CFTC MRAC Adopts "SOFR First" Recommendation

The CFTC Market Risk Advisory Committee ("MRAC") adopted the "Secured Overnight Financing Rate First" ("SOFR First") recommendation developed by MRAC's Interest Rate Benchmark Reform Subcommittee. The SOFR First recommendation calls for a four-phase transition from LIBOR to SOFR for U.S. dollar linear interest rate swaps, cross currency swaps, non-linear derivatives, and exchange traded derivatives and others. The recommendation now goes to the full Commission for consideration.

The phased implementation of the SOFR First recommendation is as follows:

  1. Replacing LIBOR with SOFR for linear swaps such as outright swaps, swap spreads and curve trades by July 26, 2021, and turning off interdealer LIBOR screens by October 22, 2021;

  2. Expecting to replace LIBOR with SOFR for cross currency swaps, including those with legs involving the Swiss Franc, the British Pound, the Japanese Yen and USD LIBOR (with other currencies transitioning at a later date), by September 21, 2021;

  3. Replacing LIBOR with SOFR for non-linear derivatives such as swaptions, caps and floors at a later date to be confirmed by the Subcommittee; and

  4. Replacing LIBOR with SOFR for exchange traded derivatives, including certain futures contacts and other currencies not covered in Phase 2, at a later date to be confirmed by the Subcommittee.

At the meeting, the MRAC's Central Counterparty ("CCP") Risk and Governance Subcommittee also presented reports on (i) "Capital and Skin-in-the-Game" and (ii) "Stress Testing and Liquidity" for acceptance by the full MRAC.

In his statement, Acting Chair Rostin Behnam, sponsor of the MRAC, stated that in anticipation of the discontinuation of LIBOR and its replacement with SOFR, he intends to have staff provide the CFTC with a rule proposal on the required clearing of SOFR swaps to be finalized in 2022. Additionally, Mr. Behnam said that for the purposes of CFTC Rule 37.9(d) ("Exceptions to required methods of execution for package transactions"), CFTC staff expects that swap execution facilities will treat SOFR swaps as intended to be cleared or required to be cleared swaps.

In a separate statement, Commissioner Dawn D. Stump emphasized the need for the CFTC to update its clearing requirements to address the limitations that prevent U.S. clients from accessing foreign CCPs. Commissioner Stump stated that the CFTC should revise its policies to enable U.S. persons to access clearing services at non-U.S. CCPs subject to a regulatory framework comparable to that of the United States, without requiring them to register with and be directly supervised by the CFTC.

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