| LCH circular number: | 4287 |
|---|---|
| Date: | December 20, 2023 |
| To: | All SwapClear Users |
On 17 November 2023, LCH Limited (“LCH”) issued an invitation [1] to all SwapClear users to respond to a consultation regarding the treatment of outstanding MXN 28D-TIIE SwapClear Contracts and their potential conversion into (or replacement with) corresponding F-TIIE-based SwapClear Contracts at or around 31 December 2024 [2]. The consultation document set out LCH’s proposals and SwapClear requested responses by 15 December 2023 [3].
LCH received a good number of responses, and we outline the consultation outcome below.
Summary of Consultation Outcome
MXN 28D-TIIE Conversion event
Respondents to our consultation unanimously supported a MXN 28D-TIIE conversion event at or around 31 December 2024, leveraging the core functionality successfully deployed in past conversions.
Conversion scope
LCH proposed a conversion approach whereby 28D-TIIE trades relying on fixings occurring after 31 December 2025 will be subject to LCH conversion, with overlay bookings generated accordingly.
The majority of respondents agreed with this approach and, as a result, LCH will move forward with the conversion scope as proposed.
Valuation of the Input MXN 28D-TIIE Contracts and related cash compensation methodology
LCH proposed to value the MXN 28D-TIIE SwapClear Contracts subject to the conversion process (the “Input 28D-TIIE Contracts”) for cash compensation purposes by using projections of 28D-TIIE rates based on the new methodology set by Banxico for fixings beyond the end of 2024. This involves calculating the 28D-TIIE rate as a forward-looking value by compounding the projected F-TIIE on the day prior to the reference day being determined and adding a spread adjustment of 24 basis points [4].
A strong majority of respondents agreed with LCH’s proposal. Those who did not agree cited the following: (i) that LCH should consider using a competing valuation methodology for the Input 28D-TIIE Contracts based on a so-called “ISDA-Fallback style” or “ISDA Protocol” approach; and (ii) that consistency among CCPs is vital. We strongly believe that addressing the first of these is the key to successful transition. We also note that LCH can only control its own process.
With regards to the Input 28D-TIIE Contracts valuation, we do not consider that there are robust grounds for using any methodology other than Banxico’s new methodology. As a legal matter, given the absence of an Index Cessation Event and in relation to contracts adhering to ISDA’s definitions, it is our view that this new methodology represents the appropriate basis on which outstanding SwapClear Contracts referencing 28D-TIIE can be fulfilled beyond the end of 2024.
As a result, we confirm that LCH will move ahead – backed by consensus amongst our users – with the valuation methodology proposed in our consultation.
Target Design Principles - Conversion Standard Output F-TIIE Contracts
LCH proposed the generation of backward-looking F-TIIE contracts as target conversion SwapClear Contracts, modelled to the greatest extent possible on F-TIIE OIS conventions (the “Conversion Standard F-TIIE Output Contracts”), with the application of a 24 basis points spread adjustment on the floating leg of the converted trade.
The majority of respondents supported the approach proposed by LCH for the generation of Conversion Standard F-TIIE Output trades as articulated above. A minority of respondents expressed a preference for using attributes of the afore-mentioned “ISDA Fallback-style” approach. As articulated above, we do not consider that we have appropriate grounds for this here. We will therefore move forward as proposed in our consultation.
Timing
LCH proposed a conversion date of 23 November 2024 and a contingency date of 7 December 2024.
The majority of respondents agreed with the timing proposed by LCH for the MXN 28D-TIIE conversion event and, as a result, LCH confirms such timeline.
Next Steps
Based on the feedback received, LCH intends to move forward with the approach to conversion set out in our consultation document, which SwapClear participants can now treat as final. Further briefing calls will be arranged by LCH to allow users to familiarise themselves with the conversion process, and LCH will release additional operational details accordingly.
The approach and process described herein remain subject to risk governance and legal and regulatory review.
Should you have any comments or questions on these outcomes, or if you require further information, please do not hesitate to contact MXNConversion@lseg.com and lchsales@lseg.com.
[1] https://www.lseg.com/en/post-trade/clearing/membership/ltd-membership/ltd-member-updates/lch-consultation-conversion-outstanding-cleared-mxn
[2] “SwapClear Contract” includes an “FCM SwapClear Contract” for the purposes of this circular and the consultation. SwapClear Contract and FCM SwapClear Contract have the meanings assigned to them in the General Regulations or FCM Regulations (as applicable) and made available at https://www.lseg.com/en/post-trade/clearing/clearing-resources/rulebooks/lch-limited
[3] https://www.lseg.com/content/dam/post-trade/en_us/documents/lch/membership/member-updates/lch-ltd/lch-mxn-tiie-conversion-consultation.pdf
[4] The certainty provided by Banxico regarding the applicability of the new methodology means that the current pricing of MXN 28D-TIIE swaps, as reflected in their prevailing market rates, should incorporate and embed the new methodological relationship to F-TIIE forward projections. This will allow LCