Skip to main content
Modern building with round towers made from metal and glass
Article

CFTC expands additional LIBOR transition relief for market participants

Date:
October 12, 2020

Summary

The CFTC issued three no-action letters, targeting specific regulatory requirements, to provide relief for U.S. market participants as they transition existing derivatives away from LIBOR.

On August 31, 2020, the Commodity Futures Trading Commission (CFTC) issued three no-action letters to clarify and expand the relief available to U.S. market participants as they transition away from using LIBOR in existing derivatives. The Alternative Reference Rates Committee (ARRC) requested new letters to replace earlier no-action letters on the LIBOR transition previously issued by the CFTC in 2019. It is important to note upfront that the no-action letters do not cover Dodd-Frank reporting. Dodd-Frank still requires market participants to report a change in index as a life-cycle event.

How the no-action letters provide relief

Like the earlier letters from 2019, this new relief covers select regulatory requirements that would otherwise be triggered when market participants amend their existing derivatives. The CFTC knows that, over the next year, many market participants will either seek to amend the fallback definitions in their existing derivatives or amend the choice of underlying rate itself.

Letter 20-23 — Exemption of Dodd-Frank compliance obligations

To encourage the transition away from LIBOR, with Letter 20-23, CFTC’s Division of Swap Dealer and Intermediary Oversight provides targeted relief to swap dealers and, consequently, other market participants. Specifically, amendments to legacy and pre-transition derivatives, solely to address the LIBOR transition, are exempted from complying with business conduct standards, swap trading relationship documentation, margin requirements for uncleared swaps, portfolio reconciliation, and verification of eligible contract participant status. These amendments are also exempted from a swap dealer’s de minimis threshold calculations.

Letter 20-24 — The trade execution requirement

With Letter 20-24, CFTC’s Division of Market Oversight provides targeted relief from the trade execution requirement. This relief should be of limited importance to most end users since they are not subject to the trade execution requirement, as the trade execution requirement mandates that a subset of swaps subject to the clearing requirement be executed on a trading platform.

Letter 20-25 — Clearing requirements

With Letter 20-25, CFTC’s Division of Clearing and Risk provides targeted relief from clearing requirements for swaps that are amended to transition away from LIBOR. Specifically, the CFTC clarified that an end user amending its commercial loan documentation for the sole purpose of including new fallbacks published by the ARRC or accommodating the replacement of LIBOR would still be considered to be in compliance with the hedging or mitigating risk prong of the end user exception.

How to benefit from relief

To benefit from this relief, market participants must meet the conditions listed by the CFTC in each letter. Notably among them, the newly issued CFTC letters have clarified the kinds of changes that may be made to existing derivatives to move away from LIBOR while still benefiting from relief. Besides changing the rate, market participants may make certain other ancillary changes and minor changes to the notional amount and maturity only if necessary to accommodate the change in rate, and subject to specified conditions.


Speak to a Chatham expert

Please reach out to the Chatham team if you have questions around how the USD LIBOR transition may affect your existing derivatives.

About the author

  • Christopher Bender

    Director
    Regulatory Advisory

    Private Equity | Kennett Square, PA

    Chris is a Director of Regulatory Advisory where he serves Chatham’s private equity, infrastructure, and real estate clients. He brings significant experience advising on global derivatives regulatory regimes and compliance with derivatives regulation.

Disclaimers

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.

20-0390