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Opening Remarks

CFTC Market Risk Advisory Committee – Update From Subcommittee – June 12, 2019

Introduction

 Good afternoon everyone- it is an honor to be presenting again in front of the Market Risk Advisory 

Committee on behalf of the subcommittee on interest rate benchmark reform. My name is Tom Wipf, 

Vice Chairman of Institutional Securities at Morgan Stanley and I represent the Firm as Chairman of

the ARRC as well as a Board member of ISDA

 Before we begin, I would like to note that I will not be commenting on behalf of Morgan Stanley, the 

ARRC, or any other organizations today, and that any views I represent are strictly my own and 

those of the Subcommittee that I chair as previously established by the MRAC

 I want to take a moment to thank Commissioner Behnam, Alicia Lewis, the MRAC, and the rest of 

the CFTC for forming this subcommittee – the transition to alternative reference rates is a massive 

task ahead of us, and to achieve success it is paramount that we have close coordination between 

the public and private sectors

 I’d like to begin by first recapping the key developments in the LIBOR transition that have occurred 

since we last spoke in December 2018, and then provide an update on the progress to date of the 

MRAC Subcommittee on interest rate benchmark reform

Developments in LIBOR Transition

 I will divide key developments into two buckets – Market-driven and Regulator-driven:

Market-Driven

 The major development out of the ARRC from the turn of the year has been the publication of 

fallback language for those that continue to use LIBOR in cash products

o We completed four sets of this fallback language – for floating rate notes, syndicated loans, 

bilateral loans, and securitizations. 

o The goal was to create some degree of uniformity between ‘optimized’ fallback language 

across cash market asset classes going forward, while also addressing the idiosyncrasies of 

each market

 ISDA has also been hard at work to improve fallback language in derivative contracts, via new 

fallback terms that will be released by the end of this year. These new terms will apply to all new 

LIBOR swaps incorporating the standard ISDA interest rate definitions and to legacy LIBOR swaps 

via a voluntary protocol.
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o Following up on their initial consultation completed last year, ISDA is currently in the market

with two additional consultations – one is on the spread methodology to be applied to 

additional currencies not covered in the 2018 version, and one is on the potential inclusion of 

a pre-cessation trigger in the ISDA protocol

o I would note that this second consultation was in response to a letter that ISDA received from 

the OSSG, which is an official sector committee, encouraging such a market survey

o ISDA will also seek feedback later this year on the market’s views on the conventions to be 

applied on implementation of the eventual fallback spread, and by end of this year we should 

have final fallback terms for LIBOR swaps

 SOFR-based products continue to gain traction in the market place, among both cash and 

derivatives

o SOFR futures volumes are now the 3rd best start in CME’s history, and quarter-end saw 

significant SOFR swap volumes that we’ll look to build upon

o SOFR FRN issuance has reached $100Bn since last summer, and we continue to see this 

market evolve. Whereas last year’s FRNs used a simple average to calculate coupon 

payments, some market participants are innovating to use compounded SOFR in ways that 

match the swaps market and should introduce hedging demand in SOFR

 The ARRC’s outreach efforts have also been meaningful, both with the public and with Regulators

o A few weeks ago we published the “User Guide for SOFR”, which demystified how market 

participants can begin using SOFR in contracts today

o We also hosted our 4th annual ARRC Roundtable last week, where we heard from Vice 

Chairman Quarles as well as many ARRC members

o In May we followed up our July 2018 “Title VII” letter which requested certain regulatory 

clarification from the CFTC and other prudential regulators with an additional letter that 

provided an update regarding conversion approaches and an additional request for 

regulatory relief in order to facilitate the pace and effectiveness of the “risk free rate”, or RFR,

transition. I will discuss these views in greater depth in a moment.

