Clearing Requirement Determination Under Section 2(h) of the Commodity Exchange Act for Interest Rate Swaps To Account for the Transition From LIBOR and Other IBORs to Alternative Reference Rates

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Commodity Futures Trading Commission (Commission or CFTC) is proposing to amend its interest rate swap clearing requirement regulations adopted under applicable provisions of the Commodity Exchange Act (CEA) in light of the global transition from reliance on certain interbank offered rates (IBORs) ( e.g., the London Interbank Offered Rate (LIBOR)) that have been, or will be, discontinued as benchmark reference rates to alternative reference rates, which are predominantly overnight, nearly risk-free reference rates (RFRs). The proposed amendments would revise the set of interest rate swaps that are required to be submitted for clearing pursuant to the CEA and the Commission's regulations to a derivatives clearing organization (DCO) that is registered under the CEA (registered DCO) or a DCO that has been exempted from registration under the CEA (exempt DCO). Among other things, the proposed amendments would modify the Commission's interest rate swap clearing requirement to reflect the market shift away from swaps that reference IBORs to swaps that reference RFRs.

DATES:

Comments must be received on or before June 30, 2022.

ADDRESSES:

You may submit comments, identified by RIN 3038-AF18, by any of the following methods:

• CFTC Comments Portal: https://comments.cftc.gov. Select the “Submit Comments” link for this rulemaking and follow the instructions on the Public Comment Form.

• Mail: Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

• Hand Delivery/Courier: Follow the same instructions as for Mail, above. Please submit your comments using only one of these methods. Submissions through the CFTC Comments Portal are encouraged.

All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to https://comments.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act (FOIA), a petition for confidential treatment of the exempt information may be submitted according to the procedures established in § 145.9 of the Commission's regulations, 17 CFR 145.9.

The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from https://comments.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under FOIA.

FOR FURTHER INFORMATION CONTACT:

Sarah E. Josephson, Deputy Director, at 202-418-5684 or sjosephson@cftc.gov; Melissa D'Arcy, Special Counsel, at 202-418-5086 or mdarcy@cftc.gov; or Daniel O'Connell, Special Counsel, at 202-418-5583 or doconnell@cftc.gov; each in the Division of Clearing and Risk at the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Commission's Swap Clearing Requirement

B. End of LIBOR

C. Global Progress on Benchmark Reform

II. Overview of the Request for Information

A. Work by DCOs To Support the Transition to RFRs

B. Work by Market Participants To Support the Transition to RFRs

III. Domestic and International Coordination and Outreach

A. Domestic Coordination Efforts

B. International Coordination Efforts

C. Clearing Requirements in Other Jurisdictions

IV. Proposed Amendments to Regulation § 50.4(a)

A. Overview of the Proposed Regulation

B. Modifications to the Existing Clearing Requirements

V. Proposed Determination Analysis for RFR OIS

A. General Description of Information Considered

B. Consistency With DCO Core Principles

C. Consideration of the Five Statutory Factors

VI. Proposed Implementation Schedule and Compliance Dates

VII. Cost Benefit Considerations

A. Statutory and Regulatory Background

B. Overview of Swap Clearing

C. Consideration of the Costs and Benefits of the Commission's Actions

D. Costs and Benefits of the Proposed Amendments as Compared to Alternatives

E. Section 15(a) Factors

VIII. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

C. Antitrust Laws

I. Background

A. Commission's Swap Clearing Requirement

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established a comprehensive new regulatory framework for swaps. Title VII of the Dodd-Frank Act (Title VII) amended the CEA to require, among other things, that a swap be cleared through a registered DCO or an exempt DCO if the Commission has determined that the swap, or group, category, type, or class of swaps, is required to be cleared, unless an exception to the clearing requirement applies. The CEA, as amended by Title VII, provides that the Commission may issue a clearing requirement determination based either on a Commission-initiated review of a swap, or a swap submission from a DCO.

Section 2(h)(2)(D)(ii) of the CEA requires the Commission to consider the following five factors when making a clearing requirement determination: (I) The existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data; (II) the availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the contract on terms that are consistent with the material terms and trading conventions on which the contract is traded; (III) the effect on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the DCOs available to clear the contract; (IV) the effect on competition, including appropriate fees and charges applied to clearing; and (V) the existence of reasonable legal certainty in the event of the insolvency of the relevant DCO or one or more of its clearing members with regard to the treatment of customer and swap counterparty positions, funds, and property.

The Commission adopted its first clearing requirement determination (First Determination) in 2012. The First Determination was implemented between March 2013 and October 2013 based on the schedule described in regulation § 50.25 and the preamble to the First Determination. The First Determination applied to interest rate swaps in four classes: Fixed-to-floating swaps, basis swaps, forward rate agreements (FRAs), and overnight index swaps (OIS).

In making its initial interest rate swap clearing determination, the Commission focused on the size of the interest rate swap market relative to the swap market overall, as well as the fact that these swaps were already widely being cleared. As set forth in regulation § 50.4(a), the Commission identified four classes of interest rate swaps having certain specifications related to (i) the currency in which the notional and payment amounts are specified; (ii) the floating rate index referenced in the swap; (iii) the stated termination date; (iv) optionality; (v) dual currencies; and (vi) conditional notional amounts. The Commission limited the interest rate swaps required to be cleared to those denominated in four currencies (U.S. dollar (USD), Euro (EUR), British pound (GBP), and Japanese yen (JPY)). The Commission noted that interest rate swaps denominated in these currencies comprised an outsized portion of the interest rate swap market in terms of notional amounts outstanding and trading volumes compared to interest rate swaps denominated in other currencies.

The First Determination covered a number of interest rate swaps that reference IBORs, including fixed-to-floating swaps, basis swaps, and FRAs denominated in USD, GBP, and JPY, referencing USD, GBP, and JPY LIBOR, respectively, and OIS denominated in EUR referencing the Euro Overnight Index Average (EONIA). The Commission observed that interest rate swaps referencing those indexes had significant outstanding notional amounts and trading liquidity.

The Commission adopted its second clearing requirement determination (Second Determination) in 2016. The Second Determination was implemented between December 2016 and October 2018, and covered interest rate swaps in nine additional currencies: Australian dollar (AUD), Canadian dollar (CAD), Hong Kong dollar (HKD), Mexican peso (MXN), Norwegian krone (NOK), Polish zloty (PLN), Singapore dollar (SGD), Swedish krona (SEK), and Swiss franc (CHF). The Commission adopted the Second Determination largely in order to further harmonize its interest rate swap clearing requirement with those of other jurisdictions that had already issued, or were in the process of issuing, clearing mandates on similar interest rate swaps. The Second Determination also covered swaps that reference other IBORs, including fixed-to-floating swaps denominated in SGD referencing the Singapore Swap Offer Rate (SOR-VWAP) and fixed-to-floating swaps denominated in CHF referencing CHF LIBOR. These rates will be discussed further below.

B. End of LIBOR

LIBOR is an interest rate benchmark that was intended to measure the average rate at which a bank can obtain unsecured funding in the London interbank market for a given tenor and currency. It had been one of the world's most frequently referenced interest rate benchmarks, serving as a reference rate for a wide variety of swaps and other financial products. Over the years, LIBOR was calculated based on submissions from a panel of contributor banks and published every London business day. Immediately prior to January 1, 2022, LIBOR was published for five currencies (USD, GBP, EUR, CHF, and JPY) and seven tenors (overnight or spot next depending on currency, 1-week, 1-month, 2-month, 3-month, 6-month, and 12-month), resulting in 35 individual LIBOR rates. Beginning this year, these LIBOR rates have almost entirely ceased publication or become nonrepresentative of the underlying market they are intended to measure.

Nearly a decade ago, government investigations concerning LIBOR, as well as a decline in the volume of interbank lending transactions that LIBOR is intended to measure, gave rise to concerns regarding the integrity and reliability of LIBOR and other IBORs. Although LIBOR was subject to a number of significant reform efforts, regulators and global standard-setting bodies did not view these reforms as a long-term solution. On July 27, 2017, Andrew Bailey, then-Chief Executive of the United Kingdom (UK) Financial Conduct Authority (FCA), LIBOR's primary regulator, announced that the FCA would not use its authority to compel LIBOR panel banks to contribute to the benchmark after 2021. On March 5, 2021, the FCA announced that publication of LIBOR would cease on December 31, 2021, for the following:

(i) EUR LIBOR in all tenors;

(ii) CHF LIBOR in all tenors;

(iii) JPY LIBOR in the spot next, 1-week, 2-month, and 12-month tenors;

(iv) GBP LIBOR in the overnight, 1-week, 2-month, and 12-month tenors; and

(v) USD LIBOR in the 1-week and 2-month tenors.

The FCA further determined that GBP and JPY LIBOR in 1-month, 3-month, and 6-month tenors would become nonrepresentative after December 31, 2021. Additionally, the FCA determined that USD LIBOR in the overnight and 12-month tenors would cease after June 30, 2023, and that USD LIBOR in the 1-month, 3-month, and 6-month tenors would not be representative after that date. At this time, EUR, CHF, JPY, and GBP LIBOR in all tenors, and USD LIBOR in the 1-week and 2-month tenors, have ceased publication or become nonrepresentative of the underlying market they are intended to measure.

The historic circumstances surrounding the transition from IBORs to RFRs are the result of significant private and public sector coordinated efforts. As plans to retire LIBOR proceeded, regulators in the United States and other jurisdictions worked to identify, develop, and implement reference rates to serve as alternatives to LIBOR and other IBORs. In the United States, the Alternative Reference Rates Committee (ARRC), convened in 2014 by the Federal Reserve Board (FRB) and the Federal Reserve Bank of New York (FRBNY) and comprised of private market participants and ex officio banking and financial sector regulators, selected the Secured Overnight Financing Rate (SOFR) as its preferred alternative to USD LIBOR. The ARRC developed a Paced Transition Plan, which has now been completed, to facilitate an orderly transition from USD LIBOR to USD SOFR.

C. Global Progress on Benchmark Reform

Regulators and public-private working groups in other IBOR currency jurisdictions have been working to identify, develop, and encourage market uptake of RFRs to replace LIBOR in currencies other than USD, as well as IBORs other than LIBOR. As relevant to this proposal, RFRs identified as alternatives for IBORs in currencies other than USD include: (i) The Sterling Overnight Index Average (SONIA) for GBP; (ii) the Swiss Average Rate Overnight (SARON) for CHF; (iii) the Tokyo Overnight Average (TONA) for JPY; and (iv) the Euro Short-Term Rate (€STR) for EUR.

In the European Union (EU), the Working Group on Euro Risk-Free Rates, convened in 2018 by the European Central Bank in connection with the Belgian Financial Services, the European Securities and Markets Authority (ESMA), and the European Commission (EC), also identified €STR as its preferred alternative to EUR EONIA, which ceased publication on January 3, 2022. Additionally, with regard to SGD, the Steering Committee for SOR & SIBOR Transition to SORA, established by the Monetary Authority of Singapore (MAS), has been working to oversee a transition from SGD SOR-VWAP to the Singapore Overnight Rate Average (SORA). SGD SOR-VWAP relies on USD LIBOR as an input and is expected to be discontinued across all tenors after June 30, 2023.

Table 1 that follows this paragraph contains a non-exhaustive list of RFRs that have been identified to replace IBORs around the world:

Regulators and global standard-setting bodies have urged market participants to accelerate their adoption of USD SOFR and other RFRs and cease entering new swaps referencing LIBOR and other IBORs, and have issued guidance and regulatory relief to facilitate the transition. In the United States, on July 13, 2021, the Commission's Market Risk Advisory Committee adopted SOFR First, a phased initiative to switch interdealer trading conventions from reliance on USD LIBOR to USD SOFR as a reference rate for swaps. SOFR First was implemented in four phases between July 26, 2021, and December 16, 2021. SOFR First mirrors similar best practices adopted in other jurisdictions to increase activity in swaps referencing RFRs.

