[Federal Register Volume 87, Number 104 (Tuesday, May 31, 2022)]
[Proposed Rules]
[Pages 32898-32939]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-10490]

[[Page 32897]]

Vol. 87

Tuesday,

No. 104

May 31, 2022

Part V

Commodity Futures Trading Commission

———————————————————————–

17 CFR Part 50

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; Proposed Rule

Federal Register / Vol. 87, No. 104 / Tuesday, May 31, 2022 / 
Proposed Rules

[[Page 32898]]

———————————————————————–

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 50

RIN 3038-AF18

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 Sec.  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 [email protected]; Melissa D’Arcy, Special 
Counsel, at 202-418-5086 or [email protected]; or Daniel O’Connell, 
Special Counsel, at 202-418-5583 or [email protected]; 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 Sec.  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.1 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.2 
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,3 or a swap submission from a 
DCO.4
—————————————————————————

    1 Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    2 Section 2(h)(1)(A) of the CEA, 7 U.S.C. 2(h)(1)(A).
    3 Section 2(h)(2)(A) of the CEA, 7 U.S.C. 2(h)(2)(A). Section 
2(h)(2)(A) provides for a Commission-initiated review process 
whereby the Commission, on an ongoing basis, must review swaps, or a 
group, category, type, or class of swaps, to determine whether a 
swap, or a group, category, type, or class of swaps, should be 
required to be cleared.
    4 Section 2(h)(2)(B) of the CEA, 7 U.S.C. 2(h)(2)(B). Section 
2(h)(2)(B)(i) requires that each DCO submit to the Commission each 
swap, or group, category, type, or class of swaps, that it plans to 
accept for clearing. The swaps subject to this proposed 
determination were submitted by DCOs pursuant to CEA section 
2(h)(2)(B)(i) and regulation 39.5(b), 17 CFR 39.5(b). Pursuant to 
section 2(h)(2)(B)-(C) of the CEA, the Commission must review swap 
submissions from DCOs to determine whether the swaps should be 
subject to required clearing. Regulation Sec.  39.5(b) implements 
the procedural elements of section 2(h)(2)(B)-(C) by establishing 
the process by which a DCO must submit the swaps it offers for 
clearing to the Commission for purposes of considering a clearing 
requirement determination.
—————————————————————————

    Section 2(h)(2)(D)(ii) of the CEA requires the Commission to 
consider the

[[Page 32899]]

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.5
—————————————————————————

    5 7 U.S.C. 2(h)(2)(D)(ii).
—————————————————————————

    The Commission adopted its first clearing requirement determination 
(First Determination) in 2012.6 The First Determination was 
implemented between March 2013 and October 2013 based on the schedule 
described in regulation Sec.  50.25 and the preamble to the First 
Determination.7 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).8
—————————————————————————

    6 Clearing Requirement Determination Under Section 2(h) of the 
CEA, 77 FR 74284 (Dec. 13, 2012) (First Determination).
    7 17 CFR 50.25; First Determination, 77 FR at 74319-74321.
    8 See generally First Determination. By way of background, an 
interest rate swap is generally an agreement by counterparties to 
exchange payments based on a series of cash flows over a specified 
period of time, typically calculated using two different rates. 
Fixed-to-floating swaps are interest rate swaps in which the 
payment(s) owed on one leg of the swap is calculated using a fixed 
rate, and the payment(s) owed on the other leg is calculated using a 
floating rate. Basis swaps are interest rate swaps for which the 
payments for both legs are calculated using floating rates. FRAs are 
interest rate swaps in which payments are exchanged on a 
predetermined date for a single period and one leg of the swap is 
calculated using a fixed rate while the other leg is calculated 
using a floating rate set on a predetermined date. OIS are interest 
rate swaps for which one leg of the swap is calculated using a fixed 
rate and the other leg is calculated using a floating rate based on 
a daily overnight rate.
—————————————————————————

    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.9 As set forth in regulation 
Sec.  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.10 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.11
—————————————————————————

    9 Id. at 74287, 74307. To this day, significant amounts of 
notional in interest rate swaps are traded in markets around the 
world, and these swaps comprise an outsized portion of notional 
among all swaps. According to the Bank for International Settlements 
(BIS), as of June 2021, there was an estimated $488 trillion in 
outstanding notional of interest rate swaps, which represents 
approximately 80% of the total outstanding notional of all over-the-
counter (OTC) derivatives. See BIS, OTC Derivatives Outstanding, 
Table D7 (OTC, Interest Rate Derivatives, H1 2021), updated Nov. 15, 
2021, available at https://stats.bis.org/statx/srs/table/d7?f=pdf; 
BIS, Global OTC Derivatives Markets, June 2021, available at https://www.bis.org/publ/otc_hy2111/intgraphs/graphA1.htm.
    10 17 CFR 50.4(a).
    11 First Determination, 77 FR at 74308.
—————————————————————————

    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.12
—————————————————————————

    12 Id. at 74309.
—————————————————————————

    The Commission adopted its second clearing requirement 
determination (Second Determination) in 2016.13 The Second 
Determination was implemented between December 2016 and October 
2018,14 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.15 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.16 These 
rates will be discussed further below.
—————————————————————————

    13 Clearing Requirement Determination Under Section 2(h) of 
the Commodity Exchange Act for Interest Rate Swaps, 81 FR 71202 
(Oct. 14, 2016) (Second Determination).
    14 17 CFR 50.26; Second Determination, 81 FR at 71202.
    15 Second Determination, 81 FR at 71203-71205. The Commission 
explained that such harmonization serves an important anti-evasion 
goal: If a non-U.S. jurisdiction issued a clearing requirement, and 
a swap dealer (SD) located in the United States were not subject to 
an analogous a clearing requirement under U.S. law, then market 
participants potentially could avoid the non-U.S. jurisdiction’s 
clearing requirement by entering into a swap with an SD located in 
the United States. Id. at 71203.
    16 Id. at 71205.
—————————————————————————

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.17 Beginning this year, these LIBOR rates have almost 
entirely ceased publication or become nonrepresentative of the 
underlying market they are intended to measure.
—————————————————————————

    17 See generally ICE Benchmark Administration (IBA), LIBOR, 
available at https://www.theice.com/iba/libor.
—————————————————————————

    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.18

[[Page 32900]]

Although LIBOR was subject to a number of significant reform 
efforts,19 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 2021.20 On March 5, 2021, the FCA announced 
that publication of LIBOR would cease on December 31, 2021, for the 
following: 21
—————————————————————————

    18 See, e.g., International Organization of Securities 
Commissions (IOSCO), Principles for Financial Benchmarks, July 2013, 
at 1, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf. See also David Bowman, et al., “How Correlated Is 
LIBOR With Bank Funding Costs?,” FEDS Notes, June 29, 2020, 
available at https://www.federalreserve.gov/econres/notes/feds-notes/how-correlated-is-libor-with-bank-funding-costs-20200629.htm; 
and Alternative Reference Rates Committee, Second Report, Mar. 2018, 
at 1-3, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report.
    19 See generally IBA, Methodology, available at https://www.theice.com/publicdocs/ICE_LIBOR_Methodology.pdf; H.M. Treasury, 
The Wheatley Review of LIBOR: Final Report, Sept. 2012, available at 
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/191762/wheatley_review_libor_finalreport_280912.pdf; Intercontinental 
Exchange (ICE), ICE LIBOR Evolution, Apr. 25, 2018, at 4, available 
at https://www.theice.com/publicdocs/ICE_LIBOR_Evolution_Report_25_April_2018.pdf.
    20 Andrew Bailey, “The future of Libor,” July 27, 2017, 
available at https://www.fca.org.uk/news/speeches/the-future-of-libor.
    21 FCA, FCA Announcement on Future Cessation and Loss of 
Representativeness of the LIBOR Benchmarks, Mar. 5, 2021 (FCA 
Announcement on LIBOR Cessation), available at https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf.
—————————————————————————

    (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.22
—————————————————————————

    22 See section IV below (discussing the continued publication 
of USD LIBOR for certain tenors through June 30, 2023).
—————————————————————————

    The FCA further determined that GBP and JPY LIBOR in 1-month, 3-
month, and 6-month tenors would become nonrepresentative after December 
31, 2021.23 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.24 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.
—————————————————————————

    23 FCA Announcement on LIBOR Cessation. The FCA stated that 
once a LIBOR rate becomes nonrepresentative, its representativeness 
will not be restored.
    24 Id.
—————————————————————————

    The historic circumstances surrounding the transition from IBORs to 
RFRs are the result of significant private and public sector 
coordinated efforts.25 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.26 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) 27 as its preferred alternative to USD LIBOR.28 The 
ARRC developed a Paced Transition Plan, which has now been completed, 
to facilitate an orderly transition from USD LIBOR to USD SOFR.29
—————————————————————————

    25 While not all benchmark rates considered to be alternative 
reference rates for IBORs may be RFRs, efforts to transition markets 
away from IBORs have focused on RFRs as alternatives. For purposes 
of brevity, the Commission uses the term “RFR” in this notice of 
proposed rulemaking to refer to alternative reference rates.
    26 For additional background information, see Swap Clearing 
Requirement To Account for the Transition from LIBOR and Other IBORs 
to Alternative Reference Rates, 86 FR 66476, 66480 (Nov. 23, 2021) 
(RFI).
    27 USD SOFR is an RFR that measures the cost of overnight 
repurchase agreement transactions collateralized by U.S. Treasury 
securities. FRBNY, Statement Introducing the Treasury Repo Reference 
Rates, Apr. 3, 2018, available at https://www.newyorkfed.org/markets/opolicy/operating_policy_180403. See also FRBNY, Secured 
Overnight Financing Rate Data, available at https://
apps.newyorkfed.org/markets/autorates/
SOFR#:~:text=The%20SOFR%20is%20calculated%20as,LLC%2C%20an%20affiliat
e%20of%20the; and FRBNY, Additional Information about the Treasury 
Repo Reference Rates, available at https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information. USD SOFR has been 
published each New York business day at 8 a.m. ET since April 3, 
2018, by the FRBNY in cooperation with the U.S. Office of Financial 
Research.
    28 ARRC, “The ARRC Selects a Broad Repo Rate as its Preferred 
Alternative Reference Rate,” June 22, 2017, available at https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-2017.pdf.
    29 ARRC, Paced Transition Plan, available at https://www.newyorkfed.org/arrc/sofr-transition#pacedtransition. The Paced 
Transition Plan called for (i) the establishment of infrastructure 
for futures and/or OIS trading in USD SOFR by the second half of 
2018; (ii) the start of trading in futures and/or bilateral, 
uncleared OIS that reference USD SOFR by the end of 2018; (iii) the 
start of trading in cleared OIS that reference USD SOFR in the 
effective Federal funds rate (EFFR) price alignment interest (PAI) 
and discounting environment by the end of the first quarter of 2019; 
(iv) Chicago Mercantile Exchange, Inc. (CME)’s and LCH Limited 
(LCH)’s conversion of discounting, and PAI and price alignment 
amount, from EFFR to USD SOFR with respect to all outstanding 
cleared USD-denominated swaps by October 16, 2020; and (v) the 
ARRC’s endorsement of a term reference rate based on USD SOFR 
derivatives markets by the end of the first half of 2021. The final 
step was completed on July 29, 2021, when the ARRC formally endorsed 
forward-looking term USD SOFR rates developed by CME.
—————————————————————————

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 
([euro]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 
[euro]STR as its preferred alternative to EUR EONIA, which ceased 
publication on January 3, 2022.30 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).31 SGD SOR-VWAP relies on USD LIBOR as an input and is 
expected to be discontinued across all tenors after June 30, 2023.32
—————————————————————————

    30 ESMA, Working Group on Euro Risk-Free Rates, available at 
https://www.esma.europa.eu/policy-activities/benchmarks/working-group-euro-risk-free-rates; European Money Markets Institute, EONIA, 
available at https://www.emmi-benchmarks.eu/benchmarks/eonia/.
    31 Association of Banks in Singapore, About SC-STS, available 
at https://www.abs.org.sg/benchmark-rates/about-sc-sts.
    32 Steering Committee for SOR & SIBOR Transition to SORA, 
Timelines to Cease Issuance of SOR and SIBOR-Linked Financial 
Products, Mar. 31, 2021 (Timelines to Cease SOR), at 4, available at 
https://www.abs.org.sg/docs/library/timelines-to-cease-issuance-of-sor-derivatives-and-sibor-linked-financial-products.pdf.

—————————————————————————

[[Page 32901]]

    Table 1 that follows this paragraph contains a non-exhaustive list 
of RFRs that have been identified to replace IBORs around the world: 
33
—————————————————————————

    33 See generally Financial Stability Board (FSB), Reforming 
Major Interest Rate Benchmarks, Nov. 20, 2020, at 29-43, 54-55, 
available at https://www.fsb.org/2020/11/reforming-major-interest-rate-benchmarks-2020-progress-report/. See also Andreas Schrimpf and 
Vladislav Sushko, “Beyond Libor: a primer on the new reference 
rates,” BIS Quarterly Review, Mar. 2019, at 35, available at 
https://www.bis.org/publ/qtrpdf/r_qt1903e.pdf; Bank of England, 
Preparing for 2022: What You Need to Know about LIBOR Transition, 
Nov. 2018, at 10, https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/what-you-need-to-know-about-libor-transition.pdf; 
ISDA, et al., IBOR Global Benchmark Survey 2018 Transition Roadmap, 
Feb. 2018, at 32, https://www.isda.org/a/g2hEE/IBOR-Global-Transition-Roadmap-2018.pdf; European Central Bank, Euro Short-Term 
Rate ([euro]STR), available at https://www.ecb.europa.eu/stats/
financial_markets_and_interest_rates/euro_short-term_rate/html/
index.en.html#:~:text=The%20euro%20short%2Dterm%20rate,activity%20on%
201%20October%202019; Timelines to Cease SOR.

