Statement from Commissioner Christy Goldsmith Romero regarding clearing requirement for swaps referencing rates less susceptible to manipulation than LIBOR
I support the Commission’s amended clearing requirement for swaps referencing rates less susceptible to manipulation than the London Interbank Offered Rate (“LIBOR”), as it promotes market integrity and supports the benefits of central clearing risk mitigation. I thank the CFTC staff for their work on this issue and other efforts to support the transition away from LIBOR.
The 2008 financial crisis revealed how OTC derivatives could make market participants vulnerable to the weaknesses of their counterparties and leave markets and regulators in the dark about the risks. Before the crisis, risks were hidden and companies were vulnerable to interconnected and complex bilateral transactions. This contributed to the failure of many banks and financial institutions. American households have paid the price, suffering the catastrophic consequences of a near collapse of the American financial system, a housing crisis, the inability to access credit and an unprecedented government bailout. .
One of the most critical reforms of the Dodd-Frank Act was a framework to channel swaps through central clearing, thereby reducing risk and increasing transparency in US financial markets. The CFTC has been a global leader in driving swap trades toward centralized clearing and coordinating with international regulators in a globally harmonized approach.
Central clearing has kept its promises. Markets, investors, end users and regulators have benefited from increased visibility into swap exposures and reduced interconnection and complexity.
Reliable and sound reference rates promote market integrity and protect the American public. A decade ago, allegations of LIBOR manipulation led to investigations by government authorities, including the CFTC, that resulted in billions of dollars in fines and other penalties. These investigations revealed that a handful of dominant players profited from the manipulation of LIBOR and the markets, including the US mortgage markets. Here again, American households paid the price.
Thanks to major coordinated efforts in the public and private sectors, great progress has been made in moving towards more robust alternative reference rates, namely so-called “nearly risk-free” overnight reference rates. Today’s final rule changes the CFTC’s swap clearing requirement to account for the continued shift in liquidity to these more reliable rates. The market reliance on USD LIBOR has already diminished significantly, and we have seen significant liquidity and voluntary clearing of swaps referencing the Secured Overnight Funding Rate (“SOFR”). Our goal is to reinforce and accelerate this shift and ensure that the risk-mitigating benefits of netting continue to materialize in the evolving interest rate swap markets.
The final rule also reflects the CFTC’s longstanding priority of harmonization with international regulators. The certainty of the CFTC’s timeline for adding interest rate swaps referencing USD SOFR to its clearing requirement and for removing interest rate swaps referencing USD LIBOR should help international regulators who are also revising the clearing requirements for these swaps.
Given the global nature of financial markets, international coordination is necessary for a successful transition to LIBOR. International coordination will also help ensure that central clearing remains the cornerstone of post-crisis financial reforms.