II. Overview of the Request for Information

In light of ongoing efforts by the international regulatory community, market participants, and others to transition financial markets from IBORs to RFRs, on November 23, 2021, the Commission published an RFI seeking public input regarding how it should amend the interest rate swap clearing requirement to address the cessation of IBORs that have been used as benchmark reference rates and the market adoption of swaps that reference RFRs. The RFI sought input on all aspects of the swap clearing requirement that may be affected by the transition from IBORs to RFRs, including enumerated requests for data and other information related to IBOR and RFR swaps. The Commission received 14 responses to the RFI from a variety of market infrastructure providers, market participants, and industry organizations. In addition to addressing the Commission's specific requests for information, many respondents to the RFI shared information regarding their own contributions to the transition from IBORs to RFRs.

A. Work by DCOs To Support the Transition to RFRs

The Commission received responses to its RFI from CMEG, LSEG, and Eurex, all of which operate or are registered DCOs that offer for clearing RFR swaps subject to this proposal. The Commission also received a response from JSCC, an exempt DCO that clears JPY TONA swaps. Additionally, the Commission received a response from the CCP12, a global association of central counterparties (CCPs).

DCOs played an important role in the transition from IBORs to RFRs by offering clearing services for RFR swaps and converting cleared IBOR swaps to RFR OIS. The DCOs' responses highlight the efforts they undertook to facilitate a smooth transition from cleared IBOR swaps to cleared RFR swaps. As the CCP12 noted in its response, DCOs currently provide clearing services for RFR OIS and manage the risks associated with clearing such swaps.

Table 2 that follows this paragraph shows swaps referencing RFRs that registered DCOs have offered for clearing to facilitate the transition from IBORs. After DCOs began clearing RFR swaps, they worked to move open interest in IBOR swaps to RFR swaps, reflecting the growing RFR swap market. CME, LCH, and Eurex each converted cleared EUR EONIA swaps outstanding after October 15, 2021, to €STR OIS, ahead of EUR EONIA's January 3, 2022 cessation. These DCOs also converted cleared swaps referencing CHF, EUR, JPY, and GBP LIBOR to corresponding RFR OIS in December 2021, ahead of the December 31, 2021 cessation date for these LIBOR rates. Additionally, in December 2021, JSCC completed a conversion of JPY LIBOR swaps to JPY TONA OIS. Following these conversion events, with limited exceptions, swaps referencing these LIBOR rates were no longer offered for clearing. The Commission anticipates that CME, LCH, and Eurex will launch similar conversion events for all swaps still referencing USD LIBOR prior to June 30, 2023.

B. Work by Market Participants To Support the Transition to RFRs

Market participants also played a significant role in the transition from reliance on IBORs to the adoption of RFRs through engagement with RFR working groups, such as the ARRC, and the provision of trading liquidity in interest rate swaps referencing RFRs. As Citadel and ISDA noted in their responses to the RFI, many RFR swaps are now voluntarily cleared by market participants in large proportions. Citadel explained that, in the interdealer market, the “vast majority” of trading activity has transitioned to USD SOFR, and that “streaming dealer prices can be observed across [swap execution facilities (SEFs)], evidencing the number of available market makers.”

For each of the amendments in this proposal, the Commission considered feedback and data from responses to the RFI. Respondents overwhelmingly supported updating the clearing requirement to account for the cessation of LIBOR and other IBORs. Many respondents specifically expressed a desire that the Commission harmonize any changes to the clearing requirement with changes taking place in other jurisdictions. In particular, the Commission recognizes the information provided by respondents with regard to issuing a clearing requirement determination for OIS referencing USD SOFR with a termination date range as long as 50 years.

III. Domestic and International Coordination and Outreach

The global shift from IBORs to RFRs represents a historic effort by international standard setting bodies such as IOSCO and the FSB, regulators, cross-jurisdictional working groups, market infrastructure providers, market participants, and others, to move global swap markets toward reliance on more sustainable benchmarks. Due to the cross-border nature of this effort and the size of the affected markets, the Commission believes it is a priority to engage with domestic and international regulators as it considers changes to the clearing requirement. As discussed further below, the Commission's proposed clearing requirement determination is based upon this type of ongoing consultation and coordination among regulatory authorities and with market participants.

A. Domestic Coordination Efforts

The Commission is committed to working with the FRB, FRBNY, Securities and Exchange Commission (SEC), and other domestic authorities to ensure transparency in its efforts and, to the greatest extent possible, consistency in the transition from IBORs to RFRs. To this end, the Commission consults with domestic authorities including the SEC, the FRB, and the FRBNY as part of this rulemaking process.

B. International Coordination Efforts

Section 752(a) of the Dodd-Frank Act directs the Commission to consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards for the regulations of swaps. The Commission accomplished this with respect to the Second Determination by considering the ways in which it could harmonize its clearing requirement with clearing requirements in other jurisdictions. The Commission has long recognized the interconnectedness of the interest rate swap market, and the importance of consulting and coordinating with its counterparts in other jurisdictions in the adoption of clearing requirements in order to promote regulatory consistency and certainty, and to prevent the evasion of clearing requirements.

As part of this rulemaking process, the Commission is working with its counterparts overseas to ensure a coordinated approach to required clearing of interest rate swaps during the move from use of swaps referencing IBORs to swaps referencing RFRs. In particular, as part of the ongoing regulatory dialogue among authorities, Commission staff consulted with counterparts, including those at Bank of England, FCA, ESMA, Japanese Financial Services Agency (JFSA), Hong Kong Monetary Authority (HKMA), Australian Securities and Investments Commission (ASIC), and MAS. This type of dialogue reflects an effort to ensure consistency in interest rate swap clearing requirements across jurisdictions.

C. Clearing Requirements in Other Jurisdictions

In developing this proposal, the Commission considered relevant changes to clearing requirements in other jurisdictions, with a view toward ensuring that any changes the Commission proposes are harmonized to the greatest extent possible with those adopted by its international counterparts. This goal is consistent with the Commission's approach in the Second Determination and the views of a significant number of respondents to the RFI.

Table 3 that follows this paragraph outlines the way in which regulators in other jurisdictions have revised, or proposed to revise, clearing requirements to account for the transition from IBORs to RFRs.

IV. Proposed Amendments to Regulation § 50.4(a)

As described above, the global swap marketplace has made tremendous progress toward completing the transition from reliance on swaps that reference LIBOR and other IBORs to clearing and trading swaps that reference RFRs. The Commission intends to facilitate this transition further by modifying its interest rate swap clearing requirement to reflect the cessation or loss of representativeness of certain IBORs, and the market adoption of RFRs. The Commission is grateful to market participants and others who took the time to respond to its RFI. As stated above, the Commission reviewed those responses carefully in formulating this proposal, and the Commission looks forward to further comment on this proposal.

A. Overview of the Proposed Regulation

The Commission is proposing to amend regulation § 50.4(a) to remove all LIBOR and EUR EONIA swap clearing requirements, and add requirements to clear corresponding RFR swaps. While the IBOR swaps for which clearing requirements would be removed span all four classes of swaps currently required to be cleared—fixed-to-floating swaps, basis swaps, FRAs, and (in the case of EUR EONIA) OIS—the RFR swaps that the Commission proposes to add to the clearing requirement are all OIS. OIS are swaps where one leg is calculated based on a fixed rate and the other is calculated based on a daily overnight floating rate ( i.e., the RFR). On the other hand, RFR-linked basis swaps are currently cleared, but the Commission is not proposing to add any new requirements to clear RFR-linked basis swaps at this time because they are used primarily to move out of IBOR swap positions and into RFR swap positions. By not proposing to add these interest rate swaps to the clearing requirement, the Commission believes that it is providing added flexibility for market participants. Commission staff will continue to monitor the use of RFR-linked basis swaps as the IBOR transition process moves forward.

This proposal is the first rule change that the Commission is proposing to facilitate the transition from IBORs to RFRs for purposes of the clearing requirement. But in many ways, the proposal is an update rather than expansion of the existing clearing requirement. In effect, the Commission's proposal would replace the requirement to clear IBOR swaps in a number of different classes with a requirement to clear RFR OIS because the IBOR swaps have become unavailable and liquidity has shifted into RFR OIS.

As discussed further below, the Commission is proposing that these amendments to part 50 to require clearing for certain RFR OIS would become effective 30 days after publication of the final rule in the Federal Register . The Commission is proposing to remove existing IBOR swap clearing requirements from regulation § 50.4 in two stages. The Commission proposes to remove requirements to clear (i) non-USD LIBOR and EUR EONIA swaps, 30 days after the publication of the final rule in the Federal Register ; and (ii) USD LIBOR and SGD SOR-VWAP swaps, effective July 1, 2023. There remains outstanding USD LIBOR swaps activity, and a number of respondents to the RFI requested that the Commission retain its USD LIBOR swap clearing requirement until such time as that rate is unavailable.

Specifically, the Commission is proposing to amend regulation § 50.4(a) as follows:

1. Effective 30 days after publication of the final rule in the Federal Register :

a. Remove swaps denominated in GBP, CHF, and JPY that reference LIBOR as a floating rate index from each of the fixed-to-floating swap, basis swap, and FRA classes, as applicable.

b. Remove swaps denominated in EUR that reference EONIA as a floating rate index from the OIS class.

c. Add to the OIS class:

i. Swaps denominated in USD that reference SOFR as a floating rate index with a stated termination date range of 7 days to 50 years,

ii. Swaps denominated in EUR that reference €STR as a floating rate index with a stated termination date range of 7 days to 3 years,

iii. Swaps denominated in CHF that reference SARON as a floating rate index with a stated termination date range of 7 days to 30 years,

iv. Swaps denominated in JPY that reference TONA as a floating rate index with a stated termination date range of 7 days to 30 years, and

v. Swaps denominated in SGD that reference SORA as a floating rate index with a stated termination date range of 7 days to 10 years.

d. Change the maximum stated termination date range for swaps denominated in GBP that reference SONIA as a floating rate index in the OIS class to 50 years, for a new stated termination date range of 7 days to 50 years.

2. Effective July 1, 2023:

a. Remove swaps denominated in USD that reference LIBOR as a floating rate index from each of the fixed-to-floating swap, basis swap, and FRA classes.

b. Remove swaps denominated in SGD that reference SOR-VWAP as a floating rate index from the fixed-to-floating swap class.

A comparative overview of the effect of these proposed amendments to regulation § 50.4(a) is presented following this paragraph in tabular form for illustrative purposes. Swap classes and specifications that would be removed if the Commission's proposal is finalized are stricken through. Swap classes and specifications that would be added if the Commission's proposal is finalized are bolded. The set of tables following this paragraph illustrates the effect of the amendments as of 30 days after publication of a final rule in the Federal Register .

The set of tables following this paragraph illustrates the effect of further regulation § 50.4(a) amendments that, if finalized, would be effective as of July 1, 2023:

The Commission observes that it is the only authority to require CHF LIBOR swaps be submitted to clearing. In 2016, the CFTC was aware that the Swiss Financial Market Supervisory Authority (FINMA) was considering adopting a clearing requirement for swaps referencing CHF LIBOR, and sought public comment on the matter prior to adopting a final rule that included CHF LIBOR swaps. After the CFTC's final rule went into effect, FINMA did not adopt a clearing requirement for CHF LIBOR, and no other jurisdictions adopted such a clearing requirement. At this time, FINMA has not yet implemented mandatory clearing for CHF SARON OIS.

Similarly, while MAS did not require clearing of SGD SOR-VWAP swaps with a termination date range of 28 days to 10 years, until October 2018, the Commission was aware of this expected action, and took it into account when adopting a clearing requirement for SGD SOR-VWAP swaps in 2016. At this time, MAS has not yet implemented mandatory clearing for SGD SORA OIS.