                                       Table 1–RFRs Identified for IBORs
—————————————————————————————————————-
                                           Identified     Alternative rate
      Currency              Index       alternative rate    administrator        Secured           Published
—————————————————————————————————————-
AUD……………..  Bank Bill Swap    Reserve Bank of   Reserve Bank of   No                 Yes.
                       Rate (BBSW).      Australia         Australia.
                                         Interbank
                                         Overnight Cash
                                         Rate (AONIA).
CAD……………..  Canadian Dollar   Canadian          Bank of Canada..  Yes                Yes.
                       Offered Rate      Overnight Repo
                       (CDOR).           Rate Average
                                         (CORRA).
CHF……………..  LIBOR………..  SARON………..  SIX Swiss         Yes                Yes.
                                                           Exchange.
EUR……………..  LIBOR………..  [euro]STR…….  European Central  No                 Yes.
                                                           Bank.
                      Euro Overnight    [euro]STR…….  European Central  No                 Yes.
                       Index Average                       Bank.
                       (EONIA).
                      Euro Interbank    [euro]STR…….  European Central  No                 Yes.
                       Offered Rate                        Bank.
                       (EURIBOR).
GBP……………..  LIBOR………..  SONIA………..  Bank of England.  No                 Yes.
HKD……………..  Hong Kong         Hong Kong Dollar  Treasury Market   No                 Yes.
                       Interbank         Overnight Index   Association.
                       Offered Rate      Average (HONIA).
                       (HIBOR).
JPY……………..  LIBOR………..  TONA…………  Bank of Japan…  No                 Yes.
MXN……………..  Term Interbank    Overnight TIIE..  Banco de Mexico.  Yes                Yes.
                       Equilibrium
                       Interest Rate
                       (TIIE).
SGD……………..  SOR………….  SORA…………  Association of    No                 Yes.
                                                           Banks in
                                                           Singapore.
                      Singapore         SORA…………  Association of    No                 Yes.
                       Interbank                           Banks in
                       Offered Rate                        Singapore.
                       (SIBOR).
—————————————————————————————————————-

    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,34 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.35 SOFR First was implemented 
in four phases between July 26, 2021, and December 16, 2021.36 SOFR 
First mirrors similar best practices adopted in other jurisdictions to 
increase activity in swaps referencing RFRs.37
—————————————————————————

    34 See, e.g., FRB, Federal Deposit Insurance Corporation 
(FDIC), and Office of the Comptroller of the Currency (OCC), 
Statement on LIBOR Transition, Nov. 30, 2020, available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20201130a1.pdf; and IOSCO, Statement on Benchmarks Transition, 
June 2, 2021, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD676.pdf.
    35 CFTC, “CFTC Market Risk Advisory Committee Adopts SOFR 
First Recommendation at Public Meeting,” July 13, 2021, available 
at https://www.cftc.gov/PressRoom/PressReleases/8409-21.
    36 CFTC, CFTC’s Interest Rate Benchmark Reform Subcommittee 
Issues User Guide for the Transition of Exchange-Traded Derivatives 
Activity to SOFR, Dec. 16, 2021, available at https://www.cftc.gov/PressRoom/PressReleases/8469-21.
    37 See, e.g., Bank of England, “The FCA and the Bank of 
England encourage market participants in further switch to SONIA in 
interest rate swap markets,” Sept. 28, 2020, available at https://www.bankofengland.co.uk/news/2020/september/fca-and-boe-joint-statement-on-sonia-interest-rate-swap; Cross-Industry Committee on 
Japanese Yen Interest Rate Benchmarks, “Transition of Quoting 
Conventions in the JPY interest rate swaps market (`TONA First’),” 
July 26, 2021, available at https://www.boj.or.jp/en/paym/market/jpy_cmte/data/cmt210726b.pdf.
—————————————————————————

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.38 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.39 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.
—————————————————————————

    38 RFI, 86 FR at 66486–66488.
    39 Responses were submitted by: American Council of Life 
Insurers (ACLI), CCP12, London Stock Exchange Group (LSEG), Japan 
Securities Clearing Corporation (JSCC), Tradeweb Markets LLC 
(Tradeweb), Investment Company Institute (ICI), Managed Funds 
Association (MFA), Toronto-Dominion Bank (TD Bank), Eurex Clearing 
AG (Eurex), the International Swaps and Derivatives Association 
(ISDA), Alternative Investment Management Association (AIMA), 
Citadel, Bloomberg L.P., and CME Group Inc. (CMEG). The response 
letters are available on the CFTC Comments Portal: https://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx.

—————————————————————————

[[Page 32902]]

A. Work by DCOs To Support the Transition to RFRs

    The Commission received responses to its RFI from CMEG,40 
LSEG,41 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.42 Additionally, the Commission received a response from the 
CCP12, a global association of central counterparties (CCPs).
—————————————————————————

    40 CMEG is the parent company of CME. CMEG Letter.
    41 LSEG has majority ownership of LCH Group, which operates 
LCH. LSEG Letter.
    42 OTC Clearing Hong Kong Limited (HKEX), another exempt DCO, 
also clears certain of the RFR swaps subject to this proposal. 
Specifically, HKEX offers swaps referencing USD SOFR and EUR 
[euro]STR for clearing. See Hong Kong Exchanges and Clearing, 
Interest Rate Swaps, available at https://www.hkex.com.hk/Products/OTC-Derivatives/Interest-Rate-Swaps?sc_lang=en.
—————————————————————————

    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.43 The DCOs’ responses highlight the efforts they 
undertook to facilitate a smooth transition from cleared IBOR swaps to 
cleared RFR swaps.44 As the CCP12 noted in its response, DCOs 
currently provide clearing services for RFR OIS and manage the risks 
associated with clearing such swaps.45
—————————————————————————

    43 As the Commission explained in the RFI, these conversion 
events were intended to address market participant concerns related 
to potential bifurcation of liquidity between trading in legacy IBOR 
swaps that had fallen back to RFRs (i.e., as a result of the 
operation of DCO rules implementing ISDA’s fallbacks) and new RFR 
OIS, as well as certain operational costs. RFI, 86 FR at 66484.
    44 CMEG, LSEG, Eurex, and JSCC Letters.
    45 CCP12 Letter.
—————————————————————————

    Table 2 that follows this paragraph shows swaps referencing RFRs 
that registered DCOs have offered for clearing to facilitate the 
transition from IBORs.46 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 [euro]STR OIS, ahead 
of EUR EONIA’s January 3, 2022 cessation.47 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.48 Additionally, in December 2021, JSCC 
completed a conversion of JPY LIBOR swaps to JPY TONA OIS.49 
Following these conversion events, with limited exceptions, swaps 
referencing these LIBOR rates were no longer offered for clearing.50 
The Commission anticipates that CME, LCH, and Eurex will launch similar 
conversion events for all swaps still referencing USD LIBOR prior to 
June 30, 2023.51
—————————————————————————

    46 Table 2 does not include information from exempt DCOs. 
Exempt DCOs, such as JSCC and HKEX, also offer clearing services for 
certain RFR swaps, but do not offer customer clearing to U.S. 
customers.
    47 See CME, CME Submission No. 21-413, CFTC Regulation 40.6(a) 
Certification, Notification Regarding Modification of Cleared Euro 
Overnight Index Average (“EONIA”) Overnight Index Swaps to 
Reference Euro Short Term Rate (“[euro]STR”) Ahead of Scheduled 
Discontinuation of EONIA, Sept. 29, 2021, available at https://www.cmegroup.com/content/dam/cmegroup/market-regulation/rule-filings/2021/9/21-413.pdf; LCH, LCH Limited Self-Certification: 
Benchmark Reform–Rates Conversion, Sept. 29, 2021 (LCH Self-
Certification: Benchmark Reform–Rates Conversion), available at 
https://www.lch.com/system/files/media_root/FINAL%20-%20LCH%20self%20cert_Benchmark%20Reform%202021%2009%2029%20v3%20%28Clean%29.pdf; Eurex Clearing, ECAG Rule Certification 081-21, Sept. 
16, 2021 (Eurex Rule Certification 081-21), available at https://www.eurex.com/resource/blob/2781070/61d1fccdd00bc1a06753877a5fa3f483/data/ecag_cftc_filing_for_circular_081-21.pdf; and Eurex, Eurex Clearing 
Circular 111/20 EurexOTC Clear: Summary of Consultation on the 
Transition Plan for Transactions Referencing the EONIA Benchmark, 
Dec. 14, 2020, available at https://www.eurex.com/ec-en/find/circulars/clearing-circular-2373634.
    48 LCH Self-Certification: Benchmark Reform–Rates Conversion; 
LCH, Supplementary Statement on LCH’s Solution for Outstanding 
Cleared LIBOR Contracts, LCH Circular No. 4146, Mar. 18, 2021, 
available at https://www.lch.com/membership/ltd-membership/ltd-member-updates/supplementary-statement-lchs-solution-outstanding; 
CME, CME IBOR Conversion Plan for Cleared Swaps, June 9, 2021, 
available at https://www.cmegroup.com/trading/interest-rates/files/cleared-swaps-considerations-for-ibor-fallbacks-and-conversion-plan.pdf; and Eurex Rule Certification 081-21. The Commission notes 
that only LCH conducted a conversion event for EUR LIBOR swaps 
because CME and Eurex did not offer these swaps for clearing at that 
time.
    49 JSCC Letter.
    50 CMEG, Advisory Notice #21-434, Modification of Cleared 
Over-the-Counter (OTC) British Pound (GBP), Japanese Yen (JPY) and 
Swiss Franc (CHF) Denominated Interest Rate Swap Products 
Referencing the London Interbank Offered Rate (LIBOR) and Limitation 
of Acceptance for Clearing, Nov. 22, 2021, available at https://www.cmegroup.com/notices/clearing/2021/11/Chadv21-434.pdf (noting 
that CME provides limited clearing services for certain LIBOR swaps 
resulting from the exercise of bilateral uncleared swaptions, which 
are subject to a same-day conversion event on the day such swaps are 
accepted for clearing); LCH, LIBOR Transition–Risk Notice, Nov. 
2021, available at https://www.lch.com/system/files/media_root/LIBOR%20Transition%20-%20Risk%20Notice%20Nov%202021.pdf (setting 
forth the terms of time-limited clearing services for certain 
“legacy” LIBOR transactions, including LIBOR swaps resulting from 
the exercise of certain swaptions; and Eurex, EurexOTC Clear Product 
List, available at https://www.eurex.com/resource/blob/227404/760dd5a98729621e2de7720d28bc291a/data/ec15075e_Attach.pdf.
    51 Each registered DCO has made public its plans for full USD 
LIBOR transition. CMEG, LSEG, and Eurex Letters.

                                        Table 2–Summary of Swaps Offered for Clearing To Support IBOR Transition
——————————————————————————————————————————————————–
                                                  Floating rate
          Swap class               Currency           index                 Registered DCOs o ffering clearing (Termination date range offered)
——————————————————————————————————————————————————–
Basis Swaps………………  AUD………….  BBSW-AONIA…..  LCH (up to 31 yrs).
                               CAD………….  CDOR-CORRA…..  LCH (up to 31 yrs).
                               EUR………….  EURIBOR-         CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs).
                                                  [euro]STR.
                               GBP………….  LIBOR-SONIA….  Eurex (up to 51 yrs), LCH (up to 51 yrs).
                               JPY………….  LIBOR-TONA…..  Eurex (up to 31 yrs), LCH (up to 41 yrs).
                               SGD………….  SOR-SORA…….  LCH (up to 21 yrs).
                               USD………….  LIBOR-SOFR…..  CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs).
                                                 Fed Funds-SOFR.  CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs).
OIS……………………..  AUD………….  AONIA……….  CME (up to 31 yrs), LCH (up to 31 yrs).
                               CAD………….  CORRA……….  CME (up to 31 yrs), LCH (up to 31 yrs).
                               CHF………….  SARON……….  CME (up to 31 yrs), Eurex (up to 31 yrs), LCH (up to 31 yrs).
                               EUR………….  [euro]STR……  CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs).
                               GBP………….  SONIA……….  CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs).
                               JPY………….  TONA………..  CME (up to 31 yrs), Eurex (up to 31 yrs), LCH (up to 41 yrs).
                               SGD………….  SORA………..  CME (up to 21 years), LCH (up to 21 yrs).
                               USD………….  SOFR………..  CME (up to 51 yrs), Eurex (up to 51 yrs), LCH (up to 51 yrs).
——————————————————————————————————————————————————–

[[Page 32903]]

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.52 As 
Citadel and ISDA noted in their responses to the RFI, many RFR swaps 
are now voluntarily cleared by market participants in large 
proportions.53 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.” 
54
—————————————————————————

