ARRC Requests Relief Relating to CCP Discounting Transition
The Alternative Reference Rate Committee ("ARRC") requested no-action relief from the CFTC Division of Swap Dealer and Intermediary Oversight relating to certain changes to swaps in the context of the central counterparty clearinghouse ("CCP") discounting transition.
The ARRC request comes in response to various CCP (including the CME, LCH and Eurex) announcing that they intend to change the discounting rate used for valuing cleared swaps and the rate applied to collateral or settlement amounts relating to such cleared swaps. In particular, CME and LCH stated that they will transfer from daily effective federal funds rate to SOFR in October 2020 for USD-discounted swaps. The ARRC request indicates that further relief is necessary beyond existing IBOR-transition-related relief granted by CFTC staff.
The letter requests relief so that the following types of actions are treated as "qualifying amendments" under the existing IBOR no-action relief:
- compensation or amendment of swaption terms in the context of the CCP transition; and
- changes to the interest rate on cash collateral in credit support documentation to avoid basis risk vis-a-vis CCP changes.
Commentary
The ARRC letter concedes that these measures could be viewed as for the avoidance of doubt, but greater certainty is important, particularly given the mass of contract changes of this type to be made. These measures also follow recent ARRC actions (i) to make recommendations for swaptions impacted by CCP discounting transition and (ii) to include amendments to interdealer CSAs as part of its "best practices" for IBOR transition.
As discussed previously, in addition to the shift away from LIBOR expected next year, the CCP discounting shift to come this year will have a major impact on interest rate derivatives markets.