The Commission observes that clearing rates for CHF SARON OIS and SGD SORA OIS are already high. As Table 6 below illustrates, the Commission estimates that more than 98% of notional transacted in these rates in each of November 2021, December 2021, and January 2022, was cleared. Furthermore, the Commission estimates that, as of January 28, 2022, there was $1,730 billion in outstanding notional in CHF SARON OIS, whereas there was $686 billion in outstanding notional in CHF LIBOR fixed-to-floating swaps. Similarly, the Commission estimates that, as of January 28, 2022, there was $449 billion in outstanding notional in SGD SORA OIS, and $307 billion in outstanding notional in SGD SOR-VWAP fixed-to-floating swaps.

Based on this data, it would appear that roughly half of the CHF market remains in LIBOR, and that, while SGD SOR-VWAP is expected to continue until June 30, 2023, the transition to SGD SORA is well underway. Data presented in tables 4 and 5 below further illustrate that the CHF LIBOR and SGD SOR-VWAP swap markets have rapidly diminished as markets shift to swaps referencing RFRs. The Commission estimates that, in January 2022, there were no CHF LIBOR fixed-to-floating swap transactions, and 69 SGD SOR-VWAP fixed-to-floating swap transactions (comprising $5 billion notional). The Commission also estimates that, in January 2022, there were 2,283 CHF SARON OIS transactions (comprising $130 billion notional) and 3,794 SGD SORA OIS transactions (comprising $119 billion notional).

Request for Comment

The Commission requests comment on the proposed modifications to regulation § 50.4(a), including the adoption of clearing requirements for CHF SARON OIS and SGD SORA OIS.

B. Modifications to the Existing Clearing Requirements

1. Swaps No Longer Offered for Clearing

In addition to adding certain RFR OIS to the clearing requirement, this proposal would modify the existing clearing requirement to reflect the cessation or loss of representativeness of certain IBOR swaps. Currently, all LIBOR settings with the exception of overnight, 1-month, 3-month, 6-month, and 12-month USD LIBOR, and EUR EONIA, have ceased or become nonrepresentative. As explained above, CME, LCH, and Eurex have converted cleared EUR EONIA and non-USD LIBOR swaps into RFR OIS, and with limited exceptions, swaps referencing GBP, CHF, and JPY LIBOR, as well as EUR EONIA, are no longer offered for clearing. As discussed above, regulators in the United States and other jurisdictions have called on market participants to transfer their swap positions from IBORs to RFRs, with corresponding liquidity shifting, and continuing to shift, from swaps referencing these IBORs to swaps referencing RFRs. Therefore, the Commission has preliminarily determined to update the clearing requirement for interest rate swaps where such IBOR swaps are no longer offered for clearing and have been replaced by RFR OIS.

2. Swaps Affected by Future IBOR Unavailability

By contrast, remaining USD LIBOR settings, as well as SGD SOR-VWAP settings, are not expected to cease or become nonrepresentative until after June 30, 2023. For this reason, the Commission proposes not to remove the clearing requirement for swaps referencing USD LIBOR and SGD SOR-VWAP, which relies on USD LIBOR as an input, until July 1, 2023. Because interest rate swaps referencing USD LIBOR and SGD SOR-VWAP are offered for clearing currently, and there are still outstanding notional exposures and trading activity in these swaps, the Commission believes that these swaps should remain subject to the clearing requirement. The remaining USD LIBOR settings are expected to cease or become nonrepresentative after June 30, 2023, and the Commission anticipates that there will be no new interest rate swaps referencing USD LIBOR on or after July 1, 2023. The Commission will continue to monitor the use of interest rate swaps referencing USD LIBOR and SGD SOR-VWAP as the IBOR transition process moves forward.

In anticipation of this USD LIBOR end date, the Commission anticipates that DCOs will continue to conduct conversion events to replace all outstanding USD LIBOR swaps with USD SOFR OIS, and will cease offering clearing services for USD LIBOR swaps. Until that time, however, the Commission proposes to maintain the clearing requirement for USD LIBOR swaps, and SGD SOR-VWAP swaps, until those rates cease publication.

This decision would be consistent with the fact that Bank of England has not yet proposed a clearing requirement for USD SOFR swaps and has left its USD LIBOR swap clearing obligation in place. By contrast, ESMA adopted regulatory technical standards that, subject to European Commission approval, will remove ESMA's current USD LIBOR clearing requirements and add a requirement to clear USD SOFR OIS (7 days to 3 years). While a number of respondents to the RFI expressed a desire for the Commission to harmonize its clearing requirement with clearing obligations in other jurisdictions, including the EU, several respondents specifically called for the Commission to maintain its USD LIBOR clearing requirement until such time as that rate is unavailable. Maintaining the clearing requirement for USD LIBOR swaps, and SGD SOR-VWAP swaps, until those rates cease publication would reflect both international coordination and input from responses to the RFI.

Request for Comment

The Commission requests comment regarding implementing changes to the existing interest rate swap clearing requirement, including when to remove the USD LIBOR and SGD SOR-VWAP swap clearing requirements.

V. Proposed Determination Analysis for RFR OIS

The Commission is proposing to modify its interest rate swap clearing requirement to include OIS referencing RFRs by adopting a new clearing requirement determination. The Commission has completed a review of the current RFR OIS offered for clearing and is prepared to consider the specific statutory factors required to make a new clearing requirement determination.

A. General Description of Information Considered

CME, LCH, and Eurex provided the Commission with regulation § 39.5(b) submissions relating to RFR OIS. In addition to the DCOs' submissions, the Commission looks to the ability of each DCO to clear RFR OIS, DCO swap data, swap data repository (SDR) data, publicly available data, the rule frameworks and risk management policies of each DCO, and information provided in response to the RFI.

This proposed clearing requirement determination is distinguishable from prior determinations insofar as it responds to a public and private sector, consensus-driven market event that has resulted, or will result, in liquidity shifting to new benchmark rates from rates that have become, or will soon become, unavailable. In that sense, central clearing in the RFR OIS markets, which rely on benchmark rates that are less susceptible to manipulation, may offer unique benefits that prior interest rate swap market clearing did not. As a result of this, and in light of the quick pace of market adoption along with DCOs' willingness to provide clearing for a wide variety of RFR swaps, the Commission believes the RFR swap markets are prepared for this clearing requirement determination proposal.

B. Consistency With DCO Core Principles

Section 2(h)(2)(D)(i) of the CEA requires the Commission to determine whether a clearing requirement determination would be consistent with core principles for DCOs set forth in section 5b(c)(2) of the CEA. CME, LCH, and Eurex are registered DCOs, and currently clear the RFR OIS identified in Table 2 above. CME, LCH, and Eurex are required to comply with the DCO core principles (and applicable Commission regulations) with respect to the RFR OIS being considered by the Commission as part of this proposed determination, and are subject to the Commission's DCO examination and risk surveillance programs.

The Commission believes that CME, LCH, and Eurex will be able to maintain compliance with the DCO core principles and applicable Commission regulations if the Commission adopts a clearing requirement determination for the RFR OIS. For the reasons discussed below, the Commission has preliminarily determined that subjecting any of the RFR OIS identified in this proposal to a clearing requirement is unlikely to impair CME's, LCH's, or Eurex's ability to comply with the DCO core principles, along with applicable Commission regulations. Moreover, in their responses to the RFI, each DCO stated that requiring clearing of USD SOFR or other RFR OIS would not negatively affect their ability to comply with the DCO core principles and applicable Commission regulations.

While exempt DCOs are not subject to the DCO core principles per se, the Commission determined that each was subject to comparable, comprehensive supervision and regulation by its home country regulator before granting such DCOs an exemption from registration, as required by the CEA. With regard to the two exempt DCOs that offer RFR OIS for clearing, namely, JSCC and HKEX, the Commission believes that both DCOs will continue to comply with their home country law and regulations if the Commission adopts a clearing requirement determination for the RFR OIS.

Request for Comment

The Commission requests comment as to whether the proposed determination would adversely affect any DCO's ability to comply with the DCO core principles.

C. Consideration of the Five Statutory Factors

Set forth below is the Commission's consideration of the five factors set forth in section 2(h)(2)(D)(ii) of the CEA as they relate to OIS (i) denominated in USD and referencing SOFR; (ii) denominated in GBP and referencing SONIA; (iii) denominated in CHF and referencing SARON; (iv) denominated in JPY and referencing TONA; (v) denominated in EUR and referencing €STR; and (vi) denominated in SGD and referencing SORA.

1. Factor (I)—Outstanding Notional Exposures and Trading Liquidity

Liquidity has shifted, and continues to shift, from swaps referencing IBORs to swaps referencing RFRs. The first of the five factors under section 2(h)(2)(D)(ii) of the CEA requires the Commission to consider “the existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data” related to “a submission made [by a DCO].” The Commission reviewed data from multiple sources, including but not limited to data from SDRs, data from DCOs, and other, publicly available data ( e.g., data published by ISDA). For purposes of this proposed rulemaking, the Commission principally presents notional and liquidity information based on the Commission's own collected data.

a. Outstanding Notional Exposures and Trading Liquidity

In assessing outstanding notional exposures and trading liquidity for a swap, the Commission reviews data to determine whether there is an active market for the swap, including whether there is a measurable amount of notional exposure and whether the swap is traded regularly as reflected by trade count, such that a DCO can adequately risk manage the swap. The data indicates that there is sufficient outstanding notional exposure and trading liquidity in RFR OIS to support a clearing requirement determination. Specifically, the data presented below generally demonstrates that there is significant activity in new USD SOFR, GBP SONIA, EUR €STR, CHF SARON, JPY TONA, and SGD SORA OIS trading. The Commission compiled the data used in tables 4-7 below from transaction data collected under part 45 of the Commission's regulations.

In Table 4 below, the Commission provides estimates of notional transacted by month for various categories of RFR OIS, and IBOR fixed-to-floating and basis swaps, for the period beginning November 1, 2021 and ending January 31, 2022. The data in Table 4 generally indicates significant, and relatively steady or increasing, amounts of notional transacted in RFR OIS from November 2021 through January 2022. The data also illustrates that there was comparatively little notional transacted during the same time period in fixed-to-floating swaps referencing IBORs that ceased or became nonrepresentative in December 2021 and January 2022.

The Commission notes, however, that significant amounts of notional were transacted in USD LIBOR fixed-to-floating swaps, and that while notional traded per month in USD SOFR OIS nearly doubled between December 2021 and January 2022, the amount of such notional transacted in January 2022 was still less than half that of the amount of notional transacted during the same month in USD LIBOR fixed-to-floating swaps. Thus, it appears that while the transition of liquidity from USD LIBOR fixed-to-floating swaps to USD SOFR OIS is well underway, it is not yet complete.

Table 5 that follows this paragraph provides estimates of trade counts for the same categories of RFR and IBOR swaps during the same three-month period. The data in Table 5 indicates that, with regard to RFR OIS, monthly trade count generally increased or was relatively steady between November 2021 and January 2022, with an especially pronounced increase in the number of USD SOFR OIS transactions. Conversely, trade counts for swaps referencing IBORs that ceased or became nonrepresentative in December 2021 and January 2022 dropped off precipitously by January 2022. While there were still a significant number of USD LIBOR fixed-to-floating swap transactions during the three-month period that Table 5 measures, the monthly trade count for such transactions declined significantly during that period.

Table 6 that follows this paragraph presents estimates of the percentage of notional cleared for the RFR OIS subject to this proposed determination, based on notional transacted by month during the period beginning November 1, 2021 and ending January 31, 2022. The data in Table 6 illustrates that, with respect to the RFR OIS, significant amounts of notional are already being cleared voluntarily. The proportion of notional transacted each month from November 2021 through January 2022 that was cleared was consistently high—approaching 100%—with regard to OIS referencing each of USD SOFR, GBP SONIA, EUR €STR, CHF SARON, JPY TONA, and SGD SORA.

