CFTC Provides Relief to Swap Dealer Transitioning from Soon-Defunct Libor

Three divisions of the CFTC have issued ‘no action’ relief for firms active in the swaps market.

The Commodity Futures Trading Commission (CFTC) has provided relief to market participants relating to the transition from swaps referencing LIBOR and other interbank offered rates. The CFTC staff has issued three no-action letters providing the additional relief for swap transactions transitioning from Libor to alternative benchmarks, which applies to swap dealers and other market participants.

The news comes as the scandal-ridden LIBOR is set to retire at the end of 2021 as the world’s most important benchmark following a multiyear rigging scandal by major lender since the 2008 financial crisis.

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The relief covers requirements applicable to swap dealers, the trade execution requirement and mandatory clearing.

Letter 19-26 provides relief from certain requirements under the registration exemption, uncleared swap margin rules and business conduct requirements. Letter 19-27 provides time-limited relief from the trade execution requirement, while letter 19-28 provides a similar relief from the swap clearing requirement.

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“Today’s relief will help smooth the transition away from interbank offered rates (IBORs), particularly with respect to older, legacy swaps that are sitting on the books of dealers and their clients, and in particular end-users around the world,” said CFTC Chairman, Heath P. Tarbert.

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They were also a dozen bankers that have been convicted on Libor rate-rigging charges in the US in a series of prosecutions brought by the DoJ and other regulators, which ultimately prompted an overhaul of the rate-setting rules. Prosecutors alleged that bank traders dishonestly manipulated the rate to benefit their own trading positions, nudging them up or down while ignoring rules that they should be set independently.

LIBOR, which underpins more than $300 trillion in derivatives and other instruments, is set to be replaced with the Bank of England’s Sonia rate for sterling-denominated swaps, loans, and futures.

Global regulators urged market participants earlier this year to accelerate the shift to the Sonia overnight rate before it ceases issuance of cash products, referencing Libor by the third quarter.

“This relief will remove regulatory obstacles to the adoption of potential protocols updating robust fallback procedures in the event that an IBOR ceases or becomes non-representative. Also, the relief will help market participants continue managing their swap portfolios as clearinghouses implement their planned transition of discount rates towards new reference rates, another vital step in moving the derivatives markets away from IBORs,” added the CFTC chairman.

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