Regulator-Driven

 Regulators have also played a significant role in the progress that has been made in 2019 thus far

o In April, the FSB convened a roundtable with global Regulators and many market 

participants, in order to share their views on the transition to date as well as solicit feedback 

on how the public-private partnership can be fortified to improve the outcome of the RFR

transition

 The message at this roundtable was crystal clear – that Regulators are willing to 

provide relief within reason. This view has informed the MRAC Subcommittee’s key 

updates, which I will elaborate upon momentarily.
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o Further, the Bank of England hosted their annual event last week where it was clear that they 

are amenable to thoughtful relief too

 This backdrop of Regulatory relief has been communicated to the MRAC Subcommittee for interest

rate benchmark reform, and has helped inform our updates for this group today

Next Steps

 When I addressed this group in December, I noted that our primary goal is to provide input and 

recommendations to the MRAC as it relates to potential policy changes that may impact the course 

of LIBOR reform

 Our key principles in this regard are the following:

1. We aim to remove hurdles to the transition to SOFR and other “risk free” rates

2. We aim to provide incentives via relief for market participants to transition to SOFR and the 

other RFRs

3. We aim to avoid the inadvertent creation of a safe harbor in policy changes that we 

recommend

 Putting further detail around our objectives, I included in my speech at the FSB Roundtable in early 

April that our subcommittee had narrowed our areas of focus to three key topics and nominated a 

subcommittee member to serve as a working group leader specializing in these areas. All three of 

these working group leaders have joined me today in case the group would like to ask any detailed 

follow-up questions about their work.

1. Uncleared Margin – the Subcommittee is reviewing ways in which the CFTC’s Uncleared 

Margin Rule may cause impediments to adoption of the alternative rates, and how these 

rules can be amended to improve the pace of adoption without creating a safe harbor.

 Biswarup Chatterjee (Citi) has taken a lead role on this working group

2. Clearing – the Subcommittee is reviewing ways in which current regulation regarding 

derivative clearing mandates may cause impediments to adoption of the alternative rates, 

including examining the appropriateness of mandatory clearing for derivatives linked to these 

alternative rates, also with an eye towards avoiding a safe harbor

 Marnie Rosenberg (JPM) has taken a lead role on this working group

3. Disclosures – the Subcommittee is reviewing existing risk disclosure documents used by 

market participants in order to understand if additional risk disclosures are appropriate

 Ann Battle (ISDA) has taken a lead role on this working group
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Uncleared Margin

 Starting with our focus on uncleared margin, our subcommittee noted that certain legacy IBOR 

derivatives that may be exempted from margin requirements may lose legacy status if they are 

amended to include fallback provisions or transitioned to RFRs

o The potential for losing legacy status on trades may dissuade market participants from taking 

the necessary steps to voluntarily convert their positions to new benchmark rates

o As outlined in its May letter to regulators, the ARRC identified a handful of specific 

conversion methodologies, but there may be other ways to convert outstanding LIBOR 

swaps and so we aren’t certain this is an exhaustive list of ways in which market participants 

may effect a conversion from LIBOR to SOFR in the derivatives market

 At any rate, these nine methodologies are fairly complex and would be operationally 

challenging to capture and record

 In light of this, we believe the CFTC can consider broad relief to preserve a derivative’s legacy 

status under the uncleared margin rules if it is amended to include fallback provisions or converted 

on a voluntary basis via one of the ARRC-identified methods or other newly developed methods

 Further, to better achieve the goal of promoting liquidity in the risk free rates, the CFTC can also 

consider permitting all new uncleared RFR trades executed before Jan 1, 2022 to receive blanket 

relief from IM requirements

o As a broad group of market practitioners, we felt this would provide a significant boon to 

SOFR and other RFR liquidity, and could massively benefit the transition and the policy 

objective of financial stability that both we, as market participants, and the regulators and 

central banks seek to promote

 I would like to note that these ideas are also reflected in the ARRC letter to US Regulators (including 

Chairman Giancarlo of the CFTC) dated May 13, 2019

o The MRAC Subcommittee on interest rate benchmark reform benefits from cross-pollination 

with the ARRC, keeping us updated on the progress that the ARRC’s Regulatory Working 

Group has been making over the past several months

o Importantly, our group also gives voices to market participants that do not participate in the 

ARRC – these other participants also concluded that the ARRC’s proposals on broad 

uncleared margin relief were merited and would be beneficial to the market at large

