The CFTC Market Risk Advisory Committee ("MRAC") approved recommendations for the scheduled October 2020 shift to the Secured Overnight Financing Rate ("SOFR") for central counterparties ("CCPs") discounting and price alignment interest at certain clearinghouses.
As previously covered, the MRAC Interest Rate Benchmark Reform Subcommittee (the "Subcommittee") held a "tabletop exercise" to consider CME and LCH's proposed approaches for transitioning discounting and price alignment interest for certain products to SOFR, scheduled for October 2020. Based on the exercise, the Subcommittee provided a series of broad "guiding insights" for market participants, including (1) enhanced education for "all involved parties," (2) risk mitigation strategies ahead of discounting, including trade compression and re-couponing, and (3) internal preparation and engagement by all impacted stakeholders.
The Subcommittee also offered specific recommendations for CCPs, futures commission merchants ("FCMs"), buy-side firms and regulators. In particular, the Subcommittee recommended that (i) CCPs enhance their industry education efforts and create detailed playbooks containing processes for "successful and fallback scenarios," and (ii) FCMs boost client education and outreach efforts to foster greater transparency and information flow.
The recommendations will be submitted to the CFTC for consideration and are the second set of recommendations concerning the transition from LIBOR that the Subcommittee has provided (see previous coverage on the first set of recommendations).
Primary Sources
- CFTC Market Risk Advisory Committee Interest Rate Benchmark Reform Subcommittee Report: CCP Discounting Transition Tabletop Exercise
- CFTC Press Release: CFTC Market Risk Advisory Committee Approves Subcommittee's Single-Step Transition Recommendations at Public Meeting
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