A new rule removes the requirement to clear IBOR-based swaps and extends mandatory clearing to swaps on IBOR alternatives.

On August 12, 2022, the US Commodity Futures Trading Commission (CFTC) voted to amend its mandatory clearing requirements for interest rate swaps (the Rule). The vote furthers the CFTC’s  efforts in the global transition away from inter-bank offered rates (IBORs) towards alternative reference rates.

The Rule:

• removes the requirement to clear swaps referencing the London Interbank Offered Rate (LIBOR) and certain other rates; and
• imposes mandatory clearing for overnight index swaps (OIS) referencing certain alternative reference rates such as the Secured Overnight Funding Rate (SOFR).

Subject to the compliance timelines set out below and absent an applicable exemption, covered swaps referencing alternative reference rates will need to be submitted for clearing to a derivatives clearing organization.

As the CFTC noted and Commissioner Caroline Pham emphasized in her concurring statement, the Rule is limited in scope to the mandatory clearing requirement. The Rule does not seek to address the application of the CFTC’s trade execution requirement. The extension of mandatory designated contract market / swap execution facility trade execution to swaps referencing alternative reference rates remains subject to the separate “made available to trade” determination process.

Mandatory Clearing for OIS on Alternative Reference Rates

Under the Rule, the following swaps will be subject to mandatory clearing with effect from the compliance dates set out below:

Removal of Mandatory Clearing for IBOR-Based Swaps

Under the Rule, the following swaps will no longer be subject to mandatory clearing with effect from the compliance dates set out below:

Endnote

[1] OIS that reference SONIA as a floating rate index with a stated termination date range of seven days to three years are already subject to mandatory clearing. The Rule extends the termination date rate from seven days to 50 years.