The CFTC Market Participants Division and Division of Market Oversight (the "Divisions") staff urged market participants and swap execution facilities ("SEFs") to cease the use of LIBOR on a timeline similar to that recommended by U.S. banking regulators.
In a public statement, the Divisions said that "continued reliance on LIBOR benchmarks poses risks to the stability and integrity of [derivatives] markets and consumer protection," and that firms may also face "financial, conduct, litigation, operational and reputational risks" if they are inadequately prepared for the transition. Subject to "very limited exceptions," the use of LIBOR rates in new contracts should end as soon as practicable and no later than December 31, 2021. The Divisions urged that (i) market participants expedite their conversion of legacy LIBOR contracts and (ii) SEFs continue to prioritize building liquidity in alternative reference rates. The staff stated that the Divisions expect market participants and SEFs to ensure that their clients, participants and stakeholders are aware of developments in this area.
The staff cited publications by the U.S. banking regulators, the Financial Stability Board and the Federal Housing Finance Agency, and said that "prudent risk management should consider, among other things, the robustness of the reference rate being used in place of LIBOR."
The Divisions also "strongly encourage[d]" firms to consider following the "SOFR First" principles that were unanimously adopted as a recommendation by the CFTC Market Risk Advisory Committee. Divisions staff recommended that market participants and SEFs keep track of transitions away from other IBOR rates that may impact their businesses.
Commentary Nihal Patel
One notable thing about the statement is what it is not: law. The statement explicitly states that it does not necessarily represent the views of the CFTC, and that it has "no legal force or effect" and does not "alter or amend applicable law" or create additional obligations for any person.
The statement is significant in that it indicates that the CFTC is following the lead of other regulatory bodies and that Division staff expect firms regulated by the CFTC to pursue a timeline for moving away from LIBOR consistent with the U.S. banking regulators' guidance.
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