    52 For example, ISDA, as an organization of OTC derivatives 
market participants, played a key role in the development of 
contractual fallbacks for IBORs, ensuring that swaps documented 
under ISDA agreements that reference certain key IBORs can 
transition to adjusted versions of corresponding RFRs when those 
IBORs cease or become non-representative. ISDA, “Amendments to the 
2006 ISDA Definitions to include new IBOR fallbacks,” Oct. 23, 
2020, available at http://assets.isda.org/media/3062e7b4/23aa1658.pdf; ISDA, “Amendments to the 2006 ISDA Definitions to 
include new IBOR fallbacks,” Oct. 23, 2020, available at http://assets.isda.org/media/3062e7b4/23aa1658.pdf; ISDA, ISDA 2020 IBOR 
Fallbacks Protocol, Oct. 23, 2020, available at http://assets.isda.org/media/3062e7b4/08268161-pdf/; ISDA 2021 Fallbacks 
Protocol, December 2021 Benchmark Module, Dec. 16, 2021, available 
at https://www.isda.org/a/UhtgE/ISDA-2021-Fallbacks-Protocol_December-2021-Benchmark-Module_Publication-Version.pdf. See 
also RFI, 86 FR at 66483-84 (discussing ISDA’s IBOR fallbacks 
protocol and supplement).
    53 Citadel and ISDA Letters.
    54 Citadel Letter. Citadel also noted that, for USD SOFR 
swaps, “robust liquidity exists across a wide range of maturities, 
from 7 days to 50 years.” Id.
—————————————————————————

    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.55 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.56
—————————————————————————

    55 ACLI, CCP12, Eurex, ISDA, LSEG, MFA, and TD Bank Letters.
    56 E.g., AIMA Letter (“Market participants have taken 
multiple steps in preparation for the cessation of IBORs and LIBOR, 
and there has been a corresponding material transition to the use of 
SOFR and other RFRs for OTC contracts. As a result, liquidity in 
swaps referencing SOFR has grown, and will continue to grow, 
sufficient to justify the Commission making a clearing requirement 
determination for these contracts. Accordingly, we encourage the 
Commission to update the clearing requirement to include swaps 
referencing SOFR with maturities ranging from 7 days to 50 
years.”); MFA Letter (“MFA strongly recommends that the Commission 
modify its Swap Clearing Requirement under Commission regulation 
50.4 by adding a clearing obligation to the OIS class for SOFR swaps 
with a maturity range of 7 days to 50 years as soon as 
practicable.”).
—————————————————————————

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.57 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.
—————————————————————————

    57 See RFI, 86 FR at 66478-66482.
—————————————————————————

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.58 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.59 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.60
—————————————————————————

    58 Section 752 is not codified in the CEA.
    59 Second Determination, 81 FR at 71203.
    60 E.g., Second Determination, 81 FR at 71223 (noting that 
“the interest rate swaps market is global and market participants 
are interconnected”); First Determination, 77 FR at 74287 (“The 
Commission is mindful of the benefits of harmonizing its regulatory 
framework with that of its counterparts in foreign countries. The 
Commission has therefore monitored global advisory, legislative, and 
regulatory proposals, and has consulted with foreign regulators in 
developing the final regulations.”).
—————————————————————————

    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.61
—————————————————————————

    61 ASIC, Consultation Paper 353, “Proposed amendments to the 
ASIC Derivative Transaction Rules (Clearing) 2015,” Dec. 2021, at 
5, 14, available at https://download.asic.gov.au/media/mjknuhlh/cp-353-published-6-december-2021.pdf; ESMA, Final Report, “On draft 
RTS on the clearing and derivative trading obligations in view of 
the benchmark transition to risk free rates,” Nov. 18, 2021, at 36-
38, 63, available at https://www.esma.europa.eu/sites/default/files/library/esma70-156-4953_final_report_on_the_co_and_dto_re_benchmark_transition.pdf; 
Bank of England, “Derivatives clearing obligation–modifications to 
reflect interest rate benchmark reform: Amendments to BTS 2015/
2205,” May 20, 2021, available at https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform-amendments; Bank of England, 
“Derivatives clearing obligation–modifications to reflect interest 
rate benchmark reform: Amendments to BTS 2015/2205,” Sept. 29, 
2021, available at https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform; Bank of England, “Derivatives clearing 
obligation–introduction of contracts referencing TONA: Amendment to 
BTS 2015/2205,” Dec. 3, 2021, available at https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-introduction-of-contracts-referencing-tona-ps; Bank of England, 
“Derivatives clearing obligation–introduction of contracts 
referencing TONA: Amendment to BTS 2015/2205,” Sept. 29, 2021, 
available at https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-introduction-of-contracts-referencing-tona.

[[Page 32904]]

                              Table 3–Clearing Requirements in Other Jurisdictions
—————————————————————————————————————-
                                                 EU (Final Regulatory
                                                 Technical Standards–
                           Australia (proposed)      EC to approve)        Japan (final)          UK (final)
 
—————————————————————————————————————-
USD………………….  To be determined      SOFR–7 days to 3     Not applicable (N/A)  TBD.
                            (TBD).                years.
GBP………………….  SONIA–7 days to 50   SONIA–7 days to 50   N/A……………..  SONIA–7 days to 50
                            years.                years.                                      years.
EUR………………….  [euro]STR–7 days to  [euro]STR–7 days to  N/A……………..  [euro]STR–7 days
                            2 years.              3 years.                                    to 3 years.
JPY………………….  TONA–7 days to 30    TBD……………..  TONA–7 days to 40    TONA–7 days to 30
                            years.                                      years62.            years.
—————————————————————————————————————-

IV. Proposed Amendments to Regulation Sec.  50.4(a)
—————————————————————————

    62 Although JFSA does not clearly prescribe a termination date 
range in its public notice regarding its JPY TONA clearing 
requirement, the requirement went into effect on December 6, 2021. 
JSCC rules provide for the clearing of JPY TONA OIS with a 
termination date range of 7 days to 40 years. JSCC, Interest Rate 
Swap Clearing Products: List of Cleared Products, available at 
https://www.jpx.co.jp/jscc/en/cash/irs/product.html.
—————————————————————————

    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 Sec.  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.63 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.
—————————————————————————

    63 RFR-linked basis swaps offered for clearing are generally 
RFR-IBOR basis swaps. See ACLI Letter (“We also do not believe that 
SOFR-LIBOR basis swaps should be added to the clearing requirement 
due to low liquidity and limitations on electronic execution. We 
expect SOFR-LIBOR basis swaps to require bilateral OTC treatment for 
their limited and dwindling use cases.”); ISDA Letter (“Due to low 
liquidity, we think SOFR-LIBOR basis swaps should not be subject to 
mandatory clearing.”).
—————————————————————————

    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 Sec.  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.64
—————————————————————————

    64 See additional discussion of RFI responses below.
—————————————————————————

    Specifically, the Commission is proposing to amend regulation Sec.  
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 [euro]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

[[Page 32905]]

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 Sec.  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.
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    The set of tables following this paragraph illustrates the effect 
of further regulation Sec.  50.4(a) amendments that, if finalized, 
would be effective as of July 1, 2023:
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BILLING CODE 6351-01-C
    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.65 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.
—————————————————————————

    65 Clearing Requirement Determination Under Section 2(h) of 
the CEA for Interest Rate Swaps, 81 FR 39506, 39508 (June 16, 2016); 
Second Determination, 81 FR at 71205.
—————————————————————————

    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 2016.66 At this time, MAS has not yet implemented mandatory 
clearing for SGD SORA OIS.
—————————————————————————

    66 Second Determination, 81 FR at 71205; MAS, MAS Requires OTC 
Derivatives to be Centrally Cleared to Mitigate Systemic Risk, May 
2, 2018, available at https://www.mas.gov.sg/news/media-releases/2018/mas-requires-otc-derivatives-to-be-centrally-cleared-to-mitigate-systemic-risk; MAS, Response to Feedback Received: Draft 
Regulations for Mandatory Clearing of Derivatives Contracts, May 2, 
2018, at 4, available at https://www.mas.gov.sg/-/media/MAS/News-and-Publications/Consultation-Papers/2018-May-02-Response-to-consultation-on-draft-regs-on-mandatory-clearing-of-derivatives/Response-to-Feedback-on-Draft-Regulations-for-Mandatory-Clearing-of-Derivatives-Contracts.pdf.
—————————————————————————

    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

[[Page 32915]]

cleared.67 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.68 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.69
—————————————————————————

    67 The data in Table 6 is based on the Commission’s weekly 
swaps report data.
    68 These outstanding notional figures are based on data for 
swaps that have been cleared at CME, LCH, or Eurex and reported to 
the CFTC under part 39 of the Commission’s regulations. Commission 
staff compiled, processed, and reviewed the data presented in this 
proposal.
    69 Id.
—————————————————————————

    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 Sec.  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.70 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.
—————————————————————————

    70 While clearing services generally are no longer available 
for EUR LIBOR swaps, swaps referencing EUR LIBOR are not subject to 
required clearing under regulation Sec.  50.4(a).
—————————————————————————

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.71 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).72 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,73 several respondents specifically called for the Commission 
to maintain its USD LIBOR clearing requirement until such

[[Page 32916]]

time as that rate is unavailable.74 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.
—————————————————————————

    71 Bank of England, “Derivatives clearing obligation–
modifications to reflect interest rate benchmark reform: Amendments 
to BTS 2015/2205,” Sept. 29, 2021, available at https://www.bankofengland.co.uk/paper/2021/derivatives-clearing-obligation-modifications-to-reflect-interest-rate-benchmark-reform.
    72 ESMA, Final Report, “On draft RTS on the clearing and 
derivative trading obligations in view of the benchmark transition 
to risk free rates,” Nov. 18, 2021, at 36-38, 63, available at 
https://www.esma.europa.eu/sites/default/files/library/esma70-156-4953_final_report_on_the_co_and_dto_re_benchmark_transition.pdf. In 
choosing to replace its USD LIBOR swap clearing requirement with a 
USD SOFR OIS clearing requirement, ESMA stated, “ESMA believes it 
is important to be consistent for the [clearing obligation] with the 
communication made by ESMA and other EU authorities, as well as the 
communications made by several other authorities in other 
jurisdictions and at the international level who expect entities to 
stop referencing LIBOR (including USD LIBOR) by the end of the year. 
If ESMA and other regulators[hairsp][‘] 
expectations are fulfilled, there should no longer be material 
liquidity in OTC interest rate derivatives referencing USD LIBOR 
from the start of next year. Therefore, the liquidity criteria of 
the [European Market Infrastructure Regulation] procedure would no 
longer be met at the end of the year. Following from this, ESMA is 
proposing to remove the USD LIBOR classes from the clearing 
obligation and the RTS has been modified accordingly.” Id. at 31. 
However, as shown in tables 4 and 5 below, there continues to be 
trading activity in USD LIBOR swaps.
    73 E.g., TD Bank Letter (suggesting that the Commission’s 
clearing requirement “may be updated to reflect those of UK and 
EU”); ISDA Letter (“The market needs global conformity with 
respect to mandated clearing as much as possible.”); ACLI Letter 
(“ESMA has issued its Final Report on Draft RTS on the Clearing and 
Derivative Trading Obligations in View of the Benchmark Transition 
to Risk Free Rates, which includes a recommendation to remove 
classes of swaps referencing EONIA (EUR) and LIBOR (GBP, JPY and 
USD) from its clearing obligation. We encourage the Commission 
similarly to remove classes of swaps referencing IBORs–including 
USD-LIBOR–from the clearing requirement.”); Eurex Letter (“Eurex 
Clearing notes that it previously responded to [ESMA’s] request for 
comment . . . and strongly encourages continued cooperation among 
the Commission, ESMA, and other regulators to facilitate 
international cooperation and global convergence in the transition 
to the RFRs to the extent possible. . . . Eurex Clearing believes 
the Commission and ESMA should coordinate their decision on a 
prospective removal of the USD LIBOR from the clearing obligation 
and implementation of a clearing obligation on SOFR OIS.”).
    74 E.g., AIMA Letter (“The RFI notes that the U.K. Financial 
Conduct Authority has determined that USD LIBOR in the overnight and 
12-month tenors will cease after June 30, 2023, and that USD LIBOR 
in 1-month, 3-month and 6-month tenors will not be representative 
after that date. Until such time, we believe the Commission should 
maintain its clearing requirement for USD LIBOR as it continues to 
monitor the developments associated with LIBOR’s cessation.”) 
(footnote omitted); Citadel Letter (“While we support updating the 
clearing requirement to include certain OTC derivatives referencing 
SOFR, it remains premature to remove the clearing requirement for 
OTC derivatives referencing USD LIBOR. This is because material 
volumes continue to be executed in USD LIBOR swaps that are 
currently subject to the clearing requirement, particularly in the 
dealer-to-customer segment of the market.”); MFA Letter (“Since 
trading activity continues to occur in USD LIBOR swaps as well, USD 
LIBOR should not be removed from the Swap Clearing Requirement until 
such time as the rate is not available (either because the rate is 
permanently discontinued or is deemed non-representative as of its 
cessation date).”).
—————————————————————————

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 Sec.  
39.5(b) submissions relating to RFR OIS.75 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.
—————————————————————————

    75 Regulation Sec.  39.5(b) submissions from DCOs are 
available on the Commission’s website, www.cftc.gov, under DCO Swaps 
Submissions.
—————————————————————————

    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.76 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.
—————————————————————————

    76 A discussion of the costs and benefits of this proposed 
rulemaking appears below.
—————————————————————————

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.77 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.
—————————————————————————

    77 7 U.S.C. 2(h)(2)(D)(i). The core principles address 
numerous issues, including financial resources, participant and 
product eligibility, risk management, settlement procedures, default 
management, system safeguards, reporting, recordkeeping, public 
information, and legal risk, among other subjects. 7 U.S.C. 7a-
1(c)(2). The Commission implemented the core principles through 
regulations that are applicable to registered DCOs. 17 CFR part 39.
—————————————————————————

    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.78
—————————————————————————

    78 CMEG Letter (“CME Clearing currently offers clearing for 
swaps referencing SOFR and other alternative reference rates that 
are not currently subject to the Clearing Requirement . . . . CME 
Group considers that should such swaps become subject to the 
Clearing Requirement this would not have any impact on CME 
Clearing’s ability to comply with the relevant core principles for 
DCOs”); LSEG Letter (“Provided that each DCO remains in control of 
setting its product eligibility criteria, the ability to comply with 
the core principles . . . would not be affected by the 
implementation of a clearing requirement for SOFR or any other 
relevant alternative reference rate”); and Eurex Letter 
(“Requiring the clearing of swaps referencing SOFR or other RFRs 
that are not currently subject to the Clearing Requirement will not 
affect Eurex Clearing’s ability to comply with the CEA’s core 
principles for DCOs.”).
—————————————————————————

    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.79 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.80
—————————————————————————

    79 The Commission may exempt a DCO from registration if it 
determines that the DCO is subject to comparable, comprehensive 
supervision by appropriate government authorities in its home 
country. The Commission determined that JSCC demonstrated compliance 
with the requirements of the CEA for which it must comply in order 
to be eligible for an exemption from registration as a DCO. JSCC 
Order of Exemption from Registration, Oct. 26, 2015, at 1, available 
at http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf; JSCC Amended Order of Exemption from 
Registration, May 15, 2017, at 1, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf. Likewise, HKEX is an exempt DCO 
that the Commission determined has demonstrated compliance with the 
requirements of the CEA. OTC Clearing Hong Kong Limited Order of 
Exemption from Registration, Dec. 21, 2015, at 1, available at 
https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/otccleardcoexemptorder12-21-15.pdf. See also 
section V.C. for additional information regarding maintaining status 
as an exempt DCO.
    80 JSCC Letter (“Including JPY TONA OIS in the CFTC’s 
Clearing Requirement would not affect the ability of DCOs to comply 
with the CEA or the relevant legal and regulatory regime in any 
other jurisdiction.”).
—————————————————————————

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.

