The Commodity Futures Trading Commission (CFTC) has proposed a rule that would replace certain swap rate clearing requirements pegged to the London Interbank Offered Rate (LIBOR) with other alternative reference rates that are less susceptible to manipulation.

The proposed rule would become effective 30 days after being posted in the Federal Register for some currencies and after July 1, 2023, for the U.S. dollar (USD), the CFTC said Monday in a press release.

LIBOR, which had been overseen by the U.K. Financial Conduct Authority, ceased to be available Jan. 1.

LIBOR was a daily rate in multiple terms referencing multiple currencies that established an average interest rate used by banks as they borrowed from one another. LIBOR was used extensively as a benchmark to determine lending terms on products ubiquitous to U.S. markets, such as corporate and municipal bonds, variable-rate loans, asset-backed securities, and many derivatives. But it was subject to manipulation, eventually leading to it being abandoned.

“As a result of significant coordinated efforts across the public and private sectors, great progress has been made in the transition to alternative reference rates that are less susceptible to manipulation,” said CFTC Commissioner Christy Goldsmith Romero in a statement supporting the move.

LIBOR will be replaced in CFTC regulations with different alternative reference rates, depending on the currency referenced in the swaps, according to the agency.

Once the rule takes effect, swaps denominated in:

  • Euros will reference the Euro Short-Term Rate;
  • Swiss francs will reference the Swiss Average Rate Overnight;
  • Japanese yen will reference the Tokyo Overnight Average Rate; and
  • British pound sterling will reference the Sterling Overnight Index Average.

Certain swaps—fixed-to-floating, basis, and forward rate agreement classes—denominated in USD can continue to reference LIBOR until July 1, 2023, while fixed-to-floating swaps denominated in Singapore dollars (SGD) can continue to reference the Singapore Swap Offer Rate until that same date, the CFTC said. After that date, swaps denominated in:

  • USD will reference the Secured Overnight Financing Rate; and
  • SGD will reference the Singapore Overnight Rate Average.

The comment period for the proposed rule will be open for 30 days after publication.

Aaron Nicodemus covers regulatory policy and compliance trends for Compliance Week. He previously worked as a reporter for Bloomberg Law and as business editor at the Telegram & Gazette in Worcester, Mass.

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