CFTC retires CDOR and TIIE from clearing
An amended clearing requirement follows Canadian and Mexican interest rate benchmarks to their replacements, closing a chapter of the reform that began with LIBOR.
Berkay Gumustekin via UnsplashBenchmark transition is announced in speeches and completed in rulebooks. On September 8 the Commodity Futures Trading Commission published a clearing requirement determination under section 2(h) of the Commodity Exchange Act that does the second part for two currencies.
The rule amends the Commission's interest rate swap clearing requirement regulations to address the transition from the Canadian Dollar Offered Rate to the Canadian Overnight Repo Rate Average, and the transition from the Mexican Interbank Equilibrium Interest Rate, the Tasa de Interés Interbancaria de Equilibrio, to the TIIE Funding Rate. The replacements govern swaps denominated in Canadian dollars and Mexican pesos respectively.
The clearing requirement is the obligation to send a swap in a specified class to a registered clearing house rather than leave it bilateral. It is defined by reference to the characteristics of the contract, and a floating rate benchmark is one of those characteristics. When the benchmark underlying a class of swaps is retired, the description in the regulation stops matching the instruments the market actually trades.
Left unamended, that produces a gap of the least useful kind. Contracts referencing the successor rate would sit outside a mandate that was written for the predecessor, not because anyone decided they should clear bilaterally but because the rule text described a rate that no longer exists.
The pattern is familiar from the sterling and dollar transitions. CDOR and TIIE are smaller markets than LIBOR, and the mechanical work is the same: identify the class, substitute the reference rate, preserve the scope of the obligation across the change.
The distinction from the LIBOR episode is that these transitions were conducted without the credibility problem that forced the original reform. CDOR and TIIE were retired for structural reasons — thin underlying transaction volumes and a preference for overnight rates anchored in observable funding markets — rather than because of misconduct.
For clearing members the operational consequence is small and specific: the eligibility logic that determines whether a given trade must be submitted needs to recognise the successor rates. Firms that completed the earlier transitions have the pattern.
What the determination marks is the point at which the successor rates stop being the new benchmark and become the benchmark. A rate that appears in a clearing mandate is part of the market's default infrastructure rather than a migration target.