Enter to open, tab to navigate, enter to select
ARRC Requests SEC No-Action Relief Regarding Treatment of Security-Based Swap (SBS) Risk-Free Rate Amendments
Practical Law Legal Update w-030-9179 (Approx. 6 pages)
ARRC Requests SEC No-Action Relief Regarding Treatment of Security-Based Swap (SBS) Risk-Free Rate Amendments
by Practical Law Finance
| Published on 11 May 2021 • USA (National/Federal) |
The Alternative Reference Rates Committee (ARRC) requested no-action relief from the SEC regarding the treatment of security-based swaps (SBS) that are amended or that are otherwise transitioned to reference risk-free rates (RFR) in connection with the discontinuation of LIBOR and other IBORs.
On April 30, 2021, the Alternative Reference Rates Committee (ARRC) issued a request for no-action relief regarding the treatment of security-based swaps (SBS) that are amended or otherwise transitioned to reference risk-free rates (RFR) in connection with the discontinuation of LIBOR and other interbank offered rates (IBORs) (see Legal Update, ICE Benchmark Administration (IBA) Announces Projected End Dates for USD LIBOR with Extension for Certain USD LIBOR Settings Until June 2023).
In the request letter, the AARC expresses concern that an amendment to the interest rate specified in an SBS agreement could cause a legacy SBS that is otherwise not subject to the SEC's SBS regulatory regime, which comes into effect later this year, to become subject to the regime. Under joint SEC and CFTC rules (77 Fed. Reg. 48,207), the amendment or modification of the material terms of an SBS, such as an interest rate, based on the exercise of discretion, and not through predetermined criteria or a predetermined self-executing formula, are deemed to be new SBS to which the new SEC regulatory regime would apply.
As a result, the ARRC requests that, similar to the no-action relief granted by the CFTC in connection with non-SBS that are amended in connection with the IBOR transition (see Legal Update, CFTC Provides Additional Swap LIBOR-Replacement Relief), the SEC grant no-action relief with respect to SBS that are amended to reflect a new RFR.
In connection with its general request for no-action relief, the AARC specifically requests the following:
- No-action relief for SBS that include IBOR fallback provisions under the 2020 IBOR fallbacks supplement published by ISDA® or "replacement rate" amendments, which provide that an IBOR is replaced with a new RFR following termination of an IBOR. This would ensure that SBS that reference an IBOR will continue to function after the transition from that IBOR.
- That SBS resulting from or amended by IBOR transition mechanisms are not counted towards the SBSD registration thresholds (see Practice Note, US Derivatives Regulation: Swap Dealer and SBSD Registration Thresholds: De Minimis Exemption from Designation as a Security-Based Swap Dealer).
- No-action relief for major security-based swap participants (MSBSP) and SBSDs (together, SBS entities) that are permitted to modify or enter into an SBS in connection with the IBOR transition, regardless of whether or not its counterparty is an eligible contract participant (ECP) at the time of the amendment (see Practice Note, US Derivatives Regulation: The Eligible Contract Participant (ECP) Requirement for OTC Derivatives and Implications for Secured Lending).
- No-action relief for SBS entities from compliance with the acknowledgment and verification requirements of Exchange Act Rules 15Fi-1 and 15Fi-2 (17 C.F.R. §§ 240.15Fi-1 and 240.15Fi-2) (see Practice Note, US Derivative Regulation: SEC Security-Based Swap Business Conduct Standards: SBS Trade Acknowledgement and Verification Rules).
- No-action relief for legacy SBS that are amended to include fallback provisions or replacement rate amendments and would otherwise not be exempted from the application of the upcoming SEC SBS regime as a result of triggering Rule 18a-1 (17 C.F.R. § 240.18a-1), which requires SBS to collect margin from counterparties to non-cleared SBS.
- No-action relief for SBS entities from compliance with the requirement under Exchange Act Rule 15Fi-5 (85 Fed. Reg. 6359) to establish, maintain, and follow written policies and procedures to ensure that the SBS entity executes written SBS trading relationship documentation with its counterparty (see Practice Note: US Derivatives Regulation: Risk Mitigation Rules for Uncleared Security-Based Swaps: SBS Trading Relationship Documentation).
- No-action relief for SBS entities from compliance with the discrepancy resolution timing requirements under Exchange Act Rule 15Fi-3 (85 Fed. Reg. 6359) to the extent such compliance would be required as a result of the transition from IBOR (see Practice Note: US Derivatives Regulation: Risk Mitigation Rules for Uncleared Security-Based Swaps: SBS Portfolio Reconciliation).
- No-action relief for SBS entities from compliance with the business conduct standards in Exchange Act Rule 15Fh-1-15Fh-6 (17 C.F.R. §§ 240.15Fh-1 to 240.15Fh-6), which require verification of certain “know your counterparty” information relating to the counterparty's eligibility to enter into an SBS (see Practice Note, US Derivatives Regulation: SEC Security-Based Swap Business Conduct Standards).
- Interpretive guidance from the SEC confirming that existing no-action relief with respect to Regulation SBSR would take into account any no-action relief or interpretive guidance provided by the CFTC with respect to the CFTC's swap reporting rules (see Practice Note, US Derivatives Regulation: SEC Regulation SBSR Data Reporting for Security-Based Swaps).
- Interpretive guidance or no-action relief confirming that a market participant would not be required to file an amendment to the beneficial ownership forms due to the transition of a swap from an IBOR to an RFR (see Practice Note, Section 13(d) Beneficial Ownership Reporting).