Table 7 that follows this paragraph presents a breakdown of notional transacted and trade count for the period beginning January 1, 2022 and ending January 31, 2022, by tenor, for the relevant RFR OIS. Table 7 illustrates that RFR OIS are being cleared across a wide range of maturities. By notional and trade count, most clearing activity occurs in RFR OIS dated between 6 months and 15 years. However, the Commission notes that with respect to USD SOFR and GBP SONIA OIS in particular, there is also significant clearing activity in swaps dated 15 years or greater.

In addition to this transaction-level data, Table 8 that follows this paragraph presents open swaps data illustrating outstanding notional in the RFR OIS subject to this proposed determination.

Finally, to demonstrate that clearing has expanded beyond the short-dated maturities for USD SOFR fixed-to-floating swaps, in particular, the data in Table 9 that follows this paragraph reflects the total volumes of cleared outstanding notional swaps by tenor. The Commission has preliminarily determined that the data collectively indicates sufficient outstanding notional exposures and regular trading activity in RFR OIS for purposes of demonstrating the liquidity necessary for DCOs to risk manage these products and to support a proposed clearing requirement. The Commission anticipates that RFR OIS notional exposures and trading activity will increase over time as markets continue to adopt RFR OIS in place of swaps referencing IBORs that have, or will by mid-2023, become unavailable. In addition to the extensive data presented and analyzed in this proposal, and as discussed in detail below, the Commission is basing this preliminary determination on its ongoing supervision of DCOs and its monitoring of the cleared interest rate swap market for purposes of risk surveillance.

Request for Comment

The Commission requests comment and any relevant market analysis regarding the sufficiency of outstanding notional exposures and trading liquidity in USD SOFR, GBP SONIA, EUR €STR, CHF SARON, JPY TONA, and SGD SORA OIS, including for the proposed termination date ranges, to support a clearing requirement.

The Commission invites commenters to submit additional data from any available data sources.

b. Pricing Data

The Commission regularly reviews pricing data for the RFR OIS subject to this proposed determination and has found that these OIS are capable of being priced off of deep and liquid markets. Commission staff regularly receives and reviews margin model information from DCOs that includes particular procedures that they follow to ensure that market liquidity exists in order to close out a position in a stressed market, including the time required to determine a price. Because of the stability of access to pricing data from these markets, the pricing data for the OIS that are the subject of this proposed determination is generally viewed as being reliable. Based on this information, the Commission has preliminarily determined that there is adequate pricing data to support required clearing of RFR OIS.

In addition, as part of their regulation § 39.5(b) submissions, the registered DCOs that clear the RFR OIS subject to this proposed determination provided information to support the Commission's conclusion that there exists adequate pricing data to justify a clearing requirement determination. In its regulation § 39.5(b) submissions, CME provided data regarding transaction volumes and market participation, and LCH provided information on daily volumes, and noted that pricing data for each of the RFR OIS that it clears is available from brokers. LCH also noted the range of maturities for which quotes can be obtained from brokers. In its submissions to the Commission, Eurex provided relevant language from its FCM Regulations and Clearing Conditions regarding determination of daily pricing. Eurex stated that it believes its reliance on Reuters for pricing data is accurate because it is a readily available and conventional source. Eurex noted that it also can receive pricing data from Bloomberg and has multiple backup sources.

In the RFI, the Commission specifically requested feedback on whether adequate pricing data exists for DCO risk and default management of swaps referencing USD SOFR. CME, LCH, and Eurex each stated that adequate pricing data exists for DCO risk and default management of USD SOFR swaps. Respondents to the RFI also provided support for the conclusion that sufficient liquidity and pricing data exists in RFR OIS markets to withstand stressed market conditions.

Request for Comment

The Commission requests comment and any relevant market analysis regarding whether there is adequate pricing data for DCO risk and default management of the products subject to this proposal, including with regard to the proposed stated termination date ranges.

The Commission also requests comment regarding whether DCOs offering clearing for RFR OIS markets would be able to risk manage these products during stressed market conditions.

2. Factor (II)—Availability of Rule Framework, Capacity, Operational Expertise and Resources, and Credit Support Infrastructure

Section 2(h)(2)(D)(ii)(II) of the CEA requires the Commission to take into account the availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear the proposed classes of swaps on terms that are consistent with the material terms and trading conventions on which they are now traded. Based on their regulation § 39.5(b) submissions, as well as ongoing oversight, the Commission believes that each of the registered DCOs has developed rule frameworks, capacity, operational expertise and resources, and credit support infrastructure to clear the interest rate swaps they currently clear, including the RFR OIS subject to this proposal, on terms that are consistent with the material terms and trading conventions on which those swaps are being traded. The Commission subjects each of the registered DCOs to ongoing review, risk surveillance, and examination to ensure compliance with the CEA's core principles and Commission regulations, including with respect to the submitted swaps.

Each of the registered DCOs has procedures pursuant to which they regularly review their clearing of the RFR OIS subject to this proposal in order to confirm or adjust margin and other risk management tools. When reviewing each of the registered DCOs' risk management tools, the Commission considers whether the DCO is able to manage risk during stressed market conditions to be one of the most significant considerations. Each of the registered DCOs has developed detailed risk management practices, including a description of risk factors considered when establishing margin levels. The Commission reviews and oversees each of the registered DCOs' risk management practices and development of margin models. Margin models are further refined by stress testing and daily back testing. The Commission also considers stress testing and back testing when assessing whether each of the registered DCOs can clear swaps safely during stressed market conditions.

The registered DCOs clearing the RFR OIS subject to this proposed determination design and conduct stress tests, and Commission staff monitors development of these stress tests. Each of the registered DCOs also conducts reverse stress tests to ensure that their default funds are sized appropriately and to ascertain whether any changes to their financial resources or margin models are necessary. Commission staff monitors markets in real-time and also performs stress tests against the DCOs' margin models and may recommend changes to a margin model. The registered DCOs conduct back testing on a daily basis to ensure that the margin models capture market movements for member portfolios.

Before offering a new product for clearing, each of the DCOs considers stress tests and back testing results in determining whether it has sufficient financial resources to offer new clearing services. The Commission also reviews initial margin models and default resources to ensure that the DCOs can risk manage their portfolio of products offered for clearing. This combination of stress testing and back testing in anticipation of offering new products for clearing provides the registered DCOs with greater certainty that new product offerings will be risk-managed appropriately. The process of stress testing and back testing also gives the DCOs practice incorporating the new product into their models. In addition to the Commission's surveillance and oversight, each of the registered DCOs continues to monitor and test their margin models over time so that they can operate effectively in stressed and non-stressed market environments. Registered DCOs review and validate their margin models regularly.

Each registered DCO monitors and manages credit risk exposure by asset class, clearing member, account, or individual customer. They manage credit risk by establishing position and concentration limits based on product type or counterparty. These limits reduce potential market risks so that DCOs are better able to withstand stressed market conditions. Each of the registered DCOs monitors exposure concentrations and may require additional margin deposits for clearing members with weak credit scores, with large or concentrated positions, with positions that are illiquid or exhibit correlation with the member itself, and/or where the member has particularly large exposures under stress scenarios. Registered DCOs also can call for additional margin, on top of collecting initial and variation margin, to meet the current DCO exposure and protect against stressed market conditions.

In support of its ability to clear the RFR OIS subject to this proposal, CME's regulation § 39.5(b) submissions cite to its rulebook to demonstrate the availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear interest rate swap contracts on terms that are consistent with the material terms and trading conventions on which the contracts are traded. LCH's submissions state that it has a well-developed rule framework and support infrastructure for clearing interest rate swaps, which it leverages to offer clearing services for the RFR OIS subject to this proposal. Eurex's submissions state that Eurex has a well-developed rule framework and support infrastructure for clearing the RFR OIS that are subject to this proposal. Eurex further states that it has the appropriate risk management, operations, and technology capabilities to ensure that it is able to liquidate positions in such swaps in an orderly manner in the event of a clearing member default, and that the RFR OIS are subject to margin and clearing fund requirements set forth in Eurex's FCM Regulations and Clearing Conditions.

For all of these reasons, the Commission has preliminarily determined that the application of DCO risk management practices to the RFR OIS subject to this proposed clearing requirement determination should ensure that the swaps subject to this proposal can be cleared safely, even during times of market stress. For additional information related to this factor, please see public disclosures made CME, LCH, and Eurex.

Request for Comment

The Commission requests comments concerning all aspects of this factor, including whether commenters agree that DCOs offering to clear the RFR OIS subject to this proposed clearing requirement determination can satisfy the factor's requirements.

3. Factor (III)—Effect on the Mitigation of Systemic Risk

Section 2(h)(2)(D)(ii)(III) of the CEA requires the Commission to consider the effect of the clearing requirement on the mitigation of systemic risk, taking into account the size of the market for such contract and the resources of the DCO available to clear the contract. As presented in the data and discussion above, the Commission believes that the market for each RFR OIS subject to this proposed determination is significant and mitigating counterparty credit risk through clearing likely would reduce systemic risk in the interest rate swap market generally. While not every individual RFR OIS market has large outstanding notional exposures, each such market is important, and as liquidity shifts from IBOR swaps to RFR OIS, continuity of clearing for RFR OIS serves to reduce systemic risk.

In its regulation § 39.5(b) submissions, CME explains the benefits of centralized clearing, including freer counterparty credit lines, enhanced risk management, operational efficiencies, and ease of offsetting risk exposures. LCH's submissions note that clearing avoids complex bilateral relationships, provides for default management, and enhances transparency into the risks posed by swap positions. Eurex's submissions highlight the benefits of reduction of counterparty risk, margin and collateral efficiencies, protections for customer assets, and legal certainty. Each DCO's submissions indicate that they maintain adequate resources to clear the swaps that are the subject of this proposal. Additionally, in responding to the RFI, JSCC noted that it has been clearing JPY TONA OIS since 2014 “without facing any challenge from a governance, rule framework, operational, resourcing, or credit support infrastructure perspective.”

In responding to the RFI, CME noted that mitigation of systemic risk is one of the key advantages of centralized clearing over bilateral arrangements. LSEG stated that “a clearing requirement will mitigate systemic risk, making sure that USD SOFR risk moves from the bilateral space to the cleared market to the necessary extent.” Additionally, Citadel noted that “[a]pplying a clearing requirement to OTC derivatives referencing SOFR will ensure these markets develop as centrally-cleared markets,” and further noted that “central clearing provides greater systemic risk mitigation than bilateral margining for uncleared swaps.” TD Bank agreed that a clearing requirement for USD SOFR swaps “might increase the clearing rate and therefore mitigate[] systemic risk even more,” but TD Bank also noted that the “bulk” of USD SOFR swaps are already voluntarily cleared.

Centrally clearing the RFR OIS subject to this proposal through a registered or exempt DCO should reduce systemic risk by providing counterparties with daily mark-to-market valuations upon which to exchange variation margin pursuant to the DCO's risk management framework and requiring posting of initial margin to cover potential future exposures in the event of a default. In addition, swaps transacted through a DCO are secured by the DCO's guaranty fund and other available financial resources, which are intended to cover extraordinary losses that would not be covered by initial margin.

Central clearing was developed and designed to handle significant concentration of risk. Each of the DCOs that clears the RFR OIS covered by this proposal has a procedure for closing out and/or transferring a defaulting clearing member's positions and collateral. Transferring customer positions to solvent clearing members in the event of a default is critical to reducing systemic risk. DCOs are designed to withstand defaulting positions and to prevent a defaulting clearing member's loss from spreading further and triggering additional defaults. To the extent that introduction of an RFR OIS clearing requirement increases the number of clearing members and market participants in the interest rate swap market, then DCOs may find it easier to transfer positions from defaulting clearing members if there is a larger pool of potential clearing members to receive the positions.

Each DCO has experience risk managing interest rate swaps, and the Commission believes that the DCOs have the necessary financial resources available to clear the RFR OIS that are the subject of this proposal. Accordingly, the Commission believes that these DCOs would be able to manage the risk posed by clearing the new RFR OIS that would be required to be cleared by virtue of this proposal.

