On August 31, the Commodity Futures Trading Commission’s (CFTC) Division of Clearing and Risk (DCR) issued a no-action letter (No-Action Letter 20-25) relating to the swap clearing requirement promulgated pursuant to section 2(h)(1)(A) of the Commodity Exchange Act (CEA) and codified in Part 50 of the CFTC’s regulations (Clearing Requirement). No-Action Letter 20-25 revises and supersedes in its entirety previously issued CFTC Staff Letter 19-28, which was requested by the Alternative Reference Rates Committee (AARC) and applied to uncleared interest rate swaps (IRS) that were executed prior to an applicable Clearing Requirement compliance date for which swap counterparties subsequently amend certain terms as part of an industry-wide initiative to amend swaps that reference the London Interbank Offered Rate (LIBOR) and other interbank offered rates (collectively with LIBOR, the IBORs) to reference alternative benchmarks, including risk-free rates.

No-Action Letter 20-25 is in response to AARC’s request to revise CFTC Staff Letter 19-28 primarily relating to: (1) swaps that were executed prior to the relevant compliance date on which swap counterparties were required to comply with the CFTC’s IRS Clearing Requirement and thus have not been cleared (Uncleared Legacy IRS); and (2) uncleared swaptions that, upon exercise, would result in an IRS of a type subject to the CFTC’s IRS Clearing Requirement, but where the swaption was executed prior to the relevant compliance date on which swap counterparties would have been required to comply with the IRS Clearing Requirement applicable to such IRS (Uncleared Legacy Swaptions).

AACR primarily requested the following: (1) CFTC Staff Letter 19-28 be broadened to allow swap counterparties more discretion in amending the fallback provisions in Uncleared Legacy IRS and Uncleared Legacy Swaption, (2) relief should be granted for amendments made to Uncleared Legacy IRS to replace IRRs with an alternative reference rate, (3) new relief be granted for amendments to the terms of Uncleared Legacy Swaptions based on expected changes to applicable discount rates that are used to value the swaptions, (4) CFTC Staff Letter 19-28 be broadened to apply to ancillary modifications and follow-on amendments to Uncleared Legacy IRS and Uncleared Legacy Swaptions and (5) relief to entities relying on the end-user exception and the exemption for co-operatives under Part of the CFTC’s regulations.

In response, DCR provided, among other things, that (1) the amendment of fallback provisions to an Uncleared Legacy IRS or Uncleared Legacy Swaption should not cause the loss of legacy status resulting in the swap becoming subject to the Clearing Requirement, and (2) amendments made to the Uncleared Legacy IRS to replace any reference rate that is expected to be discontinued will generally be permitted.

For a more detailed overview, please refer to No-Action Letter 20-25, available here.