Benchmark Reform impact on SwapClear EUR Products
LCH Circular No 4044
6 September 2019
All SwapClear Users
Dear SwapClear Users
LCH Group (“LCH”) strongly supports the ongoing industry-wide efforts to reform many of the benchmarks used in global rates markets. Given the impact of these reforms on EONIA, and the imminent introduction of €STR as its recommended alternative, we are writing to inform you of the following proposed changes:
- SwapClear will reflect the new definition of EONIA from 2 October, including the switch to T+1 publication;
- As a result of implementing the changes to effect this, the SwapClear Service will not open for trade registration until 06:00 London time on the morning of 1 October;
- SwapClear will offer clearing of €STR swaps from 21st October*.
Both the ECB and the EMMI have issued materials to summarise the roles that they play in the reforms, the nature of their reforms, and progress being made towards their objectives. We recommend that our users familiarise themselves with the salient points of these materials and note the proposed recalibration date relating to the overnight period ,ending on 2 October 2019. In response, we identify below the SwapClear service functionality and products that currently rely on EONIA, and the measures being taken to address the impact of the changes.
Legacy contracts linked to EONIA as a Floating Rate Option
Current registered SwapClear contracts which use EONIA as a Floating Rate Option, will be affected by a number of elements of the reforms. First, LCH will account for the switch to “T+1” publication of EONIA without any change to the settlement date of the contracts’ coupons. Second, this adjustment to account for the switch to “T+1” publication of EONIA will lead to small changes to the reporting that LCH provides to its members. Details of these changes are available in the LCH Secure Area .
LCH does not intend to amend the contractual reference to EONIA. However LCH plans to implement, in due course, any supplementary definition published by ISDA to strengthen the fallback arrangements associated with LCH-cleared EONIA contracts and to support on-going compliance with EU Benchmarking Regulations.
New contracts linked to EONIA as a Floating Rate Option
Future SwapClear contracts which use EONIA as a Floating Rate Option will also be affected by a number of elements of the reforms. LCH intends to maintain its current product eligibility for EONIA contracts until further notice. However, only contracts which utilise the supplementary definition expected to be published by ISDA ahead of the recalibration date will be eligible. All such contracts will operate from inception using €STR’s “T+1” publication convention, with no change necessary to the fixing lag or payment lags submitted.
New contracts linked to €STR as a Floating Rate Option
SwapClear intends to enable clearing eligibility for contracts which use €STR as a Floating Rate Option (subject to regulatory non-objection). We are pleased to announce a target go-live date of 21 October 2019. Please note that the product remains available in member test.
For the avoidance of doubt, €STR swaps are legally distinct from (and are not eligible for netting with) EONIA swaps.
Variation Margin: PAI / Discounting of EUR Products
At this stage, SwapClear will continue to use EONIA (flat) as its PAI rate for EUR cash exchanged to meet VM calls / pays. SwapClear will also continue to use an EONIA swap curve for discounting (valuation) purposes. The Euro RFR Working Group has issued a number of recommendations regarding the adoption of €STR-based rates in both these contexts, applicable to both cleared and non-cleared products.
LCH continues to consider how and when we might implement these recommendations.
Initial Margin: EUR cash collateral compensation
LCH Limited remunerates its members and clients for their provision of EUR cash as collateral against an outstanding IM requirement at LDR and CDR rates respectively. Both of these rates are currently EONIA-based.
Further detail regarding the proposed handling of the switch to “T+1” publication of EONIA will be published in due course.
Should you have any comments or questions, or if you require further information, please contact the Client Services team at RatesClientservices@lch.com or the Member Sales & Relationship Team at MembershipSales@lch.com .
*Subject to regulatory non-objection
 For the purpose of this announcement, “SwapClear Users” means SwapClear Clearing Members (including FCMs) and their clients
 For the purposes of this announcement “SwapClear contract” should be construed to include FCM SwapClear contracts.