Update on LCH Limited’s Position on LIBOR cessation and Forward Rate Agreements
LCH circular number:
19 January 2021
All LCH Limited Clearing Members
We are writing to confirm LCH Limited’s (“LCH”) position with respect to LIBOR Cessation and the Treatment of Forward Rate Agreements in the SwapClear service.
In December 2018, LCH issued a public circular to notify SwapClear users of its ‘Intentions in respect of ISDA’s recommended Benchmark Fallback Approaches’. This was in response to ISDA’s consultations regarding LIBOR fallbacks for the 2006 ISDA Definitions (the 2006 ISDA Definitions, as supplemented by the Fallbacks Supplement, the “Revised ISDA Definitions”). In such circular, LCH’s commitments included: (i) its intention to provide clearing eligibility for contracts incorporating the Revised ISDA Definitions; (ii) that from the date each Revised ISDA Definition becomes effective, only cleared contracts incorporating the Revised ISDA Definitions would be eligible for clearing; and (iii) all outstanding contracts would be amended to incorporate the Revised ISDA Definitions.
Since this announcement, ISDA has finalized Supplement 70 to the 2006 ISDA Definitions (the “Fallbacks Supplement”) and will publish the Fallbacks Supplement on 25 January 2021. Following the publication of the Fallbacks Supplement, the 2006 ISDA Definitions provide that unless otherwise agreed, contracts that are entered into on or after 25 January 2021 which incorporate the 2006 Definitions will include the Fallbacks Supplement. ISDA has also finalized and published the ISDA 2020 IBOR Fallbacks Protocol (the “Fallbacks Protocol”). The purpose of the Fallbacks Protocol is to allow market participants to amend, with effect from 25 January, 2021 certain contracts entered into prior to such time, to include the terms of the Fallbacks Supplement.
This circular constitutes notice under Section 1.6 of the SwapClear Contract Terms and Section 1.5 of the SwapClear FCM Contract Terms that:
(i) with effect from, and including, 25 January 2021 the Fallbacks Supplement will be deemed to be incorporated into all new SwapClear Transactions and resulting SwapClear Contracts which incorporate the 2006 ISDA Definitions and are submitted for clearing on or after 25 January 2021 and all existing SwapClear Contracts which incorporate the 2006 ISDA Definitions and were registered prior to 25 January 2021.
(ii) with effect from, and including, 25 January 2021 the paragraph 2 of the Attachment to the Fallbacks Protocol (and the Fallbacks Supplement attached to the Fallbacks Protocol) will be deemed to be incorporated into all new SwapClear Transactions and resulting SwapClear Contracts which incorporate the 2000 ISDA Definitions and are submitted for clearing on or after 25 January 2021 and all existing SwapClear Contracts which incorporate the 2000 ISDA Definitions and were registered prior to 25 January 2021.
Forward Rate Agreements (“FRA”):
Notwithstanding the incorporation of the Revised ISDA Definitions described above, LCH also published a circular on 8 December 2020 describing a proposed approach for FRAs, which would result in an alternative treatment from the approach adopted in the Revised ISDA Definitions, owing to the time lags involved with these particular types of contract. This alternative treatment is designed to more closely preserve the original economic intent of these contracts. We are writing to confirm that for any open FRA contract registered with SwapClear which relies for its contractual fulfilment on an In-scope Benchmark and for which (a) the Index Cessation Event has occurred and (b) the Index Cessation Effective Date is the date or precedes the date on which the contract’s fixing will occur, LCH will upon the announcement of such Index Cessation Event make arrangements to convert, on or before the Index Cessation Effective Date, the FRA into a single period swap with an Effective Date equal to the settlement date of the original FRA contract and running for a period equal to its Designated Maturity, and a Fixed Rate equal to the Fixed Rate on the original FRA contract.
Terms used herein and not defined herein have the meaning provided in the LCH Rulebook, FCM Rulebook or in the circulars referred to herein (as applicable). The terms SwapClear Member, SwapClear Transaction and SwapClear Contract include an FCM Clearing Member, an FCM SwapClear Transaction and an FCM SwapClear Contract.