LCH’s Consultation on Conversion of Outstanding USD LIBOR® SwapClear Contracts

LCH Group (“LCH”), and its SwapClear business, strongly supports the continuing global efforts to transition from existing benchmarks to risk-free rates (“RFRs”). In the USD market, the remaining USD LIBOR tenor benchmarks are set to be discontinued beyond 30^th June 2023 with SOFR adopted in their place.

On 29^th April 2022, LCH issued an invitation to all SwapClear participants to respond to a consultation[1] regarding the treatment of outstanding USD LIBOR SwapClear Contracts in light of cessation. The consultation document set out LCH’s proposals which largely mirror the approach delivered for the non-USD LIBOR SwapClear Contract conversions in late 2021 (“Consultation”). LCH requested responses by 10^th June 2022[2]. We experienced active engagement from both members and clients, for which we are grateful, and outline the outcome below.

Consultation Outcome

In the Consultation, LCH sought feedback on its proposals in a number of specific areas. In each case, SwapClear participants were able to express agreement with LCH’s proposal, as well as to suggest alternative preferences where they disagreed. We summarise the findings in each main area below.

Standardisation

Consultation respondents were unanimously in favour of generating Market-Standard SOFR OIS as conversion process outputs, and to do so in a process run shortly before USD LIBOR cessation. Market-Standard SOFR OIS are defined in the Consultation: in summary, they retain the accrual periods on the original USD LIBOR contract and incorporate the ISDA/BISL Spread Adjustment to maximise cashflow continuity.

Tranching

LCH proposed a 2-tranche process, with a split by product type across two dates, a first in April 2023 and second in May 2023. The majority of respondents agreed with the tranching and with the tranche timings, as well as with the proposed contingency dates.  

Representative LIBOR Preservation

LCH proposed using overlay bookings to preserve payments associated with representative LIBORs, and to trade-capture these as pairs when delivered to Client accounts. The majority of respondents agreed.

Cash Compensation

LCH proposed compensating in cash for the small valuation difference between the original LIBOR contract valued under ISDA’s Supplement 70 fallbacks and the Market-Standard SOFR OIS contract. The majority of respondents agreed.

Other Consultation Areas

There was consensus support for LCH’s proposals in all other areas. A majority of Consultation respondents agreed that LCH should: (i) avoid a mandatory basis splitting exercise; (ii) convert USD LIBOR / FEDFUNDS Basis Swaps as proposed; (iii) convert USD LIBOR ZCS as proposed; and (iv) characterise the conversion as a legal amendment of the original LIBOR contract.

LCH also asked for feedback on any other challenges related to the conversion of outstanding USD LIBOR SwapClear Contracts that were not addressed in dedicated questions. We welcomed these responses where they were offered, and while there was no discernible pattern sufficient to lead LCH to modify its proposed approach, we have engaged with individual firms to discuss the points raised.  

Next Steps

Based on this feedback, LCH intends to move forward with its proposal as communicated in the Consultation, which SwapClear participants can now treat as finalised. Further briefing calls will be arranged to allow firms to familiarise themselves with the conversion process, including greater levels of technical and operational detail, and to determine whether to make alternative arrangements should they so desire.

LCH has set out in a separate circular[3] the charges it intends to apply to USD LIBOR SwapClear Contracts in the run-up to and as part of the conversion process.

The approach and process described herein is subject to 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 USDconversion@lseg.com.

[1] LCH_USD LIBOR Conversion_Consultation.pdf

[2] LCH Consultation on Conversion of Outstanding Cleared USD LIBOR® Contracts – Extension of Response Deadline | LCH Group

[3] Rates Reform: USD LIBOR Fallback and Conversion Fees | LCH Group