—which regulates LIBOR—acknowledged that despite significant improvements to LIBOR, the goal of anchoring LIBOR submissions and rates to the greatest extent possible to actual transactions could not be achieved, the U.S. Federal Reserve estimated that the more than $200 trillion in outstanding volumes of USD LIBOR contracts were benchmarked to a rate generated by $1 billion per day. For the three-month LIBOR, the standard reference rate in the derivatives markets, was less than US $1 billion of borrowing among the largest banks. On many days, that number dropped below $100 million. Last month, Governor Bailey reminded us that this dire situation has not changed in the last four years.
The skewed proportionality that underlies LIBOR continues to raise serious concerns about market integrity, conduct risks, and most importantly within the context of this body—greater financial stability risks. Regulatory authorities have relied on broad market participation in the global cooperative and consultative efforts—by committees like the ARRC, and have stood by ready to facilitate transition efforts by helping to avoid market dislocations.
In July of 2018, I convened the Market Risk Advisory Committee, a body within the CFTC that I sponsor to focus on benchmark reform, and soon after, the Commission voted to establish the Interest Rate Benchmark Reform Subcommittee to provide reports and recommendations regarding efforts to transition U.S. dollar derivatives and related contracts to SOFR, the risk-free rate for the U.S. dollar selected by the ARRC, and the impact of such transition on the derivatives markets.
The Benchmark Subcommittee has focused on collaborating with the ARRC on market development initiatives, with a view to supplement and support those efforts. The first major effort was around “plain English” disclosures, that market participants can use to inform clients and counterparties with whom they continue to transact derivatives referencing LIBOR and other IBORs about the implications of using such products.
The second significant effort was a tabletop exercise with respect to the SOFR discounting switch by the central counterparties. The CCP discounting shift in October 2020 marked a fundamentally important event positively correlated with the noticeable uptick in SOFR-based derivatives trading that followed.
The third, announced earlier this week, is the Subcommittee’s recommendation of the SOFR First Transition Initiative as a best practice aimed at prioritizing interdealer trading in SOFR over LIBOR. This is similar to the SONIA First effort encouraged by the UK’s FCA and Bank of England.
Specifically, as part of the Initiative, the Benchmark Subcommittee recommends that interdealer brokers change USD linear swap trading conventions to SOFR on July 26, 2021. After July 26, 2021, the interdealer market should replace trading of LIBOR linear swaps with trading of SOFR linear swaps.
While LIBOR would be expected to be accessible as a basis to SOFR after this date, the screens for LIBOR linear swaps would remain visible only for informational purposes until October 22, 2021, when they will go dark.
The Benchmark Subcommittee believes its recommendations are especially prudent given the most recent FSB and IOSCO statements on LIBOR transition (June 2) which are consistent with and supportive of the interagency guidance from U.S. banking regulators that banks cease entering new contracts that reference LIBOR post December 31, 2021.
There is broad consensus among all market participants, and not just the dealer banks, of the urgency to shift away from LIBOR. Even Tuesday’s announcement is timed to ensure that market participants, the trading platforms, other service providers, have sufficient time to prepare for the July 26th event.
We must move on with a rate that is based on sustained and robust transactions. Of note, the daily transaction volume underlying SOFR often has exceeded $1 trillion and it has never been less than $700 billion. It reflects activity undertaken by diverse types of institutions, including asset managers, banks, corporate treasurers, insurance companies, money market funds, pension funds, and others.
To avoid the conduct and stability risks that emerged when LIBOR became disconnected from actual activity, we must rely on a benchmark that is both representative of transactions and proportional to the depth and breadth of products that rely upon it. SOFR demonstrates that fitness for the derivatives markets.
Thank you again Secretary Yellen for raising this very important financial stability issue within the FSOC, and Vice Chair Quarles for his presentation and efforts. Complacency is no longer an option and market participants cannot assume that they can ride the LIBOR train until the end of the line. While we collectively act to ensure a smooth transition to SOFR, we must make clear, as we are today, that the time to make the switch is now.
 Rostin Behnam, Acting Chairman, CFTC, Remarks of Acting Chairman Rostin Behnam at The SOFR Symposium: The Final Year sponsored by the Alternative Reference Rates Committee (ARRC) (June 8, 2021), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam17.
 Andrew Bailey, Chief Executive, Financial Conduct Authority, Speech at Bloomberg London: The Future of LIBOR (July 27, 2017), https://www.fca.org.uk/news/speeches/the-future-of-libor.
 Jerome H. Powell, Governor, Federal Reserve, Introductory Remarks at the Roundtable of the Alternative Reference Rates Committee, The Federal Reserve Bank of New York, New York (Nov. 2, 2017), https://www.federalreserve.gov/newsevents/speech/powell20171102a.htm.
 Andrew Bailey, Governor, Bank of England, Descending Safely: Life after LIBOR, Speech given at the Alternative Reference Rates Committee SOFR Symposium: The Final Year (May 11, 2021), https://www.bankofengland.co.uk/speech/2021/may/andrew-bailey-a-moderated-discussion-with-john-williams-president-of-ny-fed.
 Press Release Number 7752-18, CFTC, CFTC’s Market Risk Advisory Committee Announces Agenda for July 12 Public Meeting (July 10, 2018), https://www.cftc.gov/PressRoom/PressReleases/7752-18.
 Press Release Number 7819-18, CFTC, CFTC Commissioner Behnam Announces the Establishment of New Subcommittee of the Market Risk Advisory Committee and Seeks Nominations for Membership (Oct. 3, 2018), https://www.cftc.gov/PressRoom/PressReleases/7819-18.
 See Interest Rate Benchmark Reform Subcommittee of the Market Risk Advisory Committee, Plain English Disclosures for New Derivatives Referencing LIBOR and other IBORs (Sept. 9, 2019), available at https://www.cftc.gov/PressRoom/Events/opaeventmrac090919.
 See Press Release Number 8171-20, CFTC, CFTC Market Risk Advisory Committee’s Interest Rate Benchmark Reform Subcommittee Holds Table Top Discussion and Revises Membership (June 2, 2020), https://www.cftc.gov/PressRoom/PressReleases/8171-20.
 Press Release Number, CFTC, CFTC’s Interest Rate Benchmark Reform Subcommittee Recommends Dates for Transitioning Interdealer Swap Market Trading Conventions to SOFR (June 8, 2021), https://www.cftc.gov/PressRoom/PressReleases/8394-21.
 ARRC, Frequently Asked Questions at 5 (Apr. 2021), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/ARRC-faq.pdf.