In addition, the Commission believes that the central clearing of the RFR OIS that are to be added under this proposal should serve to mitigate counterparty credit risk, thereby potentially reducing systemic risk. Having considered the likely effect on the mitigation of systemic risk, the Commission is proposing to add these RFR OIS to the clearing requirement.

Request for Comment

The Commission requests comments concerning the proposal to add these RFR OIS to the clearing requirement, with regard to the possible reduction of systemic risk.

How, if at all, should the Commission consider the ongoing implementation of uncleared swap margin requirements for swap dealers in assessing this factor?

4. Factor (IV)—Effect on Competition

Section 2(h)(2)(D)(ii)(IV) of the CEA requires the Commission to take into account the effect on competition, including appropriate fees and charges applied to clearing. Of particular concern to the Commission is whether this proposed determination would harm competition by creating, enhancing, or entrenching market power in an affected product or service market, or facilitating the exercise of market power. Market power is viewed as the ability to raise prices, including clearing fees and charges, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives.

The Commission has identified one putative service market as potentially affected by this proposed clearing determination: A DCO service market encompassing those clearinghouses that currently clear the RFR OIS subject to this proposal. The Commission recognizes that this proposed clearing requirement potentially could impact competition within the affected market. Of particular importance to whether any such impact is positive or negative, is: (1) Whether the demand for these clearing services and swaps is sufficiently elastic that a small but significant price increase above competitive levels would prove unprofitable because users of the interest rate swap products and DCO clearing services would substitute other clearing services coexisting in the same market(s); and (2) the potential for new entry into this market. The availability of substitute clearing services to compete with those encompassed by this proposed determination, and the likelihood of timely, sufficient new entry in the event prices do increase above competitive levels, each operate independently to constrain anticompetitive behavior.

Any competitive import likely would stem from the fact that the proposed determination and regulations would remove the alternative of not clearing for RFR OIS subject to this proposal. The proposed determination would not specify who may or may not compete to provide clearing services for the RFR OIS subject to this proposal, as well as those not required to be cleared.

Removing the choice to enter into a swap without submitting it for clearing under this proposed rulemaking is not determinative of negative competitive impact. Other factors, including the availability of other substitutes within the market or potential for new entry into the market, may constrain market power. The Commission does not foresee that the proposed determination constructs barriers that would deter or impede new entry into a clearing services market, and the Commission anticipates that a determination to modify the clearing requirement for interest rate swaps could foster an environment conducive to new entry. For example, the proposed clearing determination is likely to reinforce, if not encourage, growth in demand for clearing services. Demand growth, in turn, can enhance the sales opportunity, a condition hospitable to new entry. Moreover, to the extent that there are high rates of voluntary clearing in the RFR OIS subject to this proposed determination already, a regulatory requirement to clear such swaps would provide additional certainty that those high rates of clearing would remain constant.

Respondents to the RFI who provided feedback regarding the potential effect on competition due to a modified clearing requirement did not identify any potential negative effects. For instance, Citadel stated that applying a clearing requirement to OTC derivatives referencing USD SOFR would increase liquidity and competition, citing, among other research, a study that found that “the Commission's clearing and trading reforms led to a significant reduction in execution costs in the USD interest rate swap market, with market participants saving as much as $20 million-$40 million per day.” LSEG, Eurex, JSCC, and TD Bank also did not identify potential competition-related concerns.

Request for Comment

The Commission requests comment on the extent to which: (1) Entry barriers currently do or do not exist with respect to a clearing services market for the RFR OIS to be added to the clearing requirement under this proposal; (2) the proposed determination may lessen or increase these barriers; and (3) the proposed determination otherwise may encourage, discourage, facilitate, and/or dampen new entry into the market. In addition to what is noted above, the Commission requests comment, and quantifiable data, on whether the required clearing of any or all of the RFR OIS to be added to the clearing requirement under this proposal will generate conditions that create, increase, or facilitate an exercise of: (1) Clearing services market power in CME, LCH, Eurex, and/or any other clearing service market participant, including conditions that would dampen competition for clearing services and/or increase the cost of clearing services, and/or (2) market power in any product markets for interest rate swaps, including conditions that would dampen competition for these product markets and/or increase the cost of RFR OIS to be added to the clearing requirement under this proposal. The Commission seeks comment, and quantifiable data, on the likely cost increases associated with clearing, particularly those fees and charges imposed by DCOs, and the effects of such increases on counterparties currently participating in the market.

The Commission also requests comment regarding whether commenters have any concerns regarding access to clearing services in the market for any RFR OIS subject to this proposed determination.

5. Factor (V)—Legal Certainty in the Event of Insolvency

Section 2(h)(2)(D)(ii)(V) of the CEA requires the Commission to take into account the existence of reasonable legal certainty in the event of the insolvency of the relevant DCO or one or more of its clearing members with regard to the treatment of customer and swap counterparty positions, funds, and property. The Commission is proposing this clearing requirement determination based on its view that there is reasonable legal certainty with regard to the treatment of customer and swap counterparty positions, funds, and property in connection with cleared swaps, including the RFR OIS subject to this proposal, in the event of the insolvency of the relevant DCO or one or more of the DCO's clearing members.

The Commission believes that, in the case of a clearing member insolvency at CME, where the clearing member is the subject of a proceeding under the U.S. Bankruptcy Code, subchapter IV of Chapter 7 of the U.S. Bankruptcy Code (11 U.S.C. 761-767) along with parts 22 and 190 of the Commission's regulations would govern the treatment of customer positions. Pursuant to section 4d(f) of the CEA, 7 U.S.C. 4d(f), a clearing member accepting funds from a customer to margin a cleared swap must be a registered futures commission merchant (FCM). Pursuant to 11 U.S.C. 761-767 and part 190 of the Commission's regulations, the customer's interest rate swap positions, carried by an insolvent FCM, would be deemed “commodity contracts.” As a result, neither a clearing member's bankruptcy nor any order of a bankruptcy court could prevent CME from closing out/liquidating such positions. However, customers of clearing members would have priority over all other claimants with respect to customer funds that had been held by the defaulting clearing member to margin swaps, such as the RFR OIS subject to this proposal. Thus, customer claims would have priority over proprietary claims and general creditor claims. Customer funds would be distributed to swap customers, including interest rate swap customers, in accordance with Commission regulations and section 766(h) of the Bankruptcy Code. Moreover, the Bankruptcy Code and the Commission's rules thereunder (in particular 11 U.S.C. 764(b) and 17 CFR 190.07) permit the transfer of customer positions and collateral to solvent clearing members.

Similarly, 11 U.S.C. 761-767 and part 190 would govern the bankruptcy of a DCO where the DCO is the subject of a proceeding under the U.S. Bankruptcy Code, in conjunction with DCO rules providing for the termination of outstanding contracts and/or return of remaining clearing member and customer property to clearing members.

With regard to LCH, the Commission understands that in general the default of an LCH clearing member would be governed by LCH's rules, and LCH would be permitted to close out and/or transfer positions of a defaulting clearing member. The Commission further understands that, under applicable law, LCH's rules governing a clearing member default would supersede insolvency laws in the clearing member's jurisdiction. For an FCM based in the United States and clearing at LCH, the applicable law as a general matter, would be the U.S. Bankruptcy Code and part 190 of the Commission's regulations. According to LCH's regulation § 39.5(b) submissions, the insolvency of LCH itself would be governed by English insolvency law, which protects the enforceability of the default-related provisions of LCH's rulebook, including in respect of compliance with applicable provisions of the U.S. Bankruptcy Code and part 190 of the Commission's regulations. LCH has obtained, and made available to the Commission, legal opinions that support the existence of such legal certainty in relation to the protection of customer and swap counterparty positions, funds, and property in the event of the insolvency of one or more of its clearing members.

On December 20, 2018, the Commission issued permission for Eurex to begin clearing swap transactions on behalf of customers of FCMs. According to Eurex's regulation § 39.5(b) submissions, Eurex observes the PFMI. Eurex represented that in February 2015, it published an assessment of its compliance with the PFMI, which was reviewed and validated by an independent outside auditor. The assessment concluded that Eurex fully complies with the PFMI, and Eurex's default management procedures were assessed to be certain in the event of its or a clearing member's insolvency with regard to the treatment of customer and counterparty positions and collateral. Such certainty continues to be reflected in Eurex's most recent PFMI assessment. According to Eurex's regulation § 39.5(b) submissions, a potential insolvency of Eurex Clearing, and the operation of default management procedures under Eurex's Clearing Conditions, would be governed by German law, with the exception of certain FCM Regulations and Clearing Conditions that relate to cleared swaps customer collateral that are governed by U.S. law.

Finally, as exempt DCOs, JSCC and HKEX demonstrate they are subject to ongoing comparable, comprehensive supervision by their home country regulator with regard to legal certainty in the event of insolvency. Both exempt DCOs maintain disclosures discussing the ways in which they comply with the PFMI, including principles related to legal certainty in the event of insolvency. Principle 1 of the PFMI provides that a CCP should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities, in all relevant jurisdictions. Among other key considerations for this factor, “[t]he legal basis should provide a high degree of certainty for each material aspect of an FMI's activities in all relevant jurisdictions.” The PFMI also provide that a CCP should have effective and clearly defined rules and procedures to manage a participant default. JSCC's and HKEX's PFMI disclosures provide, among other information, a discussion of the applicable law and legal basis for their clearing activities, as well as the way in which their rules address insolvency events.

Lastly, JSCC has provided information regarding how it would address a default by a clearing member under its rules, including information regarding the treatment of certain RFR swaps for default management purposes. Specifically, in its responses to the RFI, JSCC described the process by which it offered TIBOR-TONA basis swaps as a way to transition away from IBOR swaps without incident.

Request for Comment

The Commission requests comment regarding all aspects of this factor, including whether there is reasonable legal certainty, in the event of an insolvency of CME, LCH, Eurex, or one or more of any of these DCOs' clearing members, with regard to the treatment of customer and swap counterparty positions, funds, and property.

The Commission requests comment on whether U.S. swap counterparties have concerns about the applicability of any non-U.S. jurisdiction's law to U.S. persons clearing swaps at DCOs located outside of the United States.

The Commission requests comment regarding legal certainty with respect to an event of an insolvency for an exempt DCO, such as JSCC or HKEX, particularly with regard to the treatment of swap counterparty positions, funds, and property.

VI. Proposed Implementation Schedule and Compliance Dates

The Commission phased in compliance with the First Determination according to the schedule contained in regulation § 50.25. Under this schedule, compliance was phased in by the type of market participant entering into a swap subject to the First Determination. The phase-in occurred over a 270-day period following publication of the final rule in the Federal Register . The Commission also phased in compliance with the Second Determination according to the schedule contained in regulation § 50.26. However, the Commission decided to adopt one compliance date for all market participant types, because many market participants were already clearing the products subject to the determination and the Commission had already adopted a clearing requirement determination for the interest rate swap class. The Commission decided to tie the compliance date for each product to the first compliance date for a market participant in a non-U.S. jurisdiction.

Importantly, DCOs have largely completed IBOR swap conversions. Many market participants already clear the RFR OIS subject to this proposed determination. Several other jurisdictions are requiring, or are anticipated to soon require, clearing of these swaps. While some responses to the RFI recommended that the Commission proceed through an interim final rule process, other responses asked for longer periods of time for market participants to comment on proposed rules, and come into compliance with proposed rule changes. LSEG recommended that the effective date be set “not too far from the completion of the Commission's review” in order to “reduce uncertainty in the market and limit the risk of bifurcation of liquidity between the cleared and uncleared market for the LIBOR rates that ceased on December 31, 2021 and their respective replacement rates.”

Recognizing all these factors, the Commission proposes to adopt one compliance date for all market participant types and amend regulation § 50.26 to reflect that the compliance date shall be 30 days after publication of the final rule in the Federal Register . If the clearing requirement compliance date falls on a Saturday, Sunday, or U.S. Federal public holiday, the compliance date will be the next available business day. No compliance date will be set on a day when markets are not open in the United States.

