CFTC Chair Opines on Benchmark Reform

CFTC Chair J. Christopher Giancarlo recommended (i) reducing the number of obstacles to swaps clearing and (ii) transitioning away from LIBOR to alternative risk-free rates.

In remarks before the 2018 Financial Stability Conference in Washington, Mr. Giancarlo discussed two aspects of the CFTC approach to G-20 reforms: swap trading and clearing. He highlighted the CFTC’s recent proposal to amend its swap trading rules, saying that the changes would have the rules “encompass a wider scope of trading activity while enabling greater transactional flexibility.” In addition, Mr. Giancarlo discussed efforts to remove impediments to clearing. He cited the findings of a recent study sponsored by the Financial Stability Board on incentives to clearing (noting the CFTC co-chaired the study), and indicated that the CFTC will continue working with banking regulators to “educate them about the regulatory framework in place for cleared derivatives.” In particular, Mr. Giancarlo noted U.S. legal impediments preventing the use of client clearing margin.

As to benchmark reform, Mr. Giancarlo stressed the complexity of the process and warned that it “cannot be done through heavy-handed regulatory rulemaking.” He highlighted the work of the Alternate Reference Rates Committee (“ARRC”) and the importance of the public-private partnership driving that process. Regarding next steps, Mr. Giancarlo noted the actions taken by the ARRC, ISDA and others, and also urged market participants to consider the use of SOFR-linked derivatives, given both the impact of LIBOR going away and the potential benefits of what Mr. Giancarlo referred to as the “quite successful” clearing of SOFR swaps on LCH and CME.