LCH’s Position in respect of Pre-cessation Triggers in relation to SwapClear
LCH Circular No: 4071
Date: 20 December 2019
To: All SwapClear Participants
LCH Group (“LCH”), and its SwapClear business, supports the continuing industry-wide initiatives regarding the transition to risk-free rates (“RFRs”), including the adoption of ISDA fall-backs and the switch to discounting in Secured Overnight Financing Rate (“SOFR”) and other RFRs. A central objective of this work is to ensure that contracts referencing these rates contain well-defined fall-back procedures to ensure they continue to perform in cases where the original benchmark is considered non-representative of the underlying market. Work has recently focused on scenarios in which a benchmark ceases to be representative, as determined by the relevant competent authority.
LCH has closely monitored ISDA’s work in this regard and continues to engage with regulatory authorities and market participants regarding our response. We support the FCA’s and other regulators’ position that it is important that a benchmark is representative of the relevant underlying market.
If the competent authority supervising a benchmark provider were to announce that a specific benchmark was considered non-representative we would find it challenging, from a risk management and regulatory perspective, to continue to clear swaps linked to such a benchmark. For this reason, we continue to consider the consequences if an existing benchmark (for example a LIBOR) were deemed to be non-representative.
Notwithstanding our existing powers to use alternative rates, LCH will shortly be consulting market participants on a proposed rulebook change to provide for an automatic trigger into fallback arrangements where the relevant authority determines an existing benchmark to be non-representative. In the rulebook change to be put forward for consultation LCH is planning to propose the same approach that is planned to be used in respect of permanent cessation triggers. That is, to use the adjusted RFR as formulated in the relevant ISDA supplemented IBOR definition together with a credit spread adjustment, as applicable at the time that the relevant benchmark is determined to be non-representative.
Such considerations require thorough legal and regulatory analysis and governance review, and we are currently considering the possible options in this context. We will provide an update on the consultation process in due course.