Rates Reform: USD LIBOR Fallback and Conversion Fees

Dear SwapClear User,

This circular details the timeline and the amounts payable for USD LIBOR Fallback and Conversion Fees[1]. Furthermore, LCH Limited (“LCH”) has outlined the outcome of our consultation related to the conversion process in circular 4216[2].

In line with regulatory guidance, LCH strongly recommends that participants consider proactively transitioning away from fallen-back benchmark rates.

The Fallback Fee applies to cleared contracts for which an index cessation event has occurred. It aims to encourage early transition before the LCH conversion processes are run, thereby mitigating LCH’s concerns in relation to a) ongoing risk and default management, as well as b) the operational and technological risks associated with the conversion process (with mitigants including fewer line items to manage and fewer FpML messages for users to consume over a conversion weekend).

The Conversion Fee applies to cleared contracts for which a rate will cease and where LCH converts the cleared contract to one referencing a risk-free rate. The conversion process is designed as a last resort for those participants who are otherwise unable to transition away from fallen back rates. The fee will allow LCH to recover the costs of designing, building and running the conversion process and should also discourage over-reliance on the conversion tool.

As previously stated, other tools and processes are available to market participants to discontinue their reliance on rates that have fallen back.

USD LIBOR Fallback Fees

Effective 31^st January 2023, LCH will apply a monthly Fallback Fee for outstanding* USD LIBOR contracts as of the last good business day of that month.

The following charges will apply to cleared contracts in both SwapClear Clearing Member House and Client accounts; 30-days’ notice will be provided for any amendment to these fee amounts.

*(i) FRAs will not be subject to Fallback Fees. (ii) Any LIBOR-LIBOR basis swaps that may be voluntarily split into two interest rate swaps by LCH prior to conversion will not be double charged.

Conversion Fees

LCH will apply a conversion fee to SwapClear Clearing Member House and Client contracts[3] which are not otherwise converted and will therefore require the LCH conversion tool. The conversion processes in 2023 will encompass USD LIBOR contracts. LCH is proposing the following dates:

• Tranche 1: USD LIBOR / FEDFUNDS Basis Swaps, USD VNS and USD ZCS, conversion would apply to SwapClear Contracts outstanding at COB on Friday 21^st April 2023 and be conducted over that weekend.
• Tranche 2: all other USD LIBOR, conversion would apply to SwapClear contracts outstanding at COB on Friday 19^th May 2023 and be conducted over that weekend.

Fee Amount per Contract:

**Any LIBOR-LIBOR basis swaps that are voluntarily split into two interest rate swaps by LCH prior to conversion will be treated as two separate swaps from the point of splitting. As such, any outstanding LIBOR contracts that may have arisen from a basis swap splitting event will be charged separately if included in a conversion process.

An annual Conversion Fee Cap will apply in 2023 for all SwapClear Clearing Member House accounts as follows. Note, this cap applies to Conversion Fees only and is not applicable for LIBOR Fallback Fees.

Should you have any questions, or if you require further information, please do not hesitate to contact USDconversion@lseg.com or MembershipSales@LCH.com.

[1] Subject to regulatory review

[2] LCH’s Consultation on Conversion of Outstanding USD LIBOR® SwapClear Contracts | LCH Group

[3] ‘SwapClear Contract’ includes an ‘FCM SwapClear Contract’