As a technical amendment, because the Commission is proposing to remove certain interest rate swaps from regulation § 50.4, it is also proposing to remove those same swaps from regulation § 50.26. The Commission is proposing this change for consistency and to eliminate any confusion that might arise if different swap products are included in §§ 50.4 and 50.26. Additionally, the Commission proposes technical revisions related to the formatting of the table of compliance dates for required clearing of credit default swaps in regulation § 50.26.

Request for Comment

The Commission requests comment on whether setting a compliance date 30 days after publication of the final rule in the Federal Register provides market participants with sufficient notice and opportunity to comply with this proposed determination.

VII. Cost Benefit Considerations

A. Statutory and Regulatory Background

Proposed revised regulation § 50.4(a) identifies certain swaps that would be required to be cleared under section 2(h)(1)(A) of the CEA in addition to those currently required to be cleared by existing regulations §§ 50.2 and 50.4(a), and removes certain other swaps currently required to be cleared from the clearing requirement. The proposed clearing requirement amendments are designed to update the Commission's regulations in light of the interest rate swap market's move away from use of swaps referencing IBORs to swaps referencing RFRs. At the current time, most RFR OIS are being cleared voluntarily so the proposed regulation largely serves to ensure that the swap market under the Commission's jurisdiction continues to clear all RFR OIS subject to this proposal. The continued central clearing of RFR OIS may limit the counterparty risk associated with such swaps, thereby mitigating the possibility of such risks having a systemic impact, which might cause or exacerbate instability in the financial system. In addition, required clearing of RFR OIS would reflect the global effort to rely on benchmark rates that are less susceptible to manipulation.

The Commission believes this proposal is consistent with the principle that the use of central clearing can reduce systemic risk, which was one of the fundamental premises of the Dodd-Frank Act and the 2009 commitments by the G20 nations. The following discussion is a consideration of the costs and benefits of the Commission's proposed actions pursuant to the regulatory requirements discussed above.

B. Overview of Swap Clearing

. How Clearing Reduces Risk

When a bilateral swap is cleared, the DCO becomes the counterparty to each original swap counterparty. This arrangement mitigates counterparty risk to the extent that the DCO may be a more creditworthy counterparty than the original swap counterparties. Central clearing reduces the interconnectedness of market participants' swap positions because the DCO, an independent third party that takes no market risk, guarantees the collateralization of swap counterparties' exposures. DCOs have demonstrated resilience in the face of past market stress.

The Commission anticipates that DCOs will continue to be some of the most creditworthy swap counterparties because, among other things, they are able to monitor and manage counterparty risk effectively through (1) collection of initial and variation margin associated with outstanding swap positions; (2) marking positions to market regularly, usually multiple times per day, and issuing margin calls when the margin in a customer's account has dropped below predetermined levels that the DCO sets; (3) adjusting the amount of margin that is required to be held against swap positions in light of changing market circumstances, such as increased volatility in the underlying product; and (4) closing out swap positions if margin calls are not met within a specified period of time.

2. The Clearing Requirement and Role of the Commission

With the passage of the Dodd-Frank Act, Congress gave the Commission the responsibility for determining which swaps would be required to be cleared pursuant to section 2(h)(1)(A) of the CEA. Since 2012, there is ample evidence that the interest rate swap market has been moving toward increased use of central clearing in response to both market incentives and clearing requirements. Now with the IBOR transition completed for most LIBOR rates and with most RFR OIS already being voluntarily cleared, as discussed further below, it is possible that the effect of this proposal will be limited to ensuring that market participants continue to clear the RFR OIS subject to the proposal. The Commission has preliminarily determined that the costs and benefits related to the required clearing of the RFR OIS to be added under this proposal are attributable, in part to (1) Congress's stated goal of reducing systemic risk by, among other things, requiring clearing of swaps; and (2) the Commission's exercise of its discretion in selecting swaps or classes of swaps to achieve those ends.

C. Consideration of the Costs and Benefits of the Commission's Actions

1. CEA Section 15(a)

Section 15(a) of the CEA requires the Commission to “consider the costs and benefits” of its actions before promulgating a regulation under the CEA or issuing certain orders. Section 15(a) further specifies that the costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness and financial integrity; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations (collectively referred to herein as the Section 15(a) Factors). Accordingly, the Commission considers the costs and benefits associated with the proposed determination in light of the Section 15(a) Factors. In the sections that follow, the Commission considers: (1) The costs and benefits of required clearing for the RFR OIS to be added under this proposed rule as well as the costs and benefits of removing certain swaps from required clearing; (2) the alternatives contemplated by the Commission and their costs and benefits; and (3) the impact of required clearing for the proposed swaps on the Section 15(a) Factors.

The Commission is considering these costs and benefits against a baseline of the current set of interest rates swaps subject to the clearing requirement adopted under regulation § 50.4. This proposed determination would add certain RFR OIS to the clearing requirement and it would remove certain swaps referencing IBORs from the clearing requirement. In most cases, this would be a simultaneous exchange: As an IBOR swap is withdrawn from the clearing requirement, an RFR swap is added. However, in a few cases, there may be a delay, or even an overlap during which products referencing the IBOR rate and the RFR are both subject to the clearing requirement ( e.g., if the Commission adopts a clearing requirement for USD SOFR swaps 30 days after the publication of the final rule in the Federal Register and does not remove the clearing requirement for USD LIBOR swaps until July 1, 2023, then requirements to clear USD LIBOR swaps, including USD LIBOR fixed-to-floating swaps, would for a period of time coexist with requirements to clear USD SOFR OIS). As seen in Table 6 above, almost all transactions in interest rate swaps that would be subject to the proposed clearing requirement are cleared voluntarily today, so that the percentage of such swaps that would be cleared following implementation of the rule is unlikely to increase materially. The Commission's analysis below compares amendments in this proposed determination to the clearing requirement in effect today. The costs discussed recognize the current industry practice of high levels of RFR OIS clearing.

The Commission understands that the swap market functions internationally with (i) transactions that involve U.S. firms and DCOs occurring across different international jurisdictions; (ii) some entities organized outside of the United States that are, or may become, Commission registrants or registered entities; and (iii) some entities that typically operate both within and outside the United States and that follow substantially similar business practices wherever located. Where the Commission does not specifically refer to matters of location, this discussion of costs and benefits refers to the effects of the proposed regulations on all relevant swaps activity, whether based on their actual occurrence in the United States or on their connection with activities in, or effect on, commerce of the United States, pursuant to section 2(i) of the CEA.

2. Costs and Benefits of Required Clearing Under the Proposed Determination

Market participants may incur certain costs in order to clear the RFR OIS to be added to the clearing requirement in the proposed rule. For example, to the extent that there are market participants entering into RFR OIS that are not already clearing interest rate swaps voluntarily or pursuant to the Commission's prior clearing requirement determinations, such market participants may incur certain startup and ongoing costs related to developing technology and infrastructure, updating or creating new legal agreements, service provider fees, and collateralization of the cleared positions. The costs of collateralization, on the other hand, are likely to vary depending on whether an entity is subject to the margin requirements for uncleared swaps and capital requirements, and the differential between the cost of capital for the assets they use as collateral and the returns realized on those assets.

As noted in Table 6 above, almost all RFR OIS subject to this proposed determination are already cleared voluntarily, and market participants currently clearing RFR OIS already realize the benefits of clearing. Adoption of the proposed determination would ensure that the percentage of RFR OIS that are cleared would remain high in the future and that these benefits would continue to be realized. These benefits include reduced and standardized counterparty credit risk, increased transparency, and easier swap market access for market participants who are required to clear. Together, these benefits contribute significantly to the stability and efficiency of the financial system, but they are difficult to quantify with any degree of precision.

While there may be a benefit to removing certain swaps from required clearing, such as fewer costs to market participants who no longer have to submit such swaps to clearinghouses, in this instance, the reason the Commission is removing certain swaps referencing IBORs from the clearing requirement is because they are, with limited exceptions, no longer offered for clearing. The swap rates that the Commission is proposing to remove from the clearing requirement, other than USD LIBOR and SGD SOR-VWAP, should no longer be available or used by market participants, pursuant to broad international consensus and industry progress, as described above. Therefore, the Commission preliminarily believes that removing these swaps referencing IBORs from the clearing requirement would not impose additional costs on market participants and would result in the benefit of market and regulatory certainty. There may be no meaningful benefit to market participants from this removal because they generally cannot clear these swaps today. However, there may be benefits associated with the effort to reach broad consensus around the transition away from IBORs.

The Commission notes that any potential costs associated with the proposed determination should be viewed in light of the fact that each new swap that would be required to be cleared would stand in the place of a swap that is already subject to required clearing and that almost all of these swaps are cleared voluntarily. Liquidity tied to IBORs has shifted, and will continue to shift, to RFRs as those IBORs are discontinued or become nonrepresentative. That shift has occurred, and continues to occur, as a result of numerous market events, including DCO conversions of IBOR swaps to RFR swaps, the operation of contractual fallbacks, and new use of RFRs in parallel with declining liquidity in IBOR swaps. The RFR OIS subject to this proposal are already widely cleared so that the costs associated with clearing these swaps are already being incurred. Accordingly, the Commission anticipates that the additional cost of compliance for market participants would be de minimis.

Request for Comment

The Commission requests comment concerning the costs of clearing described above for various market participants and the extent to which they are already being incurred. The Commission requests comment from both U.S. and non-U.S. swap counterparties that may be affected by the proposed determination.

a. Technology, Infrastructure, and Legal Costs

Market participants already clearing swaps may incur costs in making necessary changes to technology systems to support the clearing required by the proposed rule if they are not yet clearing RFR OIS. To the extent that there are market participants who are not currently clearing RFR OIS, such market participants may incur costs if they need to implement technology to connect to FCMs that will clear their transactions. The costs are likely to depend on the specific business needs of each entity and therefore would vary widely among market participants. As a general matter, given that most market participants already will have undertaken the steps necessary to move away from the use of IBOR swaps in the cleared interest rate swap market, the burden associated with required clearing of RFR OIS should be minimal.

With regard to costs, market participants who do not currently have established clearing relationships with an FCM will have to set up and maintain such a relationship in order to clear swaps that are required to be cleared. Market participants who transact a limited number of swaps per year likely will be required to pay monthly or annual fees that FCMs charge to maintain both the relationship and outstanding swap positions belonging to the customer. In addition, the FCM is likely to pass along fees charged by the DCO for establishing and maintaining open positions. It is likely that most market participants already will have had experience complying with prior clearing requirements and that the incremental burdens associated with clearing any of the new RFR OIS should be minimal, especially given that these products are intended to replace already widely cleared products.

Request for Comment

The Commission requests comment, including any quantifiable data and analysis, on the changes that market participants will have to make to their technological and legal infrastructures in order to clear the RFR OIS that are subject to the proposed determination. In particular, the Commission requests comment concerning how many market participants, if any, may have to establish new relationships with FCMs, or significantly upgrade those relationships based on the inclusion of these new products to the clearing requirement.

b. Ongoing Costs Related to FCMs and Other Service Providers

In addition to costs associated with technological and legal infrastructures, market participants transacting in RFR OIS subject to the proposed determination will face ongoing costs associated with fees charged by FCMs. DCOs typically charge FCMs an initial transaction fee for each cleared interest rate swap its customers enter, as well as an annual maintenance fee for each open position. The Commission understands that customers that occasionally transact in swaps are typically required to pay a monthly or annual fee to each FCM. As noted, most RFR OIS transactions are already cleared, so that these costs are largely being incurred by market participants.

