Keynote of Chairman Rostin Behnam at Bloomberg’s The Final Chapter for USD LIBOR
The Finish Line is in Sight
November 17, 2022
Good afternoon. Thank you to Bloomberg for hosting this event. It’s a pleasure to join you to discuss LIBOR transition and expectations as we approach June 30, 2023, the end date for the remaining settings of U.S. Dollar (USD) LIBOR.
Today’s message continues to focus on the progress made by broad market participation in global cooperative and consultative efforts by committees like the Alternative Reference Rates Committee (ARRC).
The end of 2021 marked a major milestone in the transition with the cessation of a majority of the non-USD LIBOR settings, as well as 1-week and 2-month USD LIBOR. New alternative rates with liquid markets for swaps and futures continue to build around them and are gaining momentum. The Secured Overnight Financing Rate or SOFR, which is the risk-free rate for the U.S. dollar selected by the ARRC, is a fully transactions-based rate with the widest coverage of any U.S. Treasury repurchase rate available. 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.
MRAC Interest Rate Benchmark Reform Subcommittee Initiatives
When I joined the Commission in 2017, I chose to sponsor the agency’s Market Risk Advisory Committee (MRAC), one of five advisory committees created to seek input and make recommendations to the Commission on a variety of regulatory and market issues. In July of 2018, I convened the MRAC to focus on benchmark reform, and soon after, the Commission voted to establish the Interest Rate Benchmark Reform Subcommittee (Benchmark Subcommittee) to provide reports and recommendations regarding efforts to transition U.S. dollar derivatives and related contracts to SOFR, and the impact of such transition on the derivatives markets. The goal of the Benchmark Subcommittee, which was chaired then and now by Tom Wipf who also serves as Chairman of the ARRC, was to complement the work of the ARRC by raising awareness and shedding light on potential challenges, identifying risks for financial markets and individual consumers, and providing solutions within the derivatives space as we barreled towards the finish line.
In the U.S., collaboration among the ARRC, the New York Fed, and the Benchmark Subcommittee has yielded successful results. The first major collaborative initiative was around “plain English” disclosures, that market participants can use to inform clients and counterparties about the implications of continuing to transact in derivatives referencing LIBOR and other IBORs. The second significant initiative was a tabletop exercise with respect to the SOFR discounting switch by central counterparties (CCPs), LCH and CME. 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 initiative was the Subcommittee’s recommendation of SOFR First, a recommended market best practice for switching trading conventions from LIBOR to SOFR for USD linear interest rate swaps, cross currency swaps, non-linear derivatives and exchange traded derivatives. This initiative was consistent with Financial Stability Board (FSB) and International Organization of Securities Commissions statements on LIBOR transition that align with and are supportive of the interagency guidance from U.S. banking regulators that banks cease entering new contracts that reference LIBOR post December 31, 2021. In addition, this initiative was similar to the SONIA First effort encouraged by the UK’s FCA and the Bank of England.
The ARRC’s December 2021 progress report highlighted the transition’s positive momentum, particularly in the interest rate swap and futures markets. According to the report, building on the SOFR First initiatives, volume and liquidity in SOFR swaps sharply increased by 600 percent from March 2021, through the report’s publication. In the OTC derivatives markets, since the first stage of SOFR First, which prioritized tSOFR beginning July 26, 2021, the share of SOFR in interdealer swaps trading had increased to 80-100 percent.
Emphasizing our message of support and coordination, on July 14, 2021 the CFTC’s Market Participants Division and Division of Market Oversight issued a joint statement advising market participants and swap execution facilities of the importance of ensuring a smooth and timely transition away from LIBOR. CFTC staff also have worked closely with the ARRC to provide regulatory relief to facilitate transition from the various IBORs to SOFR and other relevant alternative reference rates. For example, in response to ARRC requests, in December 2019, three divisions of the CFTC issued staff no-action letters providing relief to market participants relating to the transition of swaps referencing IBORs. These letters and the staff no-action relief therein were updated in August 2020 and December 2021.
