On August 31, the Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight (DMO) issued a no-action letter (No-Action Letter 20-24) providing time-limited relief from the trade execution requirement for certain swaps.
No Action Letter 20-24 provides that until December 31, 2021, DMO will exempt from the CFTC’s trade execution requirement swaps that are amended or created by an “IBOR Transition Mechanism” for the sole purpose of replacing an interbank offered rate (IBOR) with an alternative benchmark.
Under section 2(h)(8) of the Commodity Exchange Act (CEA), swap transactions that are subject to the clearing requirement must be executed on a designated contract market (DCM), swap execution facility (SEF) that is registered with the CFTC, or a SEF that is exempt from registration under 5h(g) of the CEA (exempt SEF), unless no DCM or SEF “makes the swap available to trade” or the relevant swap transaction is subject to the clearing exception under CEA section 2(h)(7). Swaps that are subject to the trade execution requirement must be executed in accordance with one of the methods listed in § 37.9 for SEF-executed transactions or the requirements to provide a “competitive, open and efficient [trading] market” under DCM Core Principle 9.
In No-Action Letter 20-24, DMO provides that IBOR Transition Mechanisms including “fallback” amendments to swap terms, which are triggered when the IBOR the swap references becomes unavailable, is permanently discontinued, or is determined to be non-representative by the benchmark administrator or the authority in the relevant jurisdiction will not be subject to the trade execution requirement under section 2(h)(8) of the CEA. DMO specifies that this includes amendments to benchmark rates in swaps made bilaterally by counterparties and new swap transactions that reference alternative benchmarks instead of IBORs.
The letter is available here.