As discussed above, it is difficult to predict precisely how the proposed requirement to clear RFR OIS will promote the use of swap clearing, as compared to the use of clearing that would occur in the absence of the requirement. However, as presented in the data above, the use of voluntary clearing is so high that the percentage of swaps that would be cleared following adoption of the rule is unlikely to increase materially. Some RFR OIS will continue to be uncleared pursuant the exceptions and exemptions set out in subpart C of part 50 of the Commission's regulations. According to Table 6, the percentage of swaps that are cleared in USD SOFR is about 95 to 96 percent. The Commission estimates that about 96 percent of non-inter-affiliate trades in USD LIBOR fixed-to-floating IRS were cleared as of January 2022. The Commission anticipates that a similar percentage of RFR OIS subject to this proposal would continue to be cleared following the determination given that subpart C of part 50 has not changed. Because the clearing percentages in Table 6 for non-USD RFR OIS are even higher than for SOFR OIS, the increase in clearing as a result of this rule also will likely be de minimis. Any increase in the use of clearing due to the proposed determination would lead in most cases to an incremental increase in the transaction costs noted above. However, because most market participants already will have undertaken the steps necessary to accommodate the clearing of swaps subject to required clearing, the Commission anticipates that the burden associated with clearing RFR OIS should be minimal.

Request for Comment

The Commission requests comment regarding the fee structures of FCMs in general, and in particular as they relate to the clearing of the types of RFR OIS covered by the proposed rule.

c. Costs Related to Collateralization of Cleared Swap Positions

Market participants that enter into RFR OIS subject to the proposed rule will be required to post initial margin at a DCO. The Commission understands that the RFR OIS subject to this proposal are already being widely cleared on a voluntary basis, and so any additional amounts of initial margin that market participants would be required to post to a DCO as a result of the proposed determination likely would be relatively small. In reaching this preliminary view, the Commission considered situations where (1) uncleared RFR OIS may be otherwise collateralized; (2) uncleared RFR OIS between certain SDs and “financial end-users” are, or will be, subject to initial and variation margin requirements under the Commission's margin regulations for uncleared swaps; (3) the pricing of certain uncleared swaps may account for implicit contingent liabilities and counterparty risk; (4) not all RFR OIS will necessarily be eligible for clearing if they have terms that prevent them from being cleared; and (5) certain entities may elect an exception or exemption from the clearing requirement.

The Commission acknowledges that market participants who are not clearing voluntarily and not otherwise required to post margin or collateral may incur costs related to funding collateral once they are required to clear. The greater the funding cost relative to the rate of return on the asset used as initial margin, the greater the cost of procuring collateral. Quantifying this cost with any precision is challenging because different entities may have different funding costs and may choose assets with different rates of return.

Request for Comment

The Commission requests comments on all aspects of quantifying the cost of funding initial margin that would be required to be posted to a DCO pursuant to this proposed rule. In particular, the Commission requests comment on funding costs that market participants may face due to interest rates on bonds issued by a sovereign nation that also issues the currency in which the RFR OIS subject to this proposed determination is denominated. CME, LCH, and Eurex accept as initial margin bonds issued by several sovereigns, and market participants may post such bonds as initial margin if the Commission adopts this proposed rule.

The Commission recognizes further that the new initial margin amounts that would be required to be posted to DCOs for cleared RFR OIS will, for entities required to post initial margin under the uncleared swap margin regulations, replace the initial margin amount that has been, or will be, required to be posted to their swap counterparties, pursuant to the uncleared swap margin regulations. The uncleared swap margin regulations require SDs and certain “financial end-users” to post and collect initial and variation margin for uncleared swaps, subject to various conditions and limitations.

The Commission anticipates that the initial margin that would be required to be posted for a cleared swap to be added under this proposed determination would typically be less than the initial margin that would be required to be posted for uncleared swaps pursuant to the uncleared swap margin regulations. Whereas the initial margin requirement for cleared swaps must be established according to a margin period of risk of at least five days, under the uncleared swap margin regulations, the minimum initial margin requirement is set with a margin period of risk of 10 days or, under certain circumstances, less or no initial margin for inter-affiliate transactions. Phase-in of the initial margin requirements for uncleared swaps began on September 1, 2016, and will be fully implemented by September 1, 2022. The requirement for entities subject to uncleared swap margin regulations to exchange variation margin was fully implemented on March 1, 2017.

With respect to swaps that would be added to the clearing requirement under this proposed determination, but not subject to the uncleared swap margin regulations, the Commission believes that the new initial margin amounts to be deposited would displace costs that are currently embedded in the prices and fees for transacting the swaps on an uncleared and uncollateralized basis, rather than add a new cost. Entering into a swap is costly for any market participant because of the default risk posed by its counterparty. When a market participant faces a DCO, the DCO accounts for that counterparty credit risk by requiring the market participant to post collateral, and the cost of capital for the collateral is part of the cost that is necessary to maintain the swap position. When a market participant faces an SD or other counterparty in an uncleared swap, however, the uncleared swap contains an implicit line of credit upon which the market participant effectively draws when its swap position is out of the money. Typically, counterparties charge for this implicit line of credit in the spread they offer on uncollateralized, uncleared swaps. Additionally, because the counterparty credit risk that the implicit line of credit creates is the same as the counterparty risk that would result from an explicit line of credit provided to the same market participant, to a first order approximation, the charge for each should be the same as well. This means that the cost of capital for additional collateral posted as a consequence of requiring uncollateralized swaps to be cleared takes a cost that is implicit in an uncleared, uncollateralized swap and makes it explicit. This observation applies to capital costs associated with both initial margin and variation margin.

The proposed rule also may result in added operational costs for those few market participants who are not already clearing these swaps voluntarily. With uncleared swaps, counterparties may agree not to collect variation margin until certain thresholds of material swaps exposure are reached, thus reducing or eliminating the need to exchange variation margin as exposure changes. However, DCOs collect and pay variation margin daily, and sometimes more frequently. Increased required clearing therefore may increase certain operational costs associated with paying variation margin to the DCO.

The proposed rule may result in slight additional costs for clearing members in the form of guaranty fund contributions that are held by the DCO. However, it also could decrease guaranty fund contributions for certain clearing members. Once the proposed determination takes effect, there may be market participants that currently transact swaps bilaterally who would have to either become clearing members of a DCO or submit such swaps for clearing through an existing clearing member. A market participant that becomes a direct clearing member must make a guaranty fund contribution, while a market participant that clears its swaps through a clearing member may pay higher fees if the clearing member passes the costs of the guaranty fund contribution to its customers. While the addition of new clearing members and new customers for existing clearing members may result in an increase in guaranty fund requirements, it should be noted that if (1) new clearing members are not among the two clearing members used to calculate the guaranty fund and (2) any new customers trading through a clearing member do not increase the size of uncollateralized risks at either of the two clearing members used to calculate the guaranty fund, all else held constant, existing clearing members may experience a decrease in their guaranty fund requirement.

Request for Comment

The Commission requests comment regarding the total amount of additional collateral that would be posted due to required clearing of the RFR OIS covered by this proposed determination. The Commission also invites comment regarding (1) the cost of capital and returns on capital for that collateral, (2) the effects of required clearing on the capital requirements for financial institutions, and (3) the costs and benefits associated with operational differences related to the collateralization of uncleared versus cleared swaps. Please supply quantifiable data and analysis regarding these subjects, if possible.

3. Benefits of Clearing

As noted above, there are significant benefits to central clearing of swaps. These benefits include reducing and standardizing counterparty credit risk, improving market transparency, and promoting access to clearing services. Specifically, there are important risk mitigation benefits of clearing RFR OIS that replace IBOR swaps (which would be removed from the clearing requirement under the proposal). In addition, requiring the central clearing of RFR OIS would promote regulatory continuity and cross-border harmonization of clearing requirements.

The Commission believes that while the requirement to margin uncleared swaps mitigates counterparty credit risk, such risk is mitigated further for swaps that are cleared through a central counterparty. Moreover, the proposed determination would apply to a larger set of market participants than the uncleared swaps margin requirements. Thus, to the extent that the proposed determination to add RFR OIS to the clearing requirement leads to increased clearing overall, these benefits are likely to result. As is the case for the costs noted above, it is likely that the use of clearing will not increase materially as a result of the proposed rule, but implementing a clearing requirement would help ensure the benefits of the proposed rule would continue to be realized as market participants continue to clear RFR OIS.

The proposed rule's requirement that certain swaps be cleared is intended to ensure that market participants will face a DCO, and therefore, will face a highly creditworthy counterparty. As discussed above, DCOs are some of the most creditworthy counterparties in the swap market because of the risk management tools they have available. The Commission recognizes that the beneficial value of the proposal to add RFR OIS to the clearing requirement may be lessened, in part, because the swap volumes that will be subject to a new clearing requirement are expected to be shifting from one set of swaps (IBORs) to another (RFRs) rather than a straightforward addition of new swap products to the clearing requirement. Moreover, as noted, these benefits are already being realized for the large majority of these swaps that are cleared voluntarily.

Request for Comment

The Commission requests comment on whether benefits will result from the proposed rule, and, if so, the expected magnitude of such benefits. The Commission also requests comment on whether the proposed rule would provide benefits by furthering international harmonization of clearing requirements.

D. Costs and Benefits of the Proposed Rule as Compared to Alternatives

The proposed rule is a function of both the market importance of these products and the fact that they already are widely cleared. The Commission believes that these interest rate swaps should be required to be cleared because they are widely used and infrastructure for clearing and risk management of these swaps already exists.

Given the Commission's prior clearing requirement determinations, and the widespread use of clearing for RFR OIS to be added under this proposal, DCOs, FCMs, and market participants already have experience clearing the types of swaps proposed for required clearing. Because of the wide use of these swaps and their importance to the market, and because these swaps are already successfully being cleared, the Commission is proposing to include RFR OIS in the interest rate swap clearing requirement.

The Commission believes that RFR OIS should be added to the swap clearing requirement under this proposed determination after analyzing the factors under section 2(h)(2)(D) of the CEA, in order to promote consistency with its regulatory counterparts in other jurisdictions and to ensure that the benefits of required clearing accrue to the RFR OIS that replace IBOR swaps no longer offered for clearing.

The Commission could consider alternative implementation scenarios for its proposed RFR OIS clearing requirements, as discussed above. Specifically, the Commission could consider:

i. Whether to remove existing requirements to clear USD LIBOR and SGD SOR-VWAP swaps 30 days after publication of the final rule in the Federal Register instead of on July 1, 2023. The Commission notes that liquidity in USD LIBOR swaps may decline sufficiently over the coming months to support removing such swaps from the clearing requirement on a date earlier than July 1, 2023.

ii. Whether to delay implementation of the proposed requirement to clear USD SOFR and SGD SORA OIS until July 1, 2023 (or phase-in the compliance date) rather than to require compliance beginning 30 days after publication of the final rule in the Federal Register . The Commission is considering this alternative in the event that market participants have significant concerns regarding sufficiency of outstanding notional and liquidity (or pricing data) to support requiring clearing of USD SOFR swaps out to 50 years, and SGD SORA swaps out to 10 years, at an earlier time.

The Commission requests comment on these implementation alternatives.

Finally, the Commission may consider an alternative scenario in which it does not adopt any new clearing requirement for RFR OIS. Under that alternative, the cost to the market would be an increased risk of uncleared swaps (and the associated financial stability risks) should market participants decide to clear less in the future. The cost may be significant in this instance because of the potential effect on the market-wide effort to replace IBOR swaps with RFR swaps, but may be mitigated given the current high level of clearing. The benefit of not adopting any new clearing requirements would be a savings experienced by market participants that would not be required to clear new swaps referencing an RFR and did not otherwise find it beneficial to do so. However, given the high rate of voluntary clearing, any cost savings may be de minimis. In light of this, the Commission may be less likely to pursue this alternative without some type of significant change in the interest rate swap markets.

E. Section 15(a) Factors

The Commission anticipates that the proposed amendments to add and remove certain swaps from the clearing requirement will result in a slight increase in the already high use of clearing, although it is impossible to quantify with certainty the extent of that increase. This section discusses the expected results from an overall increase, or maintenance at high levels, in the use of swap clearing in terms of the factors set forth in section 15(a) of the CEA.

