Summary of LCH’s Consultation on its Solution for Outstanding Cleared EONIA Contracts
LCH Circular No 4121
13th November 2020
All SwapClear Participants
Dear SwapClear Participant,
LCH Group (“LCH”), and its SwapClear business, strongly supports the continuing industry-wide efforts to transition from existing benchmarks to risk-free rates (“RFRs”). EONIA, one such existing benchmark which remains in widespread use, is set to be discontinued on 3rd January 2022 and €STR has been identified as its recommended alternative.
On 3rd October 2020, LCH issued an invitation to all SwapClear participants to respond to a consultation regarding the treatment of outstanding cleared EONIA contracts at or around the end of 2021 and their potential conversion into (or replacement with) corresponding €STR-based contracts. This invitation incorporated links to a document which outlined a number of relevant considerations, set out LCH’s proposals for a solution, and requested responses by 30th October 2020, a deadline which LCH subsequently extended until 3rd November 2020 following participant requests.
In the consultation, LCH asked two questions. Firstly, it asked whether respondents agreed with its proposed methodology: to replace EONIA with €STR flat in the EONIA leg of EONIA swaps, to leave the non-EONIA leg of the contract unchanged, and to apply cash compensation for the resulting valuation difference. Secondly, it asked whether respondents agreed with LCH’s proposed timing: the event would take place in November 2021.
Responses & Consultation Outcome
LCH received a good number of responses from across the various types of market participants, both members and clients, for which we are very grateful.
On the question of whether respondents agreed with LCH’s proposed methodology, a very strong majority answered “Yes”. There was no commonly preferred alternative amongst the minority who answered “No”.
Based on these responses, we propose to proceed with LCH’s proposed approach.
On the question of whether respondents agreed with LCH’s proposed timing, while the majority answered that they agreed with or accepted LCH’s proposal, a significant minority did not.
Those expressing an alternative timing preference overwhelmingly preferred earlier dates. The most common reasons given were to create extra contingency relative to year-end for the EONIA process itself, and to account for expected congestion at the end of 2021 due to other related LIBOR/*IBOR fallback work.
We are persuaded by the arguments relating to year-end 2021 congestion and the benefit of additional contingency. We are also aware of the need for our plans to be articulated fully to enable the necessary preparations. We therefore propose to run the process on 15th October 2021.
Based on these responses, LCH proposes to move forward with its proposed approach of converting (or replacing) outstanding EONIA contracts into corresponding €STR based contracts in which: (i) EONIA is replaced by €STR flat in the EONIA leg; (ii) the non-EONIA leg of the contract is left unchanged; and (iii) cash compensation is applied to neutralise the resulting valuation difference. LCH proposes that this event would take place at the close of business on 15th October 2021. We will engage further with our users to develop the additional technical detail required, and will continue to engage with market participants to address any outstanding concerns identified with this choice.
Any process will be subject to regulatory non-objection.
Sales & Relationship Management, Rates Service