[[Page 32917]]

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 [euro]STR; and (vi) denominated in SGD and 
referencing SORA.81
—————————————————————————

    81 The Commission is conducting this analysis only with 
respect to the swaps that would be added to the clearing requirement 
under this proposed determination. Modifications to the clearing 
requirement, such as removing swaps that are no longer offered for 
clearing from Commission regulation Sec.  50.4, are not considered 
in this analysis.
—————————————————————————

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].” 82 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.
—————————————————————————

    82 7 U.S.C. 2(h)(2)(D)(ii).
—————————————————————————

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 [euro]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.83
—————————————————————————

    83 The data presented in these tables is the same as the data 
used to create the Commission’s weekly swaps report. This data 
represents only those swaps that are reported to the CFTC’s 
registered SDRs by swap market participants. The Commission’s weekly 
swaps report currently incorporates data from three SDRs (CME Group 
SDR, DTCC Data Repository, and ICE Trade Vault). The raw SDR data 
has been filtered to represent, as accurately as possible, the 
market-facing trades that occur and excludes certain inter-affiliate 
transactions. For more information about the data components in the 
weekly swaps report, please visit the CFTC’s web page available at: 
https://www.cftc.gov/MarketReports/SwapsReports/index.htm.
—————————————————————————

    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.84 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.
—————————————————————————

    84 Table 4 shows notional volume in USD LIBOR more than 
doubling from December 2021 to January 2022, but Table 5 below shows 
only a slight increase in trade count, suggesting the average trade 
size doubled in USD LIBOR but actually fell slightly in USD SOFR.

                                     Table 4–Estimated Notional Transacted
                                               [USD billions] 85
—————————————————————————————————————-
                          Product                             November 2021     December 2021     January 2022
—————————————————————————————————————-
USD SOFR OIS……………………………………….            $2,384            $2,011            $3,918
USD LIBOR Fixed-to-Floating Swaps…………………….             6,674             4,409             9,598
USD LIBOR-LIBOR Basis Swaps………………………….             1,049               602               292
EUR [euro]STR OIS…………………………………..             3,394             2,022             3,488
EUR EONIA OIS………………………………………                 2                 8                 0
CHF SARON OIS………………………………………               208               108               130
CHF LIBOR Fixed-to-Floating Swaps…………………….                62                 0                 0
GBP SONIA OIS………………………………………             5,852             3,151             4,149
GBP LIBOR Fixed-to-Floating Swaps…………………….               340               205                 2
JPY TONA OIS……………………………………….               425               360               377
JPY LIBOR Fixed-to-Floating Swaps…………………….                45                15                 0
SGD SORA OIS……………………………………….                74                41               119
SGD SOR Fixed-to-Floating Swaps………………………                 8                 3                 5
—————————————————————————————————————-

    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

[[Page 32918]]

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.
—————————————————————————

    85 The data in Table 4 is based on the Commission’s weekly 
swaps report data. In this table, a notional figure of $0 billion 
indicates that the notional transacted during a given time period 
was less than $1 billion.

                                       Table 5–Estimated Trade Count 86
—————————————————————————————————————-
                          Product                             November 2021     December 2021     January 2022
—————————————————————————————————————-
USD SOFR OIS……………………………………….            18,484            19,110            41,728
USD LIBOR Fixed-to-Floating Swaps…………………….            48,245            29,309            30,749
USD LIBOR-LIBOR Basis Swaps………………………….             1,025               831               329
EUR [euro]STR OIS…………………………………..             8,415             5,420             8,962
EUR EONIA OIS………………………………………                 7                 1                 0
CHF SARON OIS………………………………………             2,698             1,574             2,283
CHF LIBOR Fixed-to-Floating Swaps…………………….               390                19                 0
GBP SONIA OIS………………………………………            24,275            12,913            17,654
GBP LIBOR Fixed-to-Floating Swaps…………………….             2,061             1,286                12
JPY TONA OIS……………………………………….             5,311             4,639             5,141
JPY LIBOR Fixed-to-Floating Swaps…………………….               577                69                 9
SGD SORA OIS……………………………………….             2,422             1,846             3,794
SGD SOR Fixed-to-Floating Swaps………………………               197                94                69
—————————————————————————————————————-

    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 
[euro]STR, CHF SARON, JPY TONA, and SGD SORA.
—————————————————————————

    86 The data in Table 5 is based on the Commission’s weekly 
swaps report data.

         Table 6–Estimated Percentage of Notional Cleared (Based on Notional Transacted by Month) 87
—————————————————————————————————————-
                                                 Percentage notional   Percentage notional   Percentage notional
                      OIS                        cleared– November    cleared– December     cleared– January
                                                        2021                  2021                  2022
—————————————————————————————————————-
USD SOFR………………………………..                  96.3                  94.9                  95.1
GBP SONIA……………………………….                  98.8                  98.7                  97.8
EUR [euro]STR……………………………                  99.0                  99.2                  97.6
CHF SARON……………………………….                  99.6                  98.1                  99.2
JPY TONA………………………………..                  96.6                  98.7                  98.0
SGD SORA………………………………..                  98.2                  98.6                  98.7
—————————————————————————————————————-

    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.
—————————————————————————

    87 The data in Table 6 is based on the Commission’s weekly 
swaps report data.

                          Table 7–Estimated Cleared Notional and Trade Count by Tenor
                                      [January 2022 transaction data] 88
—————————————————————————————————————-
                                                                        Notional cleared
                   OIS                               Tenor               (USD billions)          Trade count
—————————————————————————————————————-
USD SOFR…………………………..  7 days-3 months………..                  $199                   213
                                          3-6 months…………….                   210                   296
                                          6 months-1 year………..                   191                   498
                                          1-5 years……………..                 1,328                 8,841
                                          5-15 years…………….                 1,559                22,230
                                          >15 years……………..                   234                 7,589
GBP SONIA………………………….  7 days-3 months………..                   778                   434
                                          3-6 months…………….                 1,136                   470
                                          6 months-1 year………..                   673                   357
                                          1-5 years……………..                   846                 5,016
                                          5-15 years…………….                   503                 7,570
                                          >15 years……………..                   124                 3,351
EUR [euro]STR………………………  7 days-3 months………..                   336                   210

[[Page 32919]]

 
                                          3-6 months…………….                   302                   226
                                          6 months-1 year………..                 1,295                   642
                                          1-5 years……………..                 1,110                 3,365
                                          5-15 years…………….                   329                 3,487
                                          >15 years……………..                    32                   865
CHF SARON………………………….  7 days-3 months………..                     7                    11
                                          3-6 months…………….                    16                    26
                                          6 months-1 year………..                     6                    12
                                          1-5 years……………..                    56                   625
                                          5-15 years…………….                    42                 1,447
                                          >15 year………………                     2                   135
JPY TONA…………………………..  7 days-3 months………..                    12                    10
                                          3-6 months…………….                    20                    20
                                          6 months-1 year………..                    15                    30
                                          1-5 years……………..                   122                   718
                                          5-15 years…………….                   164                 2,801
                                          >15 years……………..                    36                 1,455
SGD SORA…………………………..  7 days-3 months………..                     2                    10
                                          3-6 months…………….                     2                    12
                                          6 months-1 year………..                    16                   122
                                          1-5 years……………..                    69                 1,480
                                          5-15 years…………….                    29                 2,114
                                          >15 years……………..                     0                     8
—————————————————————————————————————-

    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.
—————————————————————————

    88 The data in Table 7 is based on the Commission’s weekly 
swaps report data. Tenor length is approximate. In Table 7, a 
notional figure of $0 billion USD indicates that the notional 
transacted during a given time period was less than $1 billion.

        Table 8–Outstanding Notional as of January 28, 2022 89
————————————————————————
                                                    Outstanding notional
                        OIS                            (USD billions)
————————————————————————
USD SOFR……………………………………                $8,558
GBP SONIA…………………………………..                23,363
EUR [euro]STR……………………………….                10,496
CHF SARON…………………………………..                 1,730
JPY TONA……………………………………                 4,256
SGD SORA……………………………………                   449
————————————————————————

    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.
—————————————————————————

    89 The data in Table 8 represents swaps that have been cleared 
at CME, LCH, or Eurex and reported to the CFTC under part 39 of the 
Commission’s regulations.

        Table 9–Outstanding Notional as of January 25, 2022 90
————————————————————————
                                                      Notional cleared
              OIS                      Tenor           (USD billions)
————————————————————————
USD LIBOR Fixed-to-Floating      0-1 months…….                  $118
 Swaps.
                                 >1 month to 3                       299
                                  months.
                                 >3 months to 1                      876
                                  year.
                                 >1-3 years…….                 1,933

[[Page 32920]]

 
                                 >3-5 years…….                   848
                                 >5-7 years…….                   509
                                 >7-10 years……                   426
                                 >10-15 years…..                   249
                                 >15-25 years…..                   291
                                 >25-35 years…..                   137
                                 >35 years……..                    13
USD SOFR Fixed-to-Floating       0-1 months…….                    30
 Swaps.
                                 >1 month to 3                       220
                                  months.
                                 >3 months to 1                      741
                                  year.
                                 >1-3 years…….                   985
                                 >3-5 years…….                   269
                                 >5-7 years…….                   110
                                 >7-10 years……                   125
                                 >10-15 years…..                    54
                                 >15-25 years…..                    59
                                 >25-35 years…..                    41
                                 >35 years……..                     4
————————————————————————

Request for Comment
—————————————————————————

    90 The data in Table 9 represents swaps that have been cleared 
at CME, LCH, or Eurex and reported to the CFTC under part 39 of the 
Commission’s regulations.
—————————————————————————

    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 [euro]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.91 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.
—————————————————————————

    91 As discussed further below, Commission staff receives and 
reviews margin model information from the registered DCOs that clear 
these swaps, including information regarding how those DCOs would 
ensure that liquidity exists in order to exit a position in a 
stressed market. For purposes of the first statutory factor, the 
Commission considers possible periods of market stress, particularly 
when assessing whether there is sufficient liquidity and pricing 
data. Second Determination, 81 FR at 71210 (noting that the 
Commission considered “the effect a new clearing mandate will have 
on a DCO’s ability to withstand stressed market conditions” as part 
of its analysis in connection with the Second Determination).
—————————————————————————

    In addition, as part of their regulation Sec.  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 Sec.  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.92 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.93
—————————————————————————

    92 CMEG Letter (“CME Clearing has accepted SOFR swaps for 
clearing since October 2018. Throughout this time there has been, 
and continues to be, adequate pricing data for DCO risk and default 
management of swaps referencing SOFR given the depth and liquidity 
of SOFR markets.”); LSEG Letter (“SOFR liquidity and related 
pricing data has developed to an adequate extent and continues to 
further increase. We also note that the number of underlying 
transactions supporting the production of the SOFR rate itself is 
very high, supporting the rate’s robustness. Such robustness, 
transparency and confidence in the SOFR rate is reflected in the 
swap market, both in terms of trading and clearing volumes, 
including in relation to the availability of pricing data. This 
ultimately means that in the case of a default, there would be 
adequate swap pricing data for LCH to manage such default.”); Eurex 
Letter (“Eurex Clearing believes there is adequate pricing data for 
DCO risk and default management of swaps referencing SOFR.”). JSCC 
did not have any specific responses related to this question, as 
JSCC “[does] not have a plan to clear swaps referencing SOFR.” 
JSCC Letter.
    93 LSEG noted significant increases in USD SOFR volumes after 
SOFR First, and Eurex noted that liquidity in USD SOFR swaps 
increased considerably after March 5, 2021. LSEG and Eurex Letters. 
TD Bank agreed that market participants have observed sufficient 
outstanding notional exposures and trading liquidity in swaps 
referencing USD SOFR during both stressed and non-stressed market 
conditions to support a clearing requirement. TD Bank Letter.
—————————————————————————

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.

