The US Commodity Futures Trading Commission (CFTC) recently provided relief to Derivatives Clearing Organizations (DCOs) in relation to LIBOR transitions. The LIBOR system is set to retire at the end of 2021.
Relief from the CFTC
The regulator has provided additional relief to market participants in relation to the transition from LIBOR-referenced swaps to other interbank offered rates. The staff at CFTC recently issues two no-action letters which helped provide more relief to DCOs in shifting to alternative benchmarks.
LIBOR has been ridden with scandals after the news of a manipulation scheme broke out that led to global indictments of banking professionals. LIBOR was the most prominent benchmark that was plagued by a multiyear rigging scandal. It will retire at the end of LIBOR.
Swaps dealers were earlier provided relief by the regulator in September for transitioning from LIBOR to other alternative benchmarks. The relief covered requirements applicable to swap dealers, mandatory clearing, and trade execution requirements. Letter 19-26 will provide relief to some swaps executed on October 16, 2020, as part of the LCH limited discounting transition auction. The second letter, Letter No. 20-33 will provide relief to some swaps executed as part of a similar discounting transition auction by CME Inc. on October 19, 2020.
SONIA set to replace LIBOR
The CFTC said that its relief measures will help in smoothening the transition away from LIBOR to other benchmarks. This is specifically true in terms of older legacy swaps which are currently in the books of several end-users globally.
About a dozen bankers were convicted on LIBOR manipulating charges in the US as the DoJ and a series of other regulators prosecuted the culprits. Bank traders were charged with dishonestly manipulating the rate to benefit their respective trading positions. They rigged the rates up and down even though the rates should be set up independently. This eventually led to an overhaul in the system because of which LIBOR is now being replaced by SONIA. The rate is the Bank of England’s rate for swaps, futures, and loans denominated in sterling.