Statement on LCH’s Position in respect of LIBOR® Contracts denominated in CHF, EUR, GBP and JPY and submitted for registration at LCH subsequent to the completion of LCH’s Conversion Processes
LCH Circular No 4171
21 September 2021
All SwapClear Users
Dear SwapClear User,
LCH Group (“LCH”), and its SwapClear business, remains strongly supportive of industry-wide efforts to transition from existing benchmarks to risk-free rates (“RFRs”). We ran a 6-week market consultation open to all SwapClear participants launched on 15th December 2020 in which we proposed an approach for converting LIBOR-linked SwapClear Contracts cleared at LCH’s SwapClear service on a date (a “Conversion Date”) ahead of a then unknown index cessation date. We also stated within the consultation document that SwapClear Transactions which reference the relevant LIBOR would not be eligible for clearing beyond such a Conversion Date.
Shortly following the completion of the consultation, LCH issued a circular, on 16th February 2021, summarising its central outcomes. LCH reported general support for and details of its proposed approach of converting outstanding LIBOR SwapClear Contracts into contracts referencing the corresponding recommended RFR (each an “LCH Conversion Process”). Following the subsequent announcements on 5th March 2021 confirming the index cessation dates for CHF, EUR, GBP & JPY LIBORs (together, the “In-scope LIBORs”), LCH issued a second circular, on 18th March 2021, providing additional detail. This detail included confirmation that: (i) for SwapClear Contracts linked to CHF, EUR & JPY LIBOR, conversion would apply to trades outstanding at close of business on Friday 3rd December 2021 (“CHF/EUR/JPY Cut-Off Date”) and would be conducted over that weekend; and (ii) for SwapClear Contracts linked to GBP LIBOR, conversion would apply to trades outstanding at close of business on Friday 17th December 2021 (“GBP Cut-Off Date”) and would be conducted over that weekend.
This circular aims to provide further detail to SwapClear participants regarding our approach towards SwapClear Transactions which are submitted to LCH for clearing subsequent to: (a) the CHF/EUR/JPY Cut-Off Date in the case of CHF, EUR and JPY contracts; and (b) the GBP Cut-Off Date in the case of GBP contracts. Between these dates and 31st December 2021, market participants are able, with certain restrictions, to execute new swap contracts linked to In-scope LIBORs. LCH is keen to avoid disruption to this market activity. We have also been made aware of the potential for an ongoing demand to submit legacy contracts linked to In-scope LIBORs beyond 31st December 2021, for example in relation to the expiry of non-cleared swaption contracts which have as their underlying a physically-settled SwapClear Contract. We are also keen to avoid disruption to these contracts where possible.
LCH has been working with industry bodies to establish the grounds on which it could offer a service to support this activity, and on the scope of such a service. In doing so, LCH has listened to and considered market feedback across a wide range of factors.
In light of the desire to provide market participants with the greatest degree of certainty possible, LCH confirms that, while new SwapClear Transactions linked to an In-Scope LIBOR will no longer be eligible for registration at SwapClear after the CHF/EUR/JPY Cut-Off Date or GBP Cut-Off Date (as applicable), we intend to support continued time-limited eligibility for legacy swaps submitted to LCH SwapClear for registration where: (i) notwithstanding the fact that these swaps refer to an In-scope LIBOR as their FRO, such swaps do not rely on a non-representative In-scope LIBOR for their contractual performance; and (ii) where such submission is subsequent to (a) the CHF/EUR/JPY Cut-Off Date in the case of CHF, EUR and JPY contracts; and (b) the GBP Cut-Off Date in the case of GBP contracts.
The central features of LCH’s service will be as follows:
- Trade submission and registration: submitted trades would have an In-scope LIBOR as the Floating Rate Option on their floating leg, and would be registered as such upon completion of LCH’s standard eligibility and registration criteria;
- Product eligibility: the SwapClear service would support standard spot-starting & forward-starting IRS with a constant notional amount, with a constant fixed rate, without any floating spread and without any stub periods or other non-generic features ;
- The UK Benchmark Regulation (“BMRs”) compliance: each party will be required to represent that the submitted SwapClear Transaction is compliant with the BMRs, for example through adherence to ISDA’s IBOR Fallbacks Protocol;
- Time-limited availability: the service will be available up to and including 31st December 2024;
- Trade date limitation: both parties will be required to represent, as a condition of registration, that for SwapClear Transactions submitted for clearing after 31st December 2021 the submitted transaction was originally executed before the date of this circular;
- Post-registration Conversion: subsequent to registration of the relevant SwapClear Transaction, LCH will, as a function of the terms of its Rulebook, convert any such transaction into an RFR contract equivalent to that which would have been produced had the submitted contract been subject to the relevant LCH Conversion Process with the exception that LCH would not preserve the LIBOR fixings for any trades which could otherwise make use of a representative LIBOR;
- Conversion Compensation: LCH will exchange cash compensation between the submitting parties upon conversion using prevailing RFR swap market data on each date on which the process is run and using an equivalent methodology to that used in the relevant LCH Conversion Process;
- Fees: LCH intends to apply its standard tariff structures to trades submitted and registered as part of this service. LCH’s Conversion Fees will not apply.
Further technical specifications associated with this service will be made available shortly, including a dedicated Legacy LIBOR Product Characteristics Matrix. Provision of this service remains subject to regulatory review.
 “legacy swaps” mean those transactions executed prior to 1st January 2022
 IRS has the meaning defined in LCH’s SwapClear Product Characteristics Matrix LCH.Clearnet Group - Secure Area - Secure (lchclearnet.com)