In August 2022, the CFTC issued a final rule modifying the Commission’s interest rate swap clearing requirement to remove certain clearing requirements tied to LIBOR and other interbank offered rates, and replacing them with similar clearing requirements for swaps referencing overnight, nearly risk-free reference rates. The final rule promotes financial stability and mitigates systemic risk, and provides legal certainty and regulatory transparency for DCOs, market participants, and our fellow international authorities. This is essential to ensure cross border harmonization in the interest rate swaps market.
Market Participant Initiatives
In May 2022, CME announced its SOFR First for Options initiative aimed at further incentivizing SOFR options trading, developing overall SOFR derivatives liquidity, and bolstering the transition effort. CME intends to convert all eligible Eurodollar futures and options to SOFR equivalent contracts on April 14, 2023.
For cleared swaps, LCH and CME have finalized their proposals to convert outstanding cleared swaps contracts that reference the remaining USD LIBOR settings. LCH will split the conversion into two tranches of products—to be converted over two separate weekends in April and May 2023—in order to reduce the scale of a single conversion event, allow certain product types to be given greater attention, and manage potential contingencies. CME plans to conduct a single conversion event on Friday, April 21, 2023 in order to limit the amount of operational risk and processing challenges market participants may face.
Headed toward the Finish Line- The Road Ahead
Data from cash and derivatives markets, presented at the November 9th meeting of the ARRC, showed continued progress and positive momentum in the transition to SOFR. According to the ARRC, SOFR is predominant across cash and derivatives markets. For the derivatives markets, “SOFR swaps have accounted for more than 90 percent of daily volumes on average of interest rate risk traded in the outright linear swaps market” and average daily volumes in SOFR futures volumes surpass that of Eurodollar futures. Moreover, “[s]ince July, average daily SOFR futures volumes have been nearly 3 times more than that of average daily volumes of Eurodollar futures.” As the data suggests, we continue to head in the right direction.
While we are headed into the new year with positive momentum in the transition and conversion plans for cleared swaps and Eurodollar futures and options, there are two key areas in which market participants must remain vigilant: (1) the transition of legacy LIBOR contracts, particularly legacy LIBOR loans and (2) anchoring the transition in overnight SOFR and limiting the use of Term SOFR rates.
To promote a smooth and orderly transition, the ARRC established fallback language for cash products and securitizations, and ISDA established the fallback protocol for derivatives. Federal legislation passed this year addresses the risks posed by older LIBOR contracts that do not have workable fallback language- also known as tough legacy contracts. It also provides a safe harbor to lenders if they choose SOFR in contracts where a party has the discretion to select a successor rate. The Board of Governors of the Federal Reserve System is preparing a final rule(s) implementing the federal legislation. While there is much in the works, a high volume of legacy USD LIBOR contracts remains, and waiting until June 30, 2023 to transition is untenable. In relation to these contracts, the results of the most recent ARRC Loan Remediation Survey are telling. The survey indicated that “[w]hile most respondents highlighted plans to actively transition their LIBOR loans to SOFR, rather than rely on fallbacks at cessation, over half of lenders expected most of their LIBOR loans to transition by the end of Q2 2023 or later, with almost 15 percent expecting their loans to transition post LIBOR cessation.”
CME produces and publishes Term SOFR Rates, which are derived from activity in the SOFR futures markets. Many loans have adopted Term SOFR rates. The ARRC has recognized the use of Term SOFR Rates in certain instances such as the transition of business loans, but has recommended and emphasized that overnight SOFR in advance or in arrears be used for derivatives and non-loan cash products in order to promote financial stability. Use of Term SOFR rates in derivatives and most other cash markets must be limited to avoid the types of problems created by LIBOR. Most recently, a rather large securitization that referenced Term SOFR drew concern. If this practice were to begin trending, it would increase the use of Term SOFR derivatives, which could lead to a decline in the overnight SOFR derivatives markets on which Term SOFR is based. This outcome would be the antithesis of what the official sector and market participants have worked so hard to achieve. Therefore, it is important that the use of SOFR, Term SOFR, and any other reference rates continue to align with the recommendations of the ARRC, the FSB and the Financial Stability Oversight Council.
The transition away from LIBOR has been a marathon and not a sprint. The CFTC has been running this marathon with you through the work of its Benchmark Subcommittee, its staff advisories, and its rulemakings. The finish line is within sight. Market participants must do all they can to ensure they cross that line with minimal to no operational risks. If members of the audience take one thing away today let it be this: Complacency is no longer an option and market participants cannot assume that they can ride the LIBOR train until the end of the line. 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. 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 if you have not done so already.