[[Page 32921]]

    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 Sec.  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.94
—————————————————————————

    94 In order to be registered with the Commission, a DCO must 
comply with the DCO core principles under section 5b of the CEA and 
applicable Commission regulations. Once a DCO is registered with the 
Commission, Commission staff periodically examine each DCO to 
determine whether the DCO is maintaining compliance with the CEA and 
Commission regulations. In addition, Commission staff monitors the 
risks posed to and by DCOs, clearing members, and market 
participants, and conducts independent stress testing.
—————————————————————————

    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.95 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.
—————————————————————————

    95 E.g., historical volatility, intraday volatility, seasonal 
volatility, liquidity, open interest, market concentration, and 
potential moves to default. For additional information, each of CME, 
LCH, and Eurex has published a document outlining its compliance 
with the Principles for Financial Market Infrastructures (PFMI) 
published by the Committee on Payments and Market Infrastructures 
(CPMI; formerly, CPSS) and IOSCO. CPSS-IOSCO Principles for 
Financial Market Infrastructure (PFMI), Apr. 16, 2012, available at 
https://www.bis.org/cpmi/publ/d101.htm. See CMEG, CME Clearing: PFMI 
Disclosure, Nov. 30, 2021, available at https://www.cmegroup.com/clearing/risk-management/files/cme-clearing-principles-for-financial-market-infrastructures-disclosure.pdf; LCH PFMI Self-
Assessment 2020, available at https://www.lch.com/system/files/media_root/CPMI%20IOSCO%20Self%20Qualitative%20Assessment%20of%20LCH%20LTD_1.pdf
; and Eurex Clearing AG, Assessment of Eurex Clearing AG’s 
compliance against the PFMI and disclosure framework associated to 
the PFMI, Feb. 16, 2021, available at https://www.eurex.com/resource/blob/2446522/22f4869a8649f15b54a1e86bf635c63c/data/cpss-iosco-pfmi_assessment_2020_en.pdf.
—————————————————————————

    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.96 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.97
—————————————————————————

    96 Reverse stress testing uses plausible market movements that 
could deplete guaranty funds and cause large losses for top clearing 
members. For example, CME, LCH, and Eurex may use scenarios for 
stress testing and reverse stress testing that capture, among other 
things, historical price volatilities, shifts in price determinants 
and yield curves, multiple defaults over various time horizons, and 
simultaneous pressures in funding and asset markets.
    97 Back testing tests margin models to determine whether they 
are performing as intended, and checks whether margin models produce 
margin coverage levels that meet the DCO’s established standards. 
Back testing helps CME, LCH, and Eurex determine whether their 
clearing members satisfy the required margin coverage levels and 
liquidation timeframe.
—————————————————————————

    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.98
—————————————————————————

    98 Exempt DCOs, such as JSCC and HKEX, are subject to 
oversight by their home country regulators, along with regulations 
regarding risk management. For instance, JSCC is subject to the 
supervision of JFSA. JSCC, Principles for Financial Market 
Infrastructures Disclosure, Mar. 31, 2021, at 19, available at 
https://www.jpx.co.jp/jscc/en/company/cimhll0000000osu-att/JSCC_PFMI_Disclosure_20210331_EN.pdf. In granting JSCC’s order of 
exemption, the Commission determined that JSCC is subject to 
comparable, comprehensive supervision and regulation by its home 
country regulator. See JSCC Order of Exemption from Registration, 
Oct. 26, 2015, at 1, available at http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptorder10-26-15.pdf; 
JSCC Amended Order of Exemption from Registration, May 15, 2017, at 
1, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/jsccdcoexemptamdorder5-15-17.pdf. 
Among other requirements, JSCC must provide the Commission with an 
annual certification that it continues to observe the PFMI in all 
material respects, and the Commission must receive annually, at 
JSCC’s request, a certification from JFSA that JSCC is in good 
regulatory standing. Likewise, HKEX is overseen by HKMA, which 
provides ongoing supervision, and must meet the same requirements 
for registration as an exempt DCO as JSCC. See HKFE Clearing 
Corporation Limited, Principles for Financial Market Infrastructures 
Disclosure, Feb. 2021, available at https://www.hkex.com.hk/-/media/HKEX-Market/Services/Clearing/Listed-Derivatives/PFMI/HKCC_PFMI_Disclosure_Feb2021.pdf?la=en.
—————————————————————————

    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

[[Page 32922]]

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.99
—————————————————————————

    99 As a general matter, any DCO offering RFR OIS for clearing, 
including exempt DCOs, would follow this risk management approach 
with regard to offering these products for clearing.
—————————————————————————

    In support of its ability to clear the RFR OIS subject to this 
proposal, CME’s regulation Sec.  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.100
—————————————————————————

    100 CME, CME Clearing: Principles for Financial Market 
Infrastructures Disclosure, Nov. 30, 2021, available at https://www.cmegroup.com/clearing/risk-management/files/cme-clearing-principles-for-financial-market-infrastructures-disclosure.pdf; LCH 
Ltd., CPMI–IOSCO Self-Assessment 2020, Mar. 31, 2020, available at 
https://www.lch.com/system/files/media_root/CPMI%20IOSCO%20Self%20Qualitative%20Assessment%20of%20LCH%20LTD_1.pdf
; Eurex, “Assessment of Eurex Clearing AG’s compliance against the 
CPMI-IOSCO Principles for financial market infrastructures (PFMI) 
and the disclosure framework associated to the PFMIs,” Feb. 28, 
2022, available at https://www.eurex.com/resource/blob/2973806/422b675a412d96e3c8cf97a570b899a2/data/cpss-iosco-pfmi_assessment_2021_en.pdf. As explained above, similar disclosures 
are available for JSCC and HKEX.
—————————————————————————

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 Sec.  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.” 101
—————————————————————————

    101 JSCC Letter.
—————————————————————————

    In responding to the RFI, CME noted that mitigation of systemic 
risk is one of the key advantages of centralized clearing over 
bilateral arrangements.102 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.” 
103 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.” 104 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.105
—————————————————————————

    102 CMEG Letter.
    103 LSEG Letter.
    104 Citadel Letter.
    105 TD Bank Letter. See also Tradeweb Letter (“The swap 
clearing and execution requirements under Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act have increased 
investor protections, improved market liquidity, and reduced 
systemic risk, especially in the dealer-to-customer market. It will 
be critical for the CFTC to maintain these market improvements as 
new swap transactions increasingly utilize alternative risk-free 
reference rates . . . .”).
—————————————————————————

    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.106 
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

[[Page 32923]]

clearing members if there is a larger pool of potential clearing 
members to receive the positions.107
—————————————————————————

    106 For further discussion of treatment of customer and swap 
counterparty positions, funds, and property in the event of the 
insolvency of a DCO or one or more of its clearing members, please 
see Factor (V)–Legal certainty in the event of insolvency, section 
V.C below.
    107 The Commission recognizes that with high rates of 
voluntary clearing RFR OIS at this time, the prospect of adding 
additional clearing members and market participants in these swaps 
is limited.
—————————————————————————

    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.108 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.109
—————————————————————————

    108 First Determination, 77 FR at 74313; Second Determination, 
81 FR at 71220.
    109 First Determination, 77 FR at 74313 (discussing market 
power as described under U.S. Department of Justice guidelines). See 
generally U.S. Department of Justice and the Federal Trade 
Commission, Horizontal Merger Guidelines (Horizontal Merger 
Guidelines) at section 1 (Aug. 19, 2010), available at https://www.justice.gov/sites/default/files/atr/legacy/2010/08/19/hmg-2010.pdf.
—————————————————————————

    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.110 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.
—————————————————————————

    110 First Determination, 77 FR at 74298; Second Determination, 
81 FR at 71220. The DCO service market includes the registered and 
exempt DCOs that currently offer RFR OIS for clearing.
—————————————————————————

    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,111 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.112 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.
—————————————————————————

    111 That said, the Commission recognizes that (1) to the 
extent the clearing services market for the interest rate swaps 
identified in this proposal, after foreclosing uncleared swaps, 
would be limited to a concentrated few participants with highly 
aligned incentives, and (2) the clearing services market is 
insulated from new competitive entry through barriers (e.g., high 
sunk capital cost requirements, high switching costs to transition 
from embedded incumbents, and access restrictions), the proposed 
determination could have a negative competitive impact by increasing 
market concentration.
    112 See, e.g., Horizontal Merger Guidelines, section 9.2 
(entry likely if it would be profitable which is in part a function 
of “the output level the entrant is likely to obtain”).
—————————————————————————

    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.” 113 
LSEG, Eurex, JSCC, and TD Bank also did not identify potential 
competition-related concerns.114
—————————————————————————

    113 Citadel Letter (citing Staff Working Paper No. 580 
“Centralized trading, transparency and interest rate swap market 
liquidity: evidence from the implementation of the Dodd-Frank Act,” 
Bank of England, Jan. 2016, available at http://www.bankofengland.co.uk/research/Documents/workingpapers/2016/swp580.pdf).
    114 LSEG Letter (“LCH does not believe that adopting a 
clearing requirement for a new product that references an 
alternative reference rate, or expanding the scope of an existing 
clearing requirement to cover additional maturities would create 
conditions that increase or facilitate an exercise of market power 
over clearing services by any DCO. Any clearing requirement that 
applies equally to all DCOs that provide clearing services for a 
product would not adversely affect competition.”); Eurex Letter 
(“Eurex Clearing believes there is healthy competition currently in 
the market for the clearing of swaps referencing the RFRs and, 
previously, the LIBORs. Eurex Clearing does not believe that 
adopting a clearing requirement for a new product that references an 
RFR or expanding the scope of the Clearing Requirement to cover 
additionally maturities would cause [adverse effects related to 
competition or an increase in the cost of clearing services].”); 
JSCC Letter (“In relation to TONA OIS, it has been accepted for 
clearing at 3 registered DCOs . . . . Therefore, we believe that 
replacing JPY-LIBOR with TONA OIS would not change (i) the existing 
competition for clearing services of JPY swaps nor (ii) the cost of 
clearing services, in any regard.”); and TD Bank Letter (“We do 
not perceive these issues [related to adverse competitive effects or 
increasing costs of clearing services] to come” as a result of a 
clearing requirement for a new product that references an 
alternative reference rate or expanding the scope of the clearing 
requirement to cover additional maturities).

—————————————————————————

[[Page 32924]]

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.115 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.” 116 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.117 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.
—————————————————————————

    115 An FCM or DCO also may be subject to resolution under 
Title II of the Dodd-Frank Act to the extent it would qualify as a 
covered financial company (as defined in section 201(a)(8) of the 
Dodd-Frank Act). Under Title II, different rules would apply to the 
resolution of an FCM or DCO. Discussion in this section relating to 
what might occur in the event an FCM or DCO defaults or becomes 
insolvent describes procedures and powers that exist in the absence 
of a Title II receivership.
    116 If an FCM is registered as a broker-dealer, certain issues 
related to its insolvency proceeding would be governed by the 
Securities Investor Protection Act, as well.
    117 Claims seeking payment for the administration of customer 
property would share this priority.
—————————————————————————

    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 Sec.  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.118
—————————————————————————

    118 Letters of counsel on file with the Commission.
—————————————————————————

    On December 20, 2018, the Commission issued permission for Eurex to 
begin clearing swap transactions on behalf of customers of FCMs.119 
According to Eurex’s regulation Sec.  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

[[Page 32925]]

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.120 According to 
Eurex’s regulation Sec.  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.121
—————————————————————————

    119 Commission Letter Nos. 18-30, 18-31, and 18-32. 
Additionally, in responding to the RFI, Eurex noted that, with 
respect to Eurex clearing members that are FCMs and that clear swaps 
under Eurex’s U.S. regulatory framework, Eurex’s FCM Regulations 
“foresee a clear process for a potential porting of client-related 
transactions to a replacement clearing member following the 
termination of a clearing member.” Eurex Letter. In the event that 
the termination is based on an Insolvency Termination Event, as 
defined in Eurex’s FCM Regulations, Eurex will seek to coordinate 
with the CFTC and bankruptcy trustee with respect to porting the 
positions. This procedure applies to all cleared products. However, 
Eurex noted that following IBOR conversion events, it no longer 
clears any trades where obtaining new GBP LIBOR, JPY LIBOR, or CHF 
LIBOR fixings (or reliance on the relevant fallback provisions) 
would be necessary. Id.
    120 Eurex Clearing AG, Assessment of Eurex Clearing AG’s 
compliance against the PFMI and disclosure framework associated to 
the PFMI, available at https://www.eurex.com/resource/blob/2446522/22f4869a8649f15b54a1e86bf635c63c/data/cpss-iosco-pfmi_assessment_2020_en.pdf.
    121 For example, in the case of an insolvency termination 
event, as defined in Eurex’s Clearing Conditions, the relevant FCM 
clearing member would be subject to an insolvency proceeding 
pursuant to applicable U.S. law, and Eurex would seek to coordinate 
with the Commission and the bankruptcy trustee (or comparable person 
responsible for administering the proceeding) with respect to the 
transfer of FCM client transactions and eligible margin assets 
allocated to the relevant FCM client. Id. at 100.
—————————————————————————

    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.122 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.123 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.124 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.” 125 The PFMI also provide 
that a CCP should have effective and clearly defined rules and 
procedures to manage a participant default.126 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.127
—————————————————————————

