LCH Consultation on Conversion of Outstanding Cleared THB THBFIX Contracts
LCH Circular No 4244
7 December 2022
All SwapClear Users
Outcome of LCH’s Consultation on Conversion of Outstanding THB THBFIX SwapClear Contracts
LCH Group (“LCH”), and its SwapClear service, strongly support the continuing global efforts to transition from existing benchmarks to risk-free rates (“RFRs”). In preparation for the THBFIX index cessation event occurring on 30 June 2023, and its discontinuation thereafter, LCH recently consulted SwapClear participants on the potential treatments of outstanding THB THBFIX contracts.
The LCH consultation was launched on 21st October 2022 and closed on 18th November 2022. LCH is grateful for the active engagement of its participants on this consultation.
LCH’s consultation made proposals in relation to several specific areas, including: (i) the preferred treatment of outstanding THBFIX contracts; (ii) the timing of the event; and (iii) the related cash compensation mechanism. SwapClear participants were able to express agreement with LCH’s proposals and could suggest alternative preferences where they disagreed. We summarise the findings below.
Consultation respondents were asked to express their preference for a conversion (of THBFIX contracts into THOR equivalents) or for an outright termination. Respondents were strongly in favour of conversion.
LCH proposed generating standardised THOR OIS as conversion process outputs, as defined in the consultation document. In summary, these THOR OIS involve no change to their fixed leg; on their floating leg, they retain the accrual periods on the original THB THBFIX contract and carry this cashflow profile throughout their remaining life. In line with applicable second-phase fallback arrangements, such contracts do not envisage the application of any adjustment spreads on the floating leg. Respondents strongly supported LCH’s approach.
LCH’s proposals for cash compensation aimed to address the two-phase fallback of THBFIX, first to Fallback Rate (THBFIX) and then to “THORxSA”, i.e., THOR without spread adjustment. The use of THORxSA by LCH as the economic basis for compensation relating to the second phase of fallback, consistent with LCH’s prior bulk conversion processes, was strongly supported. For the first phase, LCH proposed a determination of prevailing market pricing of THBFIX/THOR basis swaps immediately prior to conversion. The majority of consultation respondents agreed with this approach, and LCH will work to refine certain details in preparation for the event itself.
LCH proposed performing the conversion over the weekend following close of business on 9th June 2023. Respondents strongly supported LCH’s proposed timing.
Based on the consensus demonstrated via these responses, LCH intends to move forward with its proposals in relation to conversion as communicated in the consultation document, with the proviso that LCH is considering small potential refinements to the THBFIX/THOR price determination process. Further briefing calls will be arranged which are designed to allow firms to familiarise themselves with these details and with the conversion process more generally. These will include greater levels of technical and operational detail and are designed to enable SwapClear participants to decide whether to make alternative arrangements for their outstanding THBFIX contracts should they so desire.
LCH will set out in a separate circular the charges it intends to apply to THB THBFIX SwapClear Contracts in the run-up to and as part of the conversion process.
The approach and process described herein is subject to ongoing legal, risk governance and regulatory review.
Should you have any comments or questions on these outcomes, or if you require further information, please do not hesitate to contact THBFIXConversion@lseg.com.