 See Press Release, Financial Conduct Authority, FCA issues final messages on LIBOR before end-2021 (Oct. 21, 2021) available at https://www.fca.org.uk/news/news-stories/final-messages-libor-end-2021; see also FCA, About Libor Transition (Last updated Sept. 29, 2022), available at https://www.fca.org.uk/markets/libor-transition.
 SOFR has been published daily by the Federal Reserve Bank of New York since April 3, 2018. See, e.g. Federal Reserve Bank of New York, Reference Rates (2018), https://www.newyorkfed.org/medialibrary/media/research/advisory_panel/far/lieber_far_april2018.pdf?la=en.
 ARRC, Frequently Asked Questions at 5 (Apr. 2021), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/ARRC-faq.pdf.
 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.
 Press Release Number 8011-19, CFTC, CFTC Market Risk Advisory Committee Approves Plain English Disclosures at Public Meeting (Sept. 13, 2019), https://www.cftc.gov/PressRoom/PressReleases/8011-19
 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 8394-21, CFTC, CFTC’s Interest Rate Benchmark Reform Subcommittee Recommends July 26 for transitioning Interdealer Swap Market Trading Conventions from LIBOR to SOFR (June 8, 2021), https://www.cftc.gov/PressRoom/PressReleases/8394-21
 Press Release, ARRC, ARRC Endorses MRAC Recommendations for September 21 “RFR First” Move of Interdealer Cross-Currency Swap Market Trading Conventions (July 21, 2021), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Endorsement_of_MRAC.pdf; See Press Release Number 8466-21, CFTC, CFTC’s Interest Rate Benchmark Reform Subcommittee Selects December 13 for SOFR First for Additional Cross-Currency Derivatives (Dec. 2, 2021), https://www.cftc.gov/PressRoom/PressReleases/8466-21.
 Press Release Number 8449-21, CFTC, CFTC’s Interest Rate Benchmark Reform Subcommittee Selects November 8 for SOFR First for Non-Linear Derivatives (Oct. 15, 2021), https://www.cftc.gov/PressRoom/PressReleases/8449-21
 Press Release Number 8469-21, CFTC, CFTC’s Interest Rate Benchmark Reform Subcommittee Issues User Guide for the Transition of Exchange-Traded Derivatives Activity to SOFR (Dec. 16, 2021), https://www.cftc.gov/PressRoom/PressReleases/8469-21
 Press Release, Financial Stability Board, FSB issues statements to support a smooth transition away from LIBOR by end 2021 (June 2, 2021), https://www.fsb.org/2021/06/fsb-issues-statements-to-support-a-smooth-transition-away-from-libor-by-end-2021/; International Organization of Securities Commissions, Statement on Benchmarks Transition (June 2, 2021), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD676.pdf.
 Board of Governors of the Federal Reserve System, SR 20-27: Interagency Statement on LIBOR Transition (Nov. 30, 2020), https://www.federalreserve.gov/supervisionreg/srletters/SR2027.htm. See also Board of Governors of the Federal Reserve System, SR 21-7: Assessing Supervised Institutions’ Plans to Transition Away from the Use of the LIBOR (Mar. 9, 2021), https://www.federalreserve.gov/supervisionreg/srletters/SR2107.htm.
 See FCA, LIBOR transition in the derivatives market (Last updated Oct. 12, 2021), available at https://www.fca.org.uk/markets/transition-libor/derivatives-market.
 The Alternative Reference Rates Committee, Year-End Progress Report: The Transition from U.S. Dollar LIBOR (Dec. 2021), 20211216-usd-libor-year-end-transition-progress-report (newyorkfed.org).
 Id. at 1.
