CFTC MRAC Considers CCP Benchmark Transition
The Interest Rate Benchmark Reform Subcommittee of the CFTC Market Risk Advisory Committee ("MRAC") considered Central Counterparty Clearing House ("CCP")-proposed plans "for the transition of discounting and price alignment interest for certain products to the secured overnight financing rate ("SOFR")." The discounting shift in the transition to alternative reference rates is set for October 2020.
According to the CFTC, subcommittee members "were able to actively work through potential scenarios and identify operational challenges," to "strengthen the current discounting transition proposals." The CFTC also indicated that subcommittee will issue a report on the meeting and follow up steps at a future public MRAC meeting.
Commentary
CME and LCH have announced plans to shift the price alignment interest and discounting for U.S. dollar rate swap products to SOFR (from Effective Federal Funds Rate ("EFFR")) in October of this year. The shift will involve a very significant operational and technical build for market participants and will have carryover effects for, among other things, firms that engage in cleared interest rate swaps as hedges to other products (e.g., to an uncleared rate swap where interest on cash remains EFFR).