On August 12, 2022, the Commodity Futures Trading Commission (CFTC) issued a final rule modifying the CFTC’s interest rate swap clearing requirement under CFTC Regulation 50.4(a). The final rule modifies the swap clearing requirements in support of the transition from London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative rates. CFTC Regulation 50.4 sets rules related to classes of swaps required to be cleared. CFTC Regulation 50.4(a) relates to interest rate swaps.
The final rule removes the requirement to clear interest rate swaps referencing LIBOR and certain other interbank offered rates and replaces them with requirements to clear interest rate swaps referencing overnight, nearly risk-free reference rates. The final rule also updates the swaps required to be submitted for clearing to a derivatives clearing organization (DCO) or an exempt DCO and the compliance dates for such swaps. CFTC Regulation 50.4(a) is amended as follows:
With global markets moving away from LIBOR and other interbank offered rates toward rates that are more observable, or transaction based and less susceptible to manipulation, regulatory bodies such as the CFTC are working to help facilitate a smooth transition away from reliance on LIBOR and other interbank offered rates. The amendments to CFTC Regulation 50.4(a) will help promote financial stability and mitigate systematic risk as well as to provide legal certainty and regulatory transparency with market participants and other international authorities.
Entities that are registered with the CFTC, enter into interest rate swap transactions, and prepare financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP), should consider the impact the amendments to CFTC Regulation 50.4(a) as well as the impact of Financial Accounting Standards Board (FASB) Accounting Standards Updates (ASU) related to Reference Rate Reform (ASU 2020-04 and ASU 2021-01) have on their company.