 More specifically, the Division of Swap Dealer and Intermediary Oversight issued CFTC Letter 19-26 providing relief to swap dealers from registration de minimis requirements, uncleared swap margin rules, business conduct requirements confirmation, documentation, and reconciliation requirements, and certain other eligibility requirements. The Division of Market Oversight issued CFTC Letter 19-27 providing time-limited no-action relief from the trade execution requirement, while the Division of Clearing and Risk issued CFTC Letter 19-28 providing time limited relief from the swap clearing requirement and related exceptions and exemptions. See Press Release Number 8096-19, CFTC, CFTC Provides Relief to Market Participants Transitioning Away from LIBOR (Dec. 18, 2019), https://www.cftc.gov/PressRoom/PressReleases/8096-19.
 See Press Release Number 82280-20, CFTC, CFTC Provides Additional Relief to Market Participants Transitioning from LIBOR (Aug. 31, 2020), https://www.cftc.gov/PressRoom/PressReleases/8228-20.
 See Press Release Number 8473-21, CFTC, CFTC Staff Revises No-Action Letters Regarding Market Participants Transitioning from LIBOR (Dec. 22, 2021), https://www.cftc.gov/PressRoom/PressReleases/8473-21. See also Press Release Number 8475-21, CFTC, CFTC Staff Issues No-Action Letter Regarding Certain Reporting Requirements for Swaps Transitioning from Certain LIBORs to Risk-Free Rates (Dec. 22, 2021), https://www.cftc.gov/PressRoom/PressReleases/8475-21.
 Press Release Number 8573-22, CFTC, CFTC Issues Final Rule Modifying the Swap Clearing Requirement in Support of the Transition from LIBOR and Other Interbank Offered Rates to Alternative Reference Rates (Aug. 12, 2022), https://www.cftc.gov/PressRoom/PressReleases/8573-22
 CME Group, On-Demand Webinar: CME SOFR First for Options (May 5, 2022), available at https://www.cmegroup.com/articles/videos/2022/cme-first-for-options-webinar.html?itm_source=cmegroup&itm_medium=cmegroup&itm_campaign=sofr_first_for_options_webinar&itm_content=20220428_options_news_section; See also Press Release, ARRC, ARRC Welcomes CME Group’s SOFR First Options Announcement (May 5, 2022), ARRC_CME_SOFR_Options_Announcement.pdf (newyorkfed.org).
 CME Group, Eurodollar Fallbacks Implementation (Oct. 12, 2022), available at https://www.cmegroup.com/articles/files/2022/eurodollar-fallbacks-implementation-plan.pdf.
 LCH, LCH’s Consultation on Conversion of Outstanding USD LIBOR SwapClear Contracts, Circular No. 4216 (July 7, 2022), available at https://www.lch.com/membership/ltd-membership/ltd-member-updates/lchs-consultation-conversion-outstanding-usd-liborr; CME Group, CME Conversion Plan for USD LIBOR Cleared Swaps (Aug. 18, 2022), available at https://www.cmegroup.com/news/2022/cme-group-publishes-usd-libor-conversion-plan-for-cleared-swaps.html.
 LCH, LCH’s Consultation on Conversion of Outstanding USD LIBOR SwapClear Contracts, Circular No. 4216 (July 7, 2022), available at https://www.lch.com/membership/ltd-membership/ltd-member-updates/lchs-consultation-conversion-outstanding-usd-liborr.
 CME Group, CME Conversion Plan for USD LIBOR Cleared Swaps (Aug. 18, 2022), available at https://www.cmegroup.com/news/2022/cme-group-publishes-usd-libor-conversion-plan-for-cleared-swaps.html
 ARRC Meeting Readout (Nov. 9, 2022) available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2022/ARRC_Readout_November_2022.pdf
 Press Release, ARRC, ARRC Releases Summary of its Spread-Adjusted Fallback Recommendations (July 21, 2021), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20211006-arrc-release-spread-adjustment-narrative-final.
 Press Release, ISDA, New IBOR Fallbacks Take Effect for Derivatives (Jan. 25, 2021), https://www.isda.org/2021/01/25/new-ibor-fallbacks-take-effect-for-derivatives/.
 Consolidated Appropriations Act (Mar. 8, 2022), https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-117HR2471SA-RCP-117-35.pdf.
 Supra note 27.
 See Press Release, ARRC, ARRC Recommends Loan Conventions and Best Practices for Use of Forward-Looking SOFR Term Rate to Accelerate the Transition Away from LIBOR (July 21, 2021), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Term_Rate_Scope_and_Conventions.pdf.