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CFTC Subcommittee Selects December 13, 2021 as LIBOR-to-SOFR Transition Date for Additional Interdealer Cross-Currency Derivatives and Issues Related FAQs
Practical Law Legal Update w-033-6753 (Approx. 5 pages)
CFTC Subcommittee Selects December 13, 2021 as LIBOR-to-SOFR Transition Date for Additional Interdealer Cross-Currency Derivatives and Issues Related FAQs
by Practical Law Finance
| Published on 07 Dec 2021 • USA (National/Federal) |
The Interest Rate Benchmark Reform Subcommittee of the CFTC’s Market Risk Advisory Committee (MRAC) announced December 13, 2021 as the selected date for transitioning interdealer trading conventions from LIBOR to the Secured Overnight Financing Rate (SOFR) for the US dollar (USD) leg of newly-executed cross-currency derivatives under Phase 3 of the MRAC’s SOFR First initiative. MRAC also released a set of six SOFR First frequently asked questions related to cross-currency derivatives.
On December 2, 2021, the Interest Rate Benchmark Reform Subcommittee of the CFTC’s Market Risk Advisory Committee (MRAC) issued:
- Release Number 8466-21, setting December 13, 2021 as the date for transitioning interdealer trading conventions from LIBOR to the Secured Overnight Financing Rate (SOFR) for the US Dollar (USD) leg of newly-executed cross-currency derivatives under Phase 3 of the MRAC’s SOFR First initiative.
- A set of six SOFR First frequently asked questions (FAQs) for cross-currency derivatives.
The MRAC committee observes in the FAQs that:
- It is appropriate for interdealer brokers to change the USD leg of newly executed cross-currency derivatives from USD LIBOR to SOFR on December 13, 2021.
- Market participants should consider, if practical or preferred, to also use a risk-free rate (RFR) for the non-USD leg of such transactions, but the subcommittee’s recommendation is limited to the USD leg of such transactions.
- For purposes of the SOFR First transition initiative, cross-currency derivatives include cross-currency basis swaps (CCBS) where one leg of the transaction is quoted in US Dollars. A CCBS is a swap in which the parties agree to a periodic exchange of floating interest payments each denominated in a different currency.
The FAQs note that typically in such CCBS transactions, the USD leg incorporates USD LIBOR, except where the transaction is covered by the CFTC's RFR First recommendation for cross currency swaps that occurred on September 21, 2021 (see Legal Update, ARRC Endorses CFTC MRAC Recommendation of September 21, 2021 LIBOR-to-RFR Transition Date for Interdealer Cross-Currency Basis Swaps).
The MRAC subcommittee also notes in the FAQs that:
- End users can still transact using USD LIBOR cross-currency derivatives after December 13, 2021 because the SOFR First transition initiative is designed for the interdealer market only.
- Global banking regulators have been clear that supervised entities should stop entering into new contracts that use USD LIBOR as a reference rate:
- as soon as practicable; and
- in any event by December 31, 2021.
- The Alternative Reference Rates Committee (ARRC) published its Recommendations for Interdealer Cross-Currency Swap Market Conventions in January 2020 (see Legal Updates, ARRC Publishes Consultation on Spread Adjustment Methodologies for Cash Products Referencing LIBOR and ARRC Announces Recommended Spread Adjustment Methodology for Cash Products Referencing LIBOR) and market participants may prefer to leverage the ARRC’s recommendations when determining trade conventions for cross-currency derivatives.
Under SOFR First, the market best practice as adopted by the MRAC at its July 13, 2021 meeting to transition the derivatives markets from LIBOR to SOFR, includes four distinct phases that occur sequentially:
- Linear swaps – which occurred on July 26, 2021 (see Legal Update, Updated: CFTC MRAC Recommends July 26, 2021 LIBOR-to-SOFR Transition Date for Interdealer Interest Rate Swap Market).
- Cross currency swaps – which occurred on September 21, 2021 (see Legal Update, ARRC Endorses CFTC MRAC Recommendation of September 21, 2021 LIBOR-to-RFR Transition Date for Interdealer Cross-Currency Basis Swaps).
- Non-linear derivatives – which occurred on November 8, 2021 (see Legal Update, CFTC Subcommittee Selects November 8, 2021 for LIBOR-to-SOFR Transition Date for Non-Linear Derivatives).
- Exchange-traded derivatives – according to the FAQs, the subcommittee will communicate its recommendation for a SOFR First transition for exchange traded derivatives in the fourth quarter of 2021.
For additional information on fallbacks to LIBOR, see LIBOR Replacement Toolkit.