SPEECHES & TESTIMONY

Statement of Chairman Heath P. Tarbert on LIBOR Transition Before the Market Risk Advisory Committee Meeting

December 11, 2019

Good morning, and thank you all for being here.  I want to thank Commissioner Behnam in particular for his tireless work on the LIBOR transition.  Through his sponsorship of the Market Risk Advisory Committee (MRAC), he has helped drive a very productive dialogue among industry and the U.S. regulators.  With all of your help as MRAC members, this dialogue has led us to what I believe will be a workable path forward.

Helping the LIBOR-to-SOFR Transition

As we all are acutely aware, the benchmark interest rates underpinning much of our markets will be sunsetting by the end of 2021.  The UK Financial Conduct Authority (FCA) has been unequivocal that it expects LIBOR as we know it to cease within two years.  Because of this, I have a word of caution to anyone hoping that LIBOR will continue into 2022.  It is simply this:  failing to transition away from LIBOR is source of risk to your individual firm as well as the global financial system.

The CFTC agrees with our fellow regulators here and abroad that it is time for global financial markets to move away from LIBOR.  We want to encourage and facilitate that transition.  For our part, we want to facilitate the conversion of U.S. Dollar LIBOR-based swaps to SOFR.

This agency has worked with the Alternative Reference Rate Committee (ARRC), of which we are an ex officio member.  The ARRC has submitted requests to the relevant U.S. financial regulators for regulatory relief that will ease the transition away from LIBOR. In our case, the ARRC has requested no-action relief from CFTC staff.  The ARRC’s request covers a number of issues addressed in our swaps regulations—including trade execution, clearing, margin for uncleared swaps, business conduct standards, and confirmations.  In effect, the ARRC is asking us treat amendments to legacy LIBOR swaps the same way we treated the original swaps.  That makes perfect sense to me. Providing such relief will ensure we do not penalize market participants as they make this critical transition in good faith.[1]

I am therefore pleased to announce that the CFTC will likely be the first out of the gate to provide LIBOR-transition related relief. Specifically, the CFTC staff is working to publish a series of relevant no-action letters by December 20, 2019.  This relief will remove many of the barriers to converting legacy LIBOR swaps to SOFR.  The relief will cover amendments to existing swaps that either add a fallback provision or change the reference rate to SOFR or another risk-free rate.

I want to express support for the collaborative efforts of our clearinghouses, in particular CME and LCH, and ISDA in developing fallback language for LIBOR swaps.  These fallback provisions can help smooth the transition to SOFR.

Avoiding Zombie LIBOR

I also want to highlight another lurking threat: the so-called “zombie LIBOR.”  If LIBOR is still published for some limited period but not enough panel banks submit daily rates, then LIBOR would exist yet not be representative of a real rate.  We would face a situation where swaps would be priced against a seemly alive rate whose is integrity as a benchmark is completely dead.

To avoid a potential zombie LIBOR apocalypse, various proposals are currently being discussed.  One possibility is that swaps referencing LIBOR could have pre-cessation triggers to change the referenced rate.[2]  We are monitoring these discussions and look forward to responding to any proposals in due course.

Regulators are also discussing how a period of non-representative LIBOR might work.  I certainly do not think this is the ideal outcome, but I appreciate that it is necessary to plan for all eventualities.

Looking ahead, 2020 is going to be crucial for our collective efforts to transition away from LIBOR.  The CFTC remains committed to working with market participants and our fellow regulators on this critical issue.

 

[1] This also comports with my view that no-action letters should be limited to those circumstances where a notice-and-comment rulemaking is not appropriate.  See “Tripling Down on Transparency,” Statement of Chairman Heath P. Tarbert Before the December 10, 2019 Open Meeting, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement121019 (stating that no-action relief is appropriate in “those situations with unique circumstances not suitable for a general rulemaking or where only temporary relief is contemplated pending either the rulemaking process or one or more market events (e.g., Brexit, SOFR transition, etc.)”).

[2] Letter of the FSB Official Sector Steering Group to the Int’l Swaps and Derivatives Ass’n (Nov. 15, 2019), available at https://www.fsb.org/2019/11/fsb-letter-to-isda-on-pre-cessation-triggers/ (“[W]e ask ISDA to include a pre-cessation trigger alongside the cessation trigger as standard language in the definitions for new derivatives and in a single protocol, without embedded optionality, for outstanding derivative contracts.”).