    122 Exempt DCOs are not permitted to clear swaps for U.S. 
customers pursuant to regulation Sec.  39.6(b)(1). Accordingly, this 
discussion of JSCC’s and HKEX’s insolvency regimes does not address 
issues related to U.S. customer clearing.
    123 JSCC, Principles for Financial Market Infrastructures 
Disclosure, Mar. 31, 2021, available at https://www.jpx.co.jp/jscc/en/company/cimhll0000000osu-att/JSCC_PFMI_Disclosure_20210331_EN.pdf; and HKFE Clearing Corporation 
Limited, Principles for Financial Market Infrastructures Disclosure, 
Feb. 2021, available at https://www.hkex.com.hk/-/media/HKEX-Market/Services/Clearing/Listed-Derivatives/PFMI/HKCC_PFMI_Disclosure_Feb2021.pdf?la=en.
    124 PFMI, Principle 1.
    125 PFMI, Principle 1, Key consideration 1.
    126 PFMI, Principle 13.
    127 JSCC, Principles for Financial Market Infrastructures 
Disclosure, Mar. 31, 2021, at 19-24, 83-91, available at https://www.jpx.co.jp/jscc/en/company/cimhll0000000osu-att/JSCC_PFMI_Disclosure_20210331_EN.pdf; and HKFE Clearing Corporation 
Limited, Principles for Financial Market Infrastructures Disclosure, 
Feb. 2021, at 20-21, 58-60, available at https://www.hkex.com.hk/-/media/HKEX-Market/Services/Clearing/Listed-Derivatives/PFMI/HKCC_PFMI_Disclosure_Feb2021.pdf?la=en.
—————————————————————————

    Lastly, JSCC has provided information regarding how it would 
address a default by a clearing member under its rules,128 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.129
—————————————————————————

    128 See JSCC’s relevant PFMI disclosures.
    129 JSCC Letter (stating that, for default management 
purposes, TIBOR-TONA basis swaps will be treated in the same manner 
as cleared JPY TONA OIS. JSCC noted that creation of these basis 
swaps was a temporary measure and the basis swaps will expire at the 
settlement of the rates that were fixed prior to the end of 2021).
—————————————————————————

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 Sec.  50.25.130 
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 Sec.  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.131 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.132
—————————————————————————

    130 Swap Transaction Compliance and Implementation Schedule: 
Clearing Requirement Under Section 2(h) of the CEA, 77 FR 44441 
(July 30, 2012).
    131 Second Determination, 81 FR at 71227.
    132 Id. at 71227–71228.
—————————————————————————

    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,133 other responses asked for longer 
periods of time for market participants to comment on proposed rules, 
and come into compliance with proposed rule changes.134 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.” 135
—————————————————————————

    133 E.g., Tradeweb Letter; Citadel Letter.
    134 ICI Letter (requesting a 90-day comment period); ISDA 
Letter (“Members request a minimum of 6 months’ notice to implement 
new [clearing requirement]”); ACLI Letter (“To ensure a smooth 
implementation of any expanded clearing requirement, a minimum of 
six months should be provided between the adoption of an expanded 
clearing requirement and the effective date of the requirement, to 
give market participants time to ready systems and processes.”).
    135 LSEG Letter.
—————————————————————————

    Recognizing all these factors, the Commission proposes to adopt one 
compliance date for all market participant types and amend regulation 
Sec.  50.26 to reflect that the compliance date shall be 30 days after 
publication of the final rule in the Federal Register.

[[Page 32926]]

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 Sec.  50.4, it is 
also proposing to remove those same swaps from regulation Sec.  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 Sec. Sec.  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 Sec.  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 Sec.  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 Sec. Sec.  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.136 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.137 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.
—————————————————————————

    136 Second Determination, 81 FR at 71210; BIS, “Statistical 
release: OTC derivatives at end-December 2020,” May 12, 2021, at 4, 
Graph 4, available at https://www.bis.org/publ/otc_hy2105.pdf 
(charting central clearing rates for interest rate swaps from 2012 
to 2020 and noting a particularly significant rise during the 2012-
2015 period). See also CMEG Letter (discussing adoption of central 
clearing); CCP12 Letter (same).
    137 It is possible that some market participants would respond 
to the requirement that RFR OIS be cleared by decreasing their use 
of such swaps, particularly if the cost of clearing increases in the 
future relative to the cost of not clearing. Thus, there is some 
uncertainty regarding how the proposed rule will affect the quantity 
of swaps that are cleared.
—————————————————————————

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.138 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.
—————————————————————————

    138 7 U.S.C. 19(a).
—————————————————————————

    The Commission is considering these costs and benefits against a 
baseline of

[[Page 32927]]

the current set of interest rates swaps subject to the clearing 
requirement adopted under regulation Sec.  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.139
—————————————————————————

    139 Pursuant to section 2(i) of the CEA, activities outside of 
the United States are not subject to the swap provisions of the CEA, 
including any rules prescribed or regulations promulgated 
thereunder, unless those activities either “have a direct and 
significant connection with activities in, or effect on, commerce of 
the United States”; or contravene any rule or regulation 
established to prevent evasion of a CEA provision enacted under the 
Dodd-Frank Act. 7 U.S.C. 2(i).
—————————————————————————

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.140 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 141 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.
—————————————————————————

    140 These per-entity costs would vary widely depending on the 
needs of such market participants. Costs likely would be lower for 
market participants who already clear interest rate swaps covered by 
the Commission’s prior clearing requirement determinations. The 
opposite would be true for market participants that start clearing 
because of the proposed determination. However, given the high rates 
of voluntary clearing, there are likely to be few, if any, new 
participants.
    141 The Commission’s margin requirements for uncleared swaps 
are codified in subpart E of part 23 of the Commission’s 
regulations.
—————————————————————————

    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.142 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.
—————————————————————————

    142 Indeed, as noted above, regulators in the United States 
have called on market participants to cease new USD LIBOR activity.
—————————————————————————

    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.143 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.144 Accordingly, the Commission 
anticipates that the additional cost of compliance for market 
participants would be de minimis.
—————————————————————————

    143 As noted above, while the Commission proposes to require 
clearing of USD SOFR and SGD SORA swaps effective 30 days after 
publication of the final rule in the Federal Register, the 
Commission proposes to remove USD LIBOR and SGD SOR-VWAP clearing 
requirements on a delayed basis, effective July 1, 2023.
    144 See section V.C above.
—————————————————————————

Request for Comment
    The Commission requests comment concerning the costs of clearing

[[Page 32928]]

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.145 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.146
—————————————————————————

    145 The Commission does not have the information necessary to 
determine either the costs associated with entities that need to 
establish relationships with one or more FCMs or the costs 
associated with entities that already have relationships with one or 
more FCMs but need to revise their agreements. Commenters are 
requested to provide the necessary data where available.
    146 E.g., Tradeweb Letter (“In effect, the CFTC is not 
expanding the existing clearing determinations, rather it will be 
applying the existing IBOR determinations to contracts based on the 
new RFRs.”); Citadel Letter (“As noted above, OTC derivatives 
referencing SOFR are currently being cleared by DCOs in material 
volumes, demonstrating that the rule frameworks and operational 
infrastructure already exist to support a clearing requirement. 
Significant voluntary clearing demonstrates the confidence market 
participants have in the current DCO offerings.”); Eurex Letter 
(“Eurex Clearing does not believe that adopting a clearing 
requirement for swaps referencing SOFR would be any hindrance to 
trading activity in those swaps. Any such clearing requirements for 
the RFRs, if adopted, were already in effect for the IBOR-based 
rates being replaced.”).
—————————————————————————

    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.147
—————————————————————————

    147 In responding to the RFI, TD Bank noted that the 
implementation of new clearing requirements to address the 
transition from IBORs to RFRs “should not materially increase 
costs” (but should be “forecasted appropriately to allow firms to 
become operationally ready”). TD Bank Letter. JSCC noted that 
“DCOs and market participants have already incurred significant 
costs to transition LIBOR swaps denominated in non-USD currencies to 
alternative reference rates” and stated that JSCC “[does] not 
believe there would be any additional costs to be borne by DCOs and 
market participants if the CFTC includes alternative reference 
rates, such as TONA OIS, in the Clearing Requirement.” JSCC Letter. 
ISDA stated that “[w]hile the changes in [the clearing requirement] 
will have a cost attached . . . these costs are part of the overall 
cost of LIBOR transition and spread across multiple jurisdictions.” 
ISDA Letter. ISDA noted that for institutional clients, additional 
costs “will be incremental as opposed to something completely new 
and potentially prohibitive,” but also noted that “[f]or smaller 
less sophisticated counterparties who do not have to currently 
clear, [a new clearing requirement] could be a significant cost that 
could deter them from hedging using swaps.” Id. ISDA requested that 
the Commission “not enact a [clearing requirement] . . . in a way 
that increases cost, for instance by providing [a] short notice 
period that would require the implementation of tactical solutions 
to meet short deadlines.” Id. ACLI encouraged the Commission to 
“consider whether the marginal risk mitigation benefits of an 
expanded clearing requirement outweigh the costs of compliance” in 
light of uncleared swap margin rules. ACLI Letter.
—————————————————————————

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.148 As 
noted, most RFR OIS transactions are already cleared, so that these 
costs are largely being incurred by market participants.
—————————————————————————

    148 The Commission does not have current information regarding 
such fees; commenters are requested to provide the necessary data 
where available.
—————————————————————————

    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 
2022.149 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.
—————————————————————————

    149 This estimate is based on swaps transacted after the most 
recent revisions to subpart C of part 50 went into effect (on or 
after December 30, 2020) so it captures all applicable exemptions 
from the swap clearing requirement.
—————————————————————————

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.

[[Page 32929]]

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; 150 (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; 151 (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; 152 and (5) certain 
entities may elect an exception or exemption from the clearing 
requirement.153
—————————————————————————

    150 E.g., under the terms of a credit support annex.
    151 Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016); Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants, 85 FR 71246 (Nov. 9, 2020).
    152 For example, if such swaps do not meet the specifications 
set forth in proposed revised regulation Sec.  50.4(a).
    153 See subpart C of part 50 (Exceptions and Exemptions to 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.154 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.
—————————————————————————

    154 Certain entities, such as pension funds and asset 
managers, may use as initial margin assets that they already own. In 
such cases, market participants would not incur funding costs in 
order to post initial margin.
—————————————————————————

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.155
—————————————————————————

    155 See generally subpart E of part 23 of the Commission’s 
regulations. Swap clearing requirements under part 50 of the 
Commission’s regulations apply to a broader scope of market 
participants than the uncleared swap margin regulations. For 
example, under subpart E of part 23, a “financial end-user” that 
does not have “material swaps exposure” (as defined by regulation 
Sec.  23.151) is not required to post initial margin, but such an 
entity may be subject to the swap clearing requirement. 17 CFR 
23.151.
—————————————————————————

    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,156 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.157 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.
—————————————————————————

    156 Commission regulation Sec.  39.13(g)(2)(ii)(c), 17 CFR 
39.13(g)(2)(ii)(c).
    157 Commission regulations Sec. Sec.  23.154(b)(2)(i) and 
23.159. See generally Margin and Capital Requirements for Covered 
Swap Entities, 80 FR 77840 (Nov. 3, 2015).
—————————————————————————

    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.158 
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.159 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.160 This 
observation

[[Page 32930]]

applies to capital costs associated with both initial margin and 
variation margin.
—————————————————————————

    158 It has been argued that the cash flows of an 
uncollateralized swap (i.e., a swap with an implicit line of credit) 
are over time substantially equivalent to the cash flows of a 
collateralized swap with an explicit line of credit. See generally 
Antonio S. Mello & John E. Parsons, Margins, Liquidity, and the Cost 
of Hedging, MIT Center for Energy and Environmental Policy Research, 
May 2012, available at http://dspace.mit.edu/bitstream/handle/1721.1/70896/2012-005.pdf?sequence=1.
    159 Id. Mello and Parsons state, “[h]edging is costly. But 
the real source of the cost is not the margin posted, but the 
underlying credit risk that motivates counterparties to demand that 
margin be posted.” Id. at 12. They also note that, “[t]o a first 
approximation, the cost charged for the non-margined swap must be 
equal to the cost of funding the margin account. This follows from 
the fact that the non-margined swap just includes funding of the 
margin account as an embedded feature of the package.” Id. at 15-
16.
    160 But note that the cost may be greater for uncleared swaps 
as the initial margin is computed on a counterparty by counterparty 
basis, whereas in the clearing context, there is most likely greater 
opportunity for netting exposures at the DCO.
—————————————————————————

    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.161 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.162
—————————————————————————

    161 Among other things, the Commission’s part 23 regulations 
set forth material swap exposure thresholds above which the exchange 
of variation margin is no longer voluntary. 17 CFR 23.151 and 
23.153.
    162 However, exchange of variation margin will lower the 
build-up of current exposure.
—————————————————————————

    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.163 Moreover, as noted, these 
benefits are already being realized for the large majority of these 
swaps that are cleared voluntarily.
—————————————————————————

    163 As discussed in section IV.A above.
—————————————————————————

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

[[Page 32931]]

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.164 
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.
—————————————————————————

    164 It is possible that the level of clearing overall may 
remain similar if the use of swaps referencing RFRs replaces the use 
of swaps referencing IBORs.
—————————————————————————

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.165 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.
—————————————————————————