 Lastly, and separately from the ARRC’s requests, it was pointed out that since SOFR and certain 

other RFRs are new rates, some firms may not have approved SIMM models to calculate required 

initial margin on bilateral trades

o As such, they may be forced to use other margin calculation methodologies that result in 

punitively high costs for clients interested in putting on SOFR or these other RFR trades
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 We felt this could serve as a barrier to entry for many market participants

o Our view is that the CFTC could recommend that SIMM model enhancements that are 

necessary to include SOFR or other RFR based swaps in SIMM should be approved 

centrally and firms should not be required to provide notice of or receive individual approvals 

with respect to those SIMM enhancements

 Cutting down on the operational difficulty associated with SOFR transactions should 

be a net benefit to liquidity

Clearing

 Moving onto our discussion of the CFTC clearing mandate, as was also reflected in the ARRC’s July 

letter to regulators, it was noted that legacy derivatives linked to LIBOR and certain other interest 

rate benchmarks, which are referred to collectively as the IBORs, that are exempt from clearing 

requirements may lose legacy status if amended to include fallback provisions

o This is an additional bit of market uncertainty that may serve as a barrier to widespread 

adoption of the ISDA protocol

 If this is not the intended outcome, the subcommittee felt that the CFTC can issue guidance 

communicating that the addition of fallback provisions in an IBOR-based derivative contract will not 

impact “legacy” status as it relates to clearing mandate

 Additionally, the subcommittee recognized a clearing mandate does not currently exist for SOFRbased products, and both cleared and uncleared trades have occurred

o We noted however that if our various forms of relief were to be granted, particularly the point 

about uncleared margin requirements, it would improve liquidity in SOFR products with much 

activity potentially remaining uncleared

o As such, we feel it is prudent that the CFTC consider a framework by which to identify when 

it is appropriate to mandate clearing of RFR transactions

 However, it was agreed that it may yet be too premature to determine exactly when 

such a mandate would be appropriate, give the nascence of the SOFR market

 Separately, it was also felt that the CFTC could consider decreasing the minimum Margin Period of 

Risk (MPOR) on cleared SOFR trades, which may also incentive new activity via reduced initial 

margin requirements for cleared trades

Disclosure Language

 Moving onto disclosures, the Subcommittee felt that disclosures for IBOR derivatives regarding 

implications of benchmark reform exist in the market, but, while accurate and compliant with 

applicable regulations, may be too complex for average market participants to understand
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o As such, there was strong interest for the CFTC to endorse “plain-English” disclosure 

language for use in new IBOR derivatives to be drafted by the MRAC Subcommittee

 We felt that ideally there would be two separate disclosures drafted: one effective 

before the ISDA definitions are amended to include fallbacks, and one effective after 

the definitions are amended to include fallbacks

o Along with this disclosure statement, the MRAC could also consider requesting the CFTC to 

establish an appendix webpage including additional information alluded to in the plainEnglish statement

 The Subcommittee is in the process of iterating this statement and aggregating materials for a 

potential backup webpage, and expect to have finalized proposals later this year

 It was also agreed that the current ISDA disclosure statements, which were last updated in March 

2018, may need to be refreshed to capture more recent developments in the IBOR transition

o However, the group felt that this update should occur closer to YE-2019, when ISDA’s 

definitions have been amended to include fallbacks

Conclusion

 These three buckets have been the Subcommittee’s areas of focus over the past several months

 By the time of the next MRAC meeting towards the end of this year, we intend to conclude our work 

in the form of final recommendations to the MRAC

 We strive to be additive to other sources of market progress, and remain focused on the scope of 

our mandate

 We welcome any feedback from the MRAC on our areas of focus or potential recommendations that 

we have discussed today

 Based on feedback we receive today, we intend to provide a letter to the MRAC detailing our 

recommendations in greater detail, and our group stands ready to work with all stakeholders in order 

to progress the stated objectives 

 Once again, I would like to thank Comm. Behnam, Alicia Lewis, and the MRAC for this opportunity 

for public service

 With this, I will conclude my prepared remarks and let Alicia solicit questions from the room