On Sep. 21, LCH issued update on LCH position on LIBOR contracts.
Statement on position in respect of LIBOR Contracts denominated in CHF, EUR, GBP, JPY and submitted for registration at LCH after completion of conversion processes.
Follows LCH Feb. 2021 issued summary of consultation on LIBOR, see #98387.
Follows LCH Mar. 2021 supplementary statement on LIBOR solution, see #100940.
Follows LCH Jul. 2021 issued rules on rates reform: conversion fees, see #111981.
And follows Aug. 6, 2021, LCH letter on LIBOR fallback, conversion fees, see #113075.
Background
LCH Group (LCH), and its SwapClear business, remains strongly supportive of industry-wide efforts to transition from existing benchmarks to risk-free rates (RFRs).
LCH ran a 6-week market consultation open to all SwapClear participants launched on Dec. 15, 2020, in which they proposed approach for converting LIBOR-linked SwapClear Contracts on conversion date ahead of then unknown index cessation date.
Also stated within consultation document that SwapClear transactions which reference the relevant LIBOR would not be eligible for clearing beyond such a conversion date.
Consultation Outcome
Shortly following the completion of the consultation, LCH issued a circular, on Feb. 16, 2021, summarizing its central outcomes, see #98387.
Reported general support for details of proposed approach of converting outstanding SwapClear contracts into contracts referencing the corresponding recommended RFR.
Following the subsequent announcements on Mar. 5, 2021, confirming the index cessation dates for CHF, EUR, GBP & JPY LIBORs (together, the in-scope LIBORs), LCH issued a second circular, on Mar. 18, 2021, providing additional detail, see #100940.
Included confirmation that for SwapClear contracts linked to CHF, EUR & JPY LIBOR, conversion would apply to trades outstanding at close of business on Dec. 3, 2021 (CHF/EUR/JPY cut-off Date), and would be conducted over that weekend.
And for contracts linked to GBP LIBOR, conversion would apply to trades outstanding at close on Dec. 17, 2021 (GBP cut-off Date); would be conducted over that weekend.
Further Detail on Approach
Now providing further detail regarding approach towards SwapClear transactions which are submitted to LCH for clearing subsequent to CHF/EUR/JPY cut-off date in the case of CHF, EUR and JPY contracts; and the GBP cut-off date in the case of GBP contracts.
Between these dates and Dec. 31, 2021, participants can, with restrictions, execute new contracts linked to in-scope LIBORs; LCH keen to avoid disruption to this activity.
Have also been made aware of the potential for an ongoing demand to submit legacy contracts linked to in-scope LIBORs beyond Dec. 31, 2021; re: expiry of non-cleared swaption contracts which have as underlying a physically-settled SwapClear contract.
LCH are also keen to avoid disruption to these contracts, where possible.
LCH has been working with industry bodies to establish the grounds on which it could offer a service to support this activity, and on the scope of such a service.
In doing so, LCH has listened to/considered market feedback across range of factors.
Conclusion
LCH confirms that, while new SwapClear transactions linked to an in-scope LIBOR will no longer be eligible for registration at SwapClear after the CHF/EUR/JPY cut-off date or GBP cut-off date (as applicable), intend to support continued time-limited eligibility for legacy swaps submitted to LCH SwapClear for registration where following applies.
Notwithstanding the fact that these swaps refer to an in-scope LIBOR as FRO, such swaps do not rely on non-representative in-scope LIBOR for contractual performance.
And where such submission is subsequent to the CHF/EUR/JPY cut-off date in the case of CHF, EUR and JPY contracts and GBP cut-off date in the case of GBP contracts.
Trade submission and registration
Submitted trades would have an in-scope LIBOR as FRO on floating leg, and would be registered as such upon completion of LCH’s standard eligibility, registration criteria.
Product eligibility
SwapClear service would support standard spot-starting and forward-starting IRS with a constant notional amount, with a constant fixed rate, without any floating spread.
And without any stub periods or other non-generic features.
BMRs compliance
Each party will need to represent that submitted SwapClear transaction is compliant with BMRs, for example through adherence to ISDA’s IBOR Fallbacks Protocol.
Time-limited availability
The service will be available up to and including Dec. 31, 2024.
Trade date limitation
Both parties will need to represent that for SwapClear transactions submitted for clearing after Dec. 31, 2021, submitted transaction was executed before this circular.
Post-registration Conversion
Subsequent to registration, LCH will, as a function of the terms of Rulebook, convert any such transaction into an RFR contract equivalent to that which would have been produced had submitted contract been subject to the relevant LCH conversion process.
With the exception that LCH would not preserve the LIBOR fixings for any trades which could otherwise make use of a representative LIBOR.
Conversion Compensation
LCH will exchange cash compensation between the submitting parties upon conversion using prevailing RFR swap market data on each date on which the process is run.
And using an equivalent methodology to that used in relevant LCH conversion process.
Fees
LCH intends to apply its standard tariff structures to trades submitted and registered as part of this service; LCH’s conversion fees will not apply.
Further Specifications
Further technical specifications associated with this service will be made available shortly, including a dedicated Legacy LIBOR Product Characteristics Matrix.
Provision of this service remains subject to regulatory review.