    165 See CMEG Letter (“CME Clearing currently accepts OIS 
referencing SOFR, SARON, [euro]STR, SONIA and TONA . . . . CME 
Clearing is therefore already in a position to support a Clearing 
Requirement in relation to these swaps.”); LSEG (noting RFR OIS 
that LCH already clears and discussing significant recent increases 
in liquidity in certain swaps, particularly JPY TONA and USD SOFR); 
Eurex Letter (“Eurex Clearing has a well-developed rule framework, 
compliance process and procedures, and support infrastructure to 
support clearing of swaps referencing the RFRs and already offers 
clearing of these swaps. Eurex Clearing has leveraged and will 
continue to leverage this operational capacity for the clearing of 
swaps referencing the RFRs and has the appropriate risk management, 
operations, technology, and compliance capabilities in place to 
continue to provide for compliance with all CEA core principles for 
DCOs.”). See also JSCC Letter (noting that JSCC has been clearing 
JPY TONA OIS since 2014 and that because “JPY swap market liquidity 
has already fully transitioned from IRS referencing LIBOR to TONA 
OIS,” there is “no concern for DCOs to accept [JPY TONA OIS] for 
clearing.”).
—————————————————————————

    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.166 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.
—————————————————————————

    166 See section V above.
—————————————————————————

    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

[[Page 32932]]

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.167 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.
—————————————————————————

    167 Issues related to competition also are considered in 
sections V and VIII.
—————————————————————————

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.168 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.
—————————————————————————

    168 For example, there is a small risk of a sudden price move 
so large that a counterparty would be unable to post sufficient 
variation margin to cover the loss, which may exceed the amount of 
initial margin posted, and could be forced into default.
—————————————————————————

    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.169
—————————————————————————

    169 Sound risk management practices are critical for all DCOs, 
especially those offering clearing for interest rate swaps given the 
size and interconnectedness of the global interest rate swap market, 
as presented throughout this proposal. The Commission considered 
whether each regulation Sec.  39.5(b) submission under review was 
consistent with the DCO core principles. In particular, the 
Commission considered the DCO submissions in light of Core Principle 
D, which relates to risk management. See also section V.C above for 
a discussion of the effect on the mitigation of systemic risk in the 
interest rate swap market, as well as the protection of market 
participants during insolvency events at either the clearing member 
or DCO level.
—————————————————————————

    Central clearing has evolved since the 2009 G20 Pittsburgh Summit, 
when G20 leaders committed to central clearing of all standardized 
swaps.170 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.171
—————————————————————————

    170 The G20 Leaders Statement made in Pittsburgh is available 
at http://www.g20.utoronto.ca/2009/2009communique0925.html.
    171 See Dietrich Domanski, et al., “Central clearing: Trends 
and current issues,” BIS Quarterly Review, Dec. 2015, available at 
https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf; U.S. Department of 
the Treasury, Office of Financial Research, Financial Stability 
Report, at 35 (Nov. 2018), available at https://www.federalreserve.gov/publications/files/financial-stability-report-201811.pdf; Umar Faruqui, et al., “Clearing risks in OTC 
derivatives markets: the CCP-bank nexus,” at 77-79 (2018), 
available at https://www.bis.org/publ/qtrpdf/r_qt1812h.pdf.
—————————————————————————

    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.172 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.
—————————————————————————

    172 The G20 Leaders Statement made in Pittsburgh is available 
at http://www.g20.utoronto.ca/2009/2009communique0925.html.
—————————————————————————

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.173 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),174 and the Commission has determined that ECPs are not small 
entities for purposes of the RFA.175 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.
—————————————————————————

    173 5 U.S.C. 601 et seq.
    174 Section 2(e) of the CEA, 7 U.S.C. 2(e).
    175 Opting Out of Segregation, 66 FR 20740, 20743 (Apr. 25, 
2001).
—————————————————————————

B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) 176 imposes certain 
requirements

[[Page 32933]]

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.
—————————————————————————

    176 44 U.S.C. 3507(d).
—————————————————————————

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.177 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.
—————————————————————————

    177 Section 15(b) of the CEA, 7 U.S.C. 15(b).
—————————————————————————

    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

0
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.]

0
2. In Sec.  50.4, revise paragraph (a) to read as follows:

Sec.  50.4   Classes of swaps required to be cleared.

    (a) Interest rate swaps. Swaps that have the following 
specifications are required to be cleared under section 2(h)(1) of the 
Act, and shall be cleared pursuant to the rules of any derivatives 
clearing organization eligible to clear such swaps under Sec.  39.5(a) 
of this chapter.

[[Page 32934]]

                                                                                                        Table 1 to Paragraph (a)
—————————————————————————————————————————————————————————————————————————————-
 
—————————————————————————————————————————————————————————————————————————————-
 Specification                                                                                                         Fixed-to-floating swap class
—————————————————————————————————————————————————————————————————————————————-
1. Currency…………………  Australian Dollar   Canadian Dollar     Euro (EUR)……..  Hong Kong Dollar    Mexican Peso (MXN)  Norwegian Krone     Polish Zloty (PLN)  Singapore Dollar    Swedish Krona       U.S. Dollar (USD).
                                   (AUD).              (CAD).                                  (HKD).                                  (NOK).                                  (SGD).              (SEK).
2. Floating Rate Indexes……..  BBSW…………..  CDOR…………..  EURIBOR………..  HIBOR………….  TIIE-BANXICO……  NIBOR………….  WIBOR………….  SOR-VWAP……….  STIBOR…………  LIBOR.
3. Stated Termination Date Range  28 days to 30       28 days to 30       28 days to 50       28 days to 10       28 days to 21       28 days to 10       28 days to 10       28 days to 10       28 days to 15       28 days to 50
                                   years.              years.              years.              years.              years.              years.              years.              years.              years.              years.
4. Optionality………………  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No.
5. Dual Currencies…………..  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No.
6. Conditional Notional Amounts.  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No.
—————————————————————————————————————————————————————————————————————————————-

[[Page 32935]]

                                            Table 2 to Paragraph (a)
—————————————————————————————————————-
 
—————————————————————————————————————-
 Specification                                                      Basis swap class
—————————————————————————————————————-
1. Currency……………………..  Australian Dollar (AUD)  Euro (EUR)………….  U.S. Dollar (USD).
2. Floating Rate Indexes………….  BBSW……………….  EURIBOR…………….  LIBOR.
3. Stated Termination Date Range…..  28 days to 30 years….  28 days to 50 years….  28 days to 50 years.
4. Optionality…………………..  No…………………  No…………………  No.
5. Dual Currencies……………….  No…………………  No…………………  No.
6. Conditional Notional Amounts……  No…………………  No…………………  No.
—————————————————————————————————————-

                                                                Table 3 to Paragraph (a)
——————————————————————————————————————————————————–
 
——————————————————————————————————————————————————–
 Specification                                                                   Forward rate agreement class
——————————————————————————————————————————————————–
1. Currency……………………  Euro (EUR)…………  Polish Zloty (PLN)….  Norwegian Krone (NOK)  Swedish Krona (SEK)..  U.S. Dollar (USD).
2. Floating Rate Indexes………..  EURIBOR……………  WIBOR……………..  NIBOR…………….  STIBOR……………  LIBOR.
3. Stated Termination Date Range…  3 days to 3 years…..  3 days to 2 years…..  3 days to 2 years….  3 days to 3 years….  3 days to 3 years.
4. Optionality…………………  No………………..  No………………..  No……………….  No……………….  No.
5. Dual Currencies……………..  No………………..  No………………..  No……………….  No……………….  No.
6. Conditional Notional Amounts….  No………………..  No………………..  No……………….  No……………….  No.
——————————————————————————————————————————————————–

                                                                                    Table 4 to Paragraph (a)
————————————————————————————————————————————————————————————————
 
————————————————————————————————————————————————————————————————
 Specification                                                                                     Overnight index swap class
————————————————————————————————————————————————————————————————
1. Currency……………….  Australian        Canadian Dollar   Euro (EUR)……  Singapore Dollar  Sterling (GBP)..  Swiss Franc       U.S. Dollar       U.S. Dollar       Yen (JPY).
                                 Dollar (AUD).     (CAD).                              (SGD).                              (CHF).            (USD).            (USD).
2. Floating Rate Indexes……  AONIA-OIS…….  CORRA-OIS…….  [euro]STR…….  SORA…………  SONIA………..  SARON………..  FedFunds……..  SOFR…………  TONA.
3. Stated Termination Date      7 days to 2       7 days to 2       7 days to 3       7 days to 10      7 days to 50      7 days to 30      7 days to 3       7 days to 50      7 days to 30
 Range.                          years.            years.            years.            years.            years.            years.            years.            years.            years.
4. Optionality…………….  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No.
5. Dual Currencies…………  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No.
6. Conditional Notional         No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No.
 Amounts.
————————————————————————————————————————————————————————————————

* * * * *
0
3. Revise Sec.  50.26 to read as follows:

Sec.  50.26   Swap clearing requirement compliance dates.

    (a) Compliance dates for interest rate swap classes. The compliance 
dates for swaps that are required to be cleared under Sec.  50.4(a) are 
specified in the following table.

                                            Table 1 to Paragraph (a)
—————————————————————————————————————-
                                                       Currency and          Stated
        Swap asset class             Swap class       floating rate     termination date   Clearing requirement
                                      subtype             index              range            compliance date
—————————————————————————————————————-
Interest Rate Swap………….  Fixed-to-Floating  Euro (EUR)         28 days to 50      Category 1 entities
                                                     EURIBOR.           years.             March 11, 2013. All
                                                                                           non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.
Interest Rate Swap………….  Fixed-to-Floating  U.S. Dollar (USD)  28 days to 50      Category 1 entities
                                                     LIBOR.             years.             March 11, 2013. All
                                                                                           non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.
Interest Rate Swap………….  Fixed-to-Floating  Australian Dollar  28 days to 30      All entities December
                                                     (AUD) BBSW.        years.             13, 2016.
Interest Rate Swap………….  Fixed-to-Floating  Canadian Dollar    28 days to 30      All entities July 10,
                                                     (CAD) CDOR.        years.             2017.
Interest Rate Swap………….  Fixed-to-Floating  Hong Kong Dollar   28 days to 10      All entities August
                                                     (HKD) HIBOR.       years.             30, 2017.
Interest Rate Swap………….  Fixed-to-Floating  Mexican Peso       28 days to 21      All entities December
                                                     (MXN) TIIE-        years.             13, 2016.
                                                     BANXICO.
Interest Rate Swap………….  Fixed-to-Floating  Norwegian Krone    28 days to 10      All entities April 10,
                                                     (NOK) NIBOR.       years.             2017.
Interest Rate Swap………….  Fixed-to-Floating  Polish Zloty       28 days to 10      All entities April 10,
                                                     (PLN) WIBOR.       years.             2017.
Interest Rate Swap………….  Fixed-to-Floating  Singapore Dollar   28 days to 10      All entities October
                                                     (SGD) SOR-VWAP.    years.             15, 2018.

[[Page 32936]]

 
Interest Rate Swap………….  Fixed-to-Floating  Swedish Krona      28 days to 15      All entities April 10,
                                                     (SEK) STIBOR.      years.             2017.
Interest Rate Swap………….  Basis…………  Euro (EUR)         28 days to 50      Category 1 entities
                                                     EURIBOR.           years.             March 11, 2013. All
                                                                                           non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.
Interest Rate Swap………….  Basis…………  U.S. Dollar (USD)  28 days to 50      Category 1 entities
                                                     LIBOR.             years.             March 11, 2013. All
                                                                                           non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.
Interest Rate Swap………….  Basis…………  Australian Dollar  28 days to 30      All entities December
                                                     (AUD) BBSW.        years.             13, 2016.
Interest Rate Swap………….  Forward Rate       Euro (EUR)         3 days to 3 years  Category 1 entities
                                  Agreement.         EURIBOR.                              March 11, 2013. All
                                                                                           non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.
Interest Rate Swap………….  Forward Rate       U.S. Dollar (USD)  3 days to 3 years  Category 1 entities
                                  Agreement.         LIBOR.                                March 11, 2013. All
                                                                                           non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.
Interest Rate Swap………….  Forward Rate       Polish Zloty       3 days to 2 years  All entities April 10,
                                  Agreement.         (PLN) WIBOR.                          2017.
Interest Rate Swap………….  Forward Rate       Norwegian Krone    3 days to 2 years  All entities April 10,
                                  Agreement.         (NOK) NIBOR.                          2017.
Interest Rate Swap………….  Forward Rate       Swedish Krona      3 days to 3 years  All entities April 10,
                                  Agreement.         (SEK) STIBOR.                         2017.
Interest Rate Swap………….  Overnight Index    Euro (EUR)         7 days to 3 years  All entities [30 DAYS
                                  Swap.              [euro]STR.                            AFTER DATE OF
                                                                                           PUBLICATION OF FINAL
                                                                                           RULE IN THE Federal
                                                                                           Register].
Interest Rate Swap………….  Overnight Index    Singapore Dollar   7 days to 10       All entities [30 DAYS
                                  Swap.              (SGD) SORA.        years.             AFTER DATE OF
                                                                                           PUBLICATION OF FINAL
                                                                                           RULE IN THE Federal
                                                                                           Register].
Interest Rate Swap………….  Overnight Index    Sterling (GBP)     7 days to 2 years  Category 1 entities
                                  Swap.              SONIA.                                March 11, 2013. All
                                                                                           non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.
                                                                       2 years + 1 day    All entities December
                                                                        to 3 years.        13, 2016.
                                                                       3 years + 1 day    All entities [30 DAYS
                                                                        to 50 years.       AFTER DATE OF
                                                                                           PUBLICATION OF FINAL
                                                                                           RULE IN THE Federal
                                                                                           Register].
Interest Rate Swap………….  Overnight Index    Swiss Franc (CHF)  7 days to 30       All entities [30 DAYS
                                  Swap.              SARON.             years.             AFTER DATE OF
                                                                                           PUBLICATION OF FINAL
                                                                                           RULE IN THE Federal
                                                                                           Register].
Interest Rate Swap………….  Overnight Index    U.S. Dollar (USD)  7 days to 2 years  Category 1 entities
                                  Swap.              FedFunds.                             March 11, 2013. All
                                                                                           non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.
                                                                       2 years + 1 day    All entities December
                                                                        to 3 years.        13, 2016.
Interest Rate Swap………….  Overnight Index    U.S. Dollar (USD)  7 days to 50       All entities [30 DAYS
                                  Swap.              SOFR.              years.             AFTER DATE OF
                                                                                           PUBLICATION OF FINAL
                                                                                           RULE IN THE Federal
                                                                                           Register].
Interest Rate Swap………….  Overnight Index    Australian Dollar  7 days to 2 years  All entities December
                                  Swap.              (AUD) AONIA-OIS.                      13, 2016.
Interest Rate Swap………….  Overnight Index    Canadian Dollar    7 days to 2 years  All entities July 10,
                                  Swap.              (CAD) CORRA-OIS.                      2017.
Interest Rate Swap………….  Overnight Index    Yen (JPY) TONA…  7 days to 30       All entities [30 DAYS
                                  Swap.                                 years.             AFTER DATE OF
                                                                                           PUBLICATION OF FINAL
                                                                                           RULE IN THE Federal
                                                                                           Register].
—————————————————————————————————————-

    (b) Compliance dates for credit default swap classes. The 
compliance dates for swaps that are required to be cleared under Sec.  
50.4(b) are specified in the following table.