1. Protection of Market Participants and the Public

The required clearing of the RFR OIS to be added under this proposed rule should ensure the reduction of counterparty risk for market participants that clear those swaps, because they will be required to face the DCO rather than another market participant that lacks the full set of risk management tools that the DCO possesses. This also should reduce uncertainty in times of market stress because, for cleared trades, market participants facing a DCO would not be concerned with the impact of such stress on the solvency of their original counterparty. By proposing to require clearing of RFR OIS, all of which are already available for clearing and predominantly cleared voluntarily, the Commission aims to further encourage a smooth transition away from IBORs. More specifically, the registered DCOs currently clearing these RFR OIS would clear a slightly increased volume of swaps that they already understand and have experience managing. Similarly, FCMs may realize slightly increased customer and transaction volume as the result of the requirement, but would not have to simultaneously learn how to operationalize clearing for the covered interest rate swaps.

In addition, uncleared swaps subject to collateral agreements can be the subject of valuation disputes, which sometimes require several months or longer to resolve. Potential future exposures can grow significantly and even beyond the amount of initial margin posted during that time, leaving one of the two counterparties exposed to counterparty credit risk. DCOs virtually eliminate valuation disputes for cleared swaps, as well as the risk that uncollateralized exposure can develop and accumulate during the time when such a dispute would have otherwise occurred, thus providing additional protection to market participants who transact in swaps that are cleared. Because most RFR OIS are cleared voluntarily, these protections are currently being realized. Requiring clearing under part 50 of the Commission's regulations would ensure that they continue to be realized.

2. Efficiency, Competitiveness, and Financial Integrity of Swap Markets

Swap clearing, in general, reduces uncertainty regarding counterparty risk in times of market stress and promotes liquidity and efficiency during those times. Increased liquidity promotes the ability of market participants to limit losses by exiting positions effectively and efficiently when necessary in order to manage risk during a time of market stress. In addition, to the extent that positions move from facing multiple counterparties in the bilateral market to being cleared through a smaller number of clearinghouses, clearing facilitates increased netting. This reduces the amount of collateral that a party must post in margin accounts. As discussed above, in formulating this proposed determination, the Commission considered a number of specific factors that relate to the financial integrity of the swap markets. Specifically, as discussed above, the Commission assessed whether the registered DCOs that clear the RFR OIS that are the subject of this proposal have the rule framework, capacity, operational expertise and resources, and credit support infrastructure to clear these swaps on terms that are consistent with the material terms and trading conventions on which the contract is then traded. The Commission also considered the resources of DCOs to handle additional clearing during stressed and non-stressed market conditions, as well as the existence of reasonable legal certainty in the event of a clearing member or DCO insolvency.

Also, as discussed above, bilateral swaps create counterparty risk that may lead market participants to discriminate among potential counterparties based on their creditworthiness. Such discrimination is expensive and time consuming insofar as market participants must conduct due diligence in order to evaluate a potential counterparty's creditworthiness. Requiring certain types of swaps to be cleared reduces the number of transactions for which such due diligence is necessary, thereby contributing to the efficiency of the swap markets. In proposing a clearing requirement for RFR OIS, the Commission must consider the effect on competition, including appropriate fees and charges applied to clearing. There are a number of potential outcomes that may result from required clearing. Some of these outcomes may impose costs, such as if a DCO possessed market power and exercised that power in an anticompetitive manner, and some of the outcomes would be positive, such as if the clearing requirement facilitated a stronger entry opportunity for competitors. Because most of these swaps are cleared voluntarily, these effects on efficiency, competitiveness, and financial integrity are, to a large degree, currently being realized. Requiring clearing would ensure that they continue to be realized.

3. Price Discovery

Clearing, in general, encourages better price discovery because it eliminates the importance of counterparty creditworthiness in pricing swaps cleared through a given DCO. By making the counterparty creditworthiness of all swaps of a certain type essentially the same, prices should reflect factors related to the terms of the swap, rather than the idiosyncratic risk posed by the entities trading it. Because most of these swaps are cleared voluntarily, these effects on price discovery are currently being realized. Requiring clearing would ensure that they continue to be realized.

4. Sound Risk Management Practices

If a firm enters into uncleared and uncollateralized swaps to hedge certain positions and then the counterparty to those swaps defaults unexpectedly, the firm could be left with large outstanding exposures. Even for uncleared swaps that are subject to the Commission's uncleared swap margin regulations, some counterparty credit risk remains. As stated above, when a swap is cleared the DCO becomes the counterparty facing each of the two original participants in the swap. This standardizes and reduces counterparty risk for each of the two original participants. To the extent that a market participant's hedges comprise swaps that are required to be cleared and would not be cleared voluntarily, the requirement enhances their risk management practices by reducing their counterparty risk.

In addition, to the extent that required clearing reduces or deters a potential increase in bilateral trading, it reduces the complexity of unwinding or transferring swap positions from large entities that default. Procedures for transfer of swap positions and mutualization of losses among DCO members are already in place, and the Commission anticipates that they are much more likely to function in a manner that enables rapid transfer of defaulted positions than legal processes that would surround the enforcement of bilateral contracts for uncleared swaps.

Central clearing has evolved since the 2009 G20 Pittsburgh Summit, when G20 leaders committed to central clearing of all standardized swaps. The percentage of the swap market that is centrally cleared has increased significantly, clearinghouses have expanded their offerings, and the range of banks and other financial institutions that submit swaps to clearinghouses has broadened. At the same time, the numbers of swap clearinghouses and swap clearing members has remained highly concentrated. This has created concerns about a concentration of credit and liquidity risk at clearinghouses that could have systemic implications.

However, the Commission believes that DCOs are capable of risk managing the swaps that are the subject of this proposed determination. Moreover, because most of the RFR OIS to be added to the clearing requirement under this proposed determination are already cleared voluntarily, the Commission anticipates that the extent to which this proposed determination would increase the credit risk and liquidity risk that is concentrated at DCOs would be relatively small. The Commission requests comments on this issue.

5. Other Public Interest Considerations

In September 2009, the President and other leaders of the G20 nations met in Pittsburgh and committed to a program of action that includes, among other things, central clearing of all standardized swaps. The Commission believes that this clearing requirement proposal would be consistent with the G20's commitment and would reflect the Commission's ongoing confidence in central clearing for swaps and other derivatives. As discussed throughout this proposal, central clearing of derivatives by DCOs can serve the public interest in numerous ways.

VIII. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) requires agencies to consider whether the rules they propose will have a significant economic impact on a substantial number of small entities and, if so, provide a regulatory flexibility analysis with respect to such impact. This proposed determination will not affect any small entities, as the RFA uses that term. Only eligible contract participants (ECPs) may enter into swaps, unless the swap is listed on a designated contract market (DCM), and the Commission has determined that ECPs are not small entities for purposes of the RFA. This proposed determination would affect only ECPs because all persons that are not ECPs are required to execute their swaps on a DCM, and all contracts executed on a DCM must be cleared by a DCO, as required by statute and regulation, not the operation of any clearing requirement determination. Therefore, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that this proposed rulemaking will not have a significant economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act (PRA) imposes certain requirements on Federal agencies, including the Commission, in connection with conducting or sponsoring any collection of information as defined by the PRA. This rulemaking will not require a new collection of information from any persons or entities, and there are no existing information collections related to this proposal.

C. Antitrust Considerations

Section 15(b) of the Act requires the Commission to take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the objectives of the Act, as well as the policies and purposes of the Act, in issuing any order or adopting any Commission rule or regulation (including any exemption under section 4(c) or 4c(b)), or in requiring or approving any bylaw, rule, or regulation of a contract market or registered futures association established pursuant to section 17 of the Act. The Commission believes that the public interest to be protected by the antitrust laws is generally to protect competition. The Commission requests comment on whether the proposal implicates any other specific public interest to be protected by the antitrust laws.

The Commission has considered the proposal to determine whether it is anticompetitive and has preliminarily identified no anticompetitive effects. The Commission requests comment on whether the proposal is anticompetitive and, if it is, what the anticompetitive effects are.

Because the Commission has preliminarily determined that the proposal is not anticompetitive and has no anticompetitive effects, the Commission has not identified any less anticompetitive means of achieving the purposes of the Act. The Commission requests comment on whether there are less anticompetitive means of achieving the relevant purposes of the Act.

List of Subjects in 17 CFR Part 50

• Business and industry
• Clearing
• Swaps

For the reasons set forth in the preamble, the Commodity Futures Trading Commission proposes to amend 17 CFR part 50 as follows:

PART 50—CLEARING REQUIREMENT AND RELATED RULES

1. The authority citation for part 50 continues to read as follows:

Authority: 7 U.S.C. 2(h), 6(c), and 7a-1, as amended by Pub. L. 111-203, 124 Stat. 1376.

[The following amendments would be effective 30 days after publication of the final rule.]

2. In § 50.4, revise paragraph (a) to read as follows:

3. Revise § 50.26 to read as follows:

4. In § 50.4 revise paragraph (a) to read as follows:

5. In § 50.26, revise paragraph (a) to read as follows:

Note: The following appendices will not appear in the Code of Federal Regulations.

Appendices to Clearing Requirement Determination Under Section 2(h) of the Commodity Exchange Act for Interest Rate Swaps To Account for the Transition From LIBOR and Other IBORs to Alternative Reference Rates—Commission Voting Summary and Commissioner's Statement

Appendix 1—Commission Voting Summary

On this matter, Chairman Behnam and Commissioners Johnson, Goldsmith Romero, Mersinger, and Pham voted in the affirmative. No Commissioner noted in the negative.

Appendix 2—Statement of Commissioner Christy Goldsmith Romero

The amendments the Commission proposes today support initiatives designed to reduce risk posed by reliance on the London Interbank Offered Rate (LIBOR), and other interbank offered rates (IBORs), as benchmark reference rates. A decade ago, allegations of manipulation of LIBOR led to government investigations. In the years since, regulators in the U.S. and abroad have recognized the need to replace LIBOR with benchmarks that promote market integrity and carry far less risk. However, it has always been recognized that this transition would be a complex and lengthy undertaking. As a result of significant coordinated efforts across the public and private sectors, great progress has been made in the transition to alternative reference rates that are less susceptible to manipulation. I commend Chairman Behnam for his steadfast leadership in pursuing a successful transition away from LIBOR. I commend the Commission's staff for their steadfast efforts to be thoughtful, careful and comprehensive at each step of the transition, including the step that brings us here today.

I will support the Notice of Proposed Rulemaking to amend the swap clearing requirement to account for the market shift to alternative reference rates that would significantly limit risk. This step would add to the successful progress in, and the Commission's commitment to, a smooth transition away from LIBOR.

Sound functioning benchmark rates promote the stability and integrity of derivatives markets. The Commission and its staff have worked closely with regulatory counterparts, in the U.S. and abroad, to support and harmonize initiatives to decrease reliance on IBORs and to encourage market adoption of overnight, nearly risk-free reference rates (RFRs). The Commission's proposal recognizes that liquidity in IBOR-linked interest rate swaps has continued to transition to RFRs, as IBORs are discontinued or become nonrepresentative. The proposal also recognizes that, in light of U.S.-led initiatives including SOFR First, there is decreasing market reliance on USD LIBOR—and significant liquidity in, and voluntary clearing of, overnight index swaps (OIS) referencing the Secured Overnight Financing Rate (SOFR).

I support the objective of aligning the Commission's approach with that of its regulatory counterparts in other jurisdictions who are similarly in the process of revisiting their clearing obligations to account for the transition away from LIBOR. International coordination is necessary for a successful transition to reduce benchmark-related risk. International coordination also will help to ensure that central clearing remains, globally, a pillar of post-crisis financial regulatory reform.

I thank the Commission's staff for all of their detailed and comprehensive work on the proposal, and look forward to reviewing the public comments provided in response.