                                            Table 2 to Paragraph (b)
—————————————————————————————————————-
                                     Swap class                                            Clearing requirement
        Swap asset class              subtype            Indices             Tenor            compliance date
—————————————————————————————————————-
Credit Default Swap…………  North American     CDX.NA.IG……..  3Y, 5Y, 7Y, 10Y..  Category 1 entities
                                  untranched CDS                                           March 11, 2013. All
                                  indices.                                                 non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.

[[Page 32937]]

 
Credit Default Swap…………  North American     CDX.NA.HY……..  5Y……………  Category 1 entities
                                  untranched CDS                                           March 11, 2013. All
                                  indices.                                                 non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.
Credit Default Swap…………  European           iTraxx Europe….  5Y, 10Y……….  Category 1 entities
                                  untranched CSD                                           April 26, 2013.
                                  indices.                                                 Category 2 entities
                                                                                           July 25, 2013. All
                                                                                           non-Category 2
                                                                                           entities October 23,
                                                                                           2013.
Credit Default Swap…………  European           iTraxx Europe      5Y……………  Category 1 entities
                                  untranched CSD     Crossover.                            April 26, 2013.
                                  indices.                                                 Category 2 entities
                                                                                           July 25, 2013. All
                                                                                           non-Category 2
                                                                                           entities October 23,
                                                                                           2013.
Credit Default Swap…………  European           iTraxx Europe      5Y……………  Category 1 entities
                                  untranched CSD     HiVol.                                April 26, 2013.
                                  indices.                                                 Category 2 entities
                                                                                           July 25, 2013. All
                                                                                           non-Category 2
                                                                                           entities October 23,
                                                                                           2013.
—————————————————————————————————————-

    [The following amendments would be effective July 1, 2023.]
0
4. In Sec.  50.4 revise paragraph (a) to read as follows:

Sec.  50.4   Classes of swaps required to be cleared.

    (a) Interest rate swaps. Swaps that have the following 
specifications are required to be cleared under section 2(h)(1) of the 
Act, and shall be cleared pursuant to the rules of any derivatives 
clearing organization eligible to clear such swaps under Sec.  39.5(a) 
of this chapter.

                                                                                    Table 1 to Paragraph (a)
————————————————————————————————————————————————————————————————
 
————————————————————————————————————————————————————————————————
Specification                                                                                      Fixed-to-floating swap class
————————————————————————————————————————————————————————————————
1. Currency…………………  Australian Dollar   Canadian Dollar     Euro (EUR)……..  Hong Kong Dollar    Mexican Peso (MXN)  Norwegian Krone     Polish Zloty (PLN)  Swedish Krona
                                   (AUD).              (CAD).                                  (HKD).                                  (NOR).                                  (SEK).
2. Floating Rate Indexes……..  BBSW…………..  CDOR…………..  EURIBOR………..  HIBOR………….  TIIE-BANXICO……  NIBOR………….  WIBOR………….  STIBOR.
3. Stated Termination Date Range  28 days to 30       28 days to 30       28 days to 50       28 days to 10       28 days to 21       28 days to 10       28 days to 10       28 days to 15
                                   years.              years.              years.              years.              years.              years.              years.              years.
4. Optionality………………  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No.
5. Dual Currencies…………..  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No.
6. Conditional Notional Amounts.  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No…………….  No.
————————————————————————————————————————————————————————————————

                        Table 2 to Paragraph (a)
————————————————————————
 
————————————————————————
Specification                                Basis swap class
————————————————————————
1. Currency…………………  Australian Dollar   Euro (EUR).
                                   (AUD).
2. Floating Rate Indexes……..  BBSW…………..  EURIBOR.
3. Stated Termination Date Range  28 days to 30       28 days to 50
                                   years.              years.
4. Optionality………………  No…………….  No.
5. Dual Currencies…………..  No…………….  No.
6. Conditional Notional Amounts.  No…………….  No.
————————————————————————

                                            Table 3 to Paragraph (a)
—————————————————————————————————————-
 
—————————————————————————————————————-
Specification                                              Forward rate agreement class
—————————————————————————————————————-
1. Currency…………………  Euro (EUR)……..  Polish Zloty (PLN)  Norwegian Krone     Swedish Krona
                                                                           (NOK).              (SEK).
2. Floating Rate Indexes……..  EURIBOR………..  WIBOR………….  NIBOR………….  STIBOR.
3. Stated Termination Date Range  3 days to 3 years.  3 days to 2 years.  3 days to 2 years.  3 days to 3 years.
4. Optionality………………  No…………….  No…………….  No…………….  No.
5. Dual Currencies…………..  No…………….  No…………….  No…………….  No.
6. Conditional Notional Amounts.  No…………….  No…………….  No…………….  No.
—————————————————————————————————————-

                                                                                    Table 4 to Paragraph (a)
————————————————————————————————————————————————————————————————
 
————————————————————————————————————————————————————————————————
Specification                                                                             Overnight index swap class
————————————————————————————————————————————————————————————————
1. Currency……………….  Australian        Canadian Dollar   Euro (EUR)……  Singapore Dollar  Sterling (GBP)..  Swiss Franc       U.S. Dollar       U.S. Dollar       Yen (JPY).
                                 Dollar (AUD).     (CAD).                              (SGD).                              (CHF).            (USD).            (USD).
2. Floating Rate Indexes……  AONIA-OIS…….  CORRA-OIS…….  [euro]STR…….  SORA…………  SONIA………..  SARON………..  FedFunds……..  SOFR…………  TONA.

[[Page 32938]]

 
3. Stated Termination Date      7 days to 2       7 days to 2       7 days to 3       7 days to 10      7 days to 50      7 days to 30      7 days to 3       7 days to 50      7 days to 30
 Range.                          years.            years.            years.            years.            years.            years.            years.            years.            years.
4. Optionality…………….  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No.
5. Dual Currencies…………  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No.
6. Conditional Notional         No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No…………..  No.
 Amounts.
————————————————————————————————————————————————————————————————

* * * * *
0
5. In Sec.  50.26, revise paragraph (a) to read as follows:

Sec.  50.26   Swap clearing requirement compliance dates.

    (a) Compliance dates for interest rate swap classes. The compliance 
dates for swaps that are required to be cleared under Sec.  50.4(a) are 
specified in the following table.

                                            Table 1 to Paragraph (a)
—————————————————————————————————————-
                                                       Currency and          Stated
        Swap asset class             Swap class       floating rate     termination date   Clearing requirement
                                      subtype             index              range            compliance date
—————————————————————————————————————-
Interest Rate Swap………….  Fixed-to-Floating  Euro (EUR)         28 days to 50      Category 1 entities
                                                     EURIBOR.           years.             March 11, 2013. All
                                                                                           non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.
Interest Rate Swap………….  Fixed-to-Floating  Australian Dollar  28 days to 30      All entities December
                                                     (AUD) BBSW.        years.             13, 2016.
Interest Rate Swap………….  Fixed-to-Floating  Canadian Dollar    28 days to 30      All entities July 10,
                                                     (CAD) CDOR.        years.             2017.
Interest Rate Swap………….  Fixed-to-Floating  Hong Kong Dollar   28 days to 10      All entities August
                                                     (HKD) HIBOR.       years.             30, 2017.
Interest Rate Swap………….  Fixed-to-Floating  Mexican Peso       28 days to 21      All entities December
                                                     (MXN) TIIE-        years.             13, 2016.
                                                     BANXICO.
Interest Rate Swap………….  Fixed-to-Floating  Norwegian Krone    28 days to 10      All entities April 10,
                                                     (NOK) NIBOR.       years.             2017.
Interest Rate Swap………….  Fixed-to-Floating  Polish Zloty       28 days to 10      All entities April 10,
                                                     (PLN) WIBOR.       years.             2017.
Interest Rate Swap………….  Fixed-to-Floating  Swedish Krona      28 days to 15      All entities April 10,
                                                     (SEK) STIBOR.      years.             2017.
Interest Rate Swap………….  Basis…………  Euro (EUR)         28 days to 50      Category 1 entities
                                                     EURIBOR.           years.             March 11, 2013. All
                                                                                           non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.
Interest Rate Swap………….  Basis…………  Australian Dollar  28 days to 30      All entities December
                                                     (AUD) BBSW.        years.             13, 2016.
Interest Rate Swap………….  Forward Rate       Euro (EUR)         3 days to 3 years  Category 1 entities
                                  Agreement.         EURIBOR.                              March 11, 2013. All
                                                                                           non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.
Interest Rate Swap………….  Forward Rate       Polish Zloty       3 days to 2 years  All entities April 10,
                                  Agreement.         (PLN) WIBOR.                          2017.
Interest Rate Swap………….  Forward Rate       Norwegian Krone    3 days to 2 years  All entities April 10,
                                  Agreement.         (NOK) NIBOR.                          2017.
Interest Rate Swap………….  Forward Rate       Swedish Krona      3 days to 3 years  All entities April 10,
                                  Agreement.         (SEK) STIBOR.                         2017.
Interest Rate Swap………….  Overnight Index    Euro (EUR)         7 days to 3 years  All entities [30 DAYS
                                  Swap.              [euro]STR.                            AFTER DATE OF
                                                                                           PUBLICATION OF FINAL
                                                                                           RULE IN THE Federal
                                                                                           Register.]
Interest Rate Swap………….  Overnight Index    Singapore Dollar   7 days to 10       All entities [30 DAYS
                                  Swap.              (SGD) SORA.        years.             AFTER DATE OF
                                                                                           PUBLICATION OF FINAL
                                                                                           RULE IN THE Federal
                                                                                           Register.]
Interest Rate Swap………….  Overnight Index    Sterling (GBP)     7 days to 2 years  Category 1 entities
                                  Swap.              SONIA.                                March 11, 2013. All
                                                                                           non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.
                                 ……………..  ……………..  2 years + 1 day    All entities December
                                                                        to 3 years.        13, 2016.
                                 ……………..  ……………..  3 years + 1 day    All entities [30 DAYS
                                                                        to 50 years.       AFTER DATE OF
                                                                                           PUBLICATION OF FINAL
                                                                                           RULE IN THE Federal
                                                                                           Register.]
Interest Rate Swap………….  Overnight Index    Swiss Franc (CHF)  7 days to 30       All entities [30 DAYS
                                  Swap.              SARON.             years.             AFTER DATE OF
                                                                                           PUBLICATION OF FINAL
                                                                                           RULE IN THE Federal
                                                                                           Register.]
Interest Rate Swap………….  Overnight Index    U.S. Dollar (USD)  7 days to 2 years  Category 1 entities
                                  Swap.              FedFunds.                             March 11, 2013. All
                                                                                           non-Category 2
                                                                                           entities June 10,
                                                                                           2013. Category 2
                                                                                           entities September 9,
                                                                                           2013.
                                 ……………..  ……………..  2 years + 1 day    All entities December
                                                                        to 3 years.        13, 2016.

[[Page 32939]]

 
Interest Rate Swap………….  Overnight Index    U.S. Dollar (USD)  7 days to 50       All entities [30 DAYS
                                  Swap.              SOFR.              years.             AFTER DATE OF
                                                                                           PUBLICATION OF FINAL
                                                                                           RULE IN THE Federal
                                                                                           Register.]
Interest Rate Swap………….  Overnight Index    Australian Dollar  7 days to 2 years  All entities December
                                  Swap.              (AUD) AONIA-OIS.                      13, 2016.
Interest Rate Swap………….  Overnight Index    Canadian Dollar    7 days to 2 years  All entities July 10,
                                  Swap.              (CAD) CORRA-OIS.                      2017.
Interest Rate Swap………….  Overnight Index    Yen (JPY) TONA…  7 days to 30       All entities [30 DAYS
                                  Swap.                                 years.             AFTER DATE OF
                                                                                           PUBLICATION OF FINAL
                                                                                           RULE IN THE Federal
                                                                                           Register.]
—————————————————————————————————————-

* * * * *

    Issued in Washington, DC, on May 11, 2022, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    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.

[FR Doc. 2022-10490 Filed 5-27-22; 8:45 am]
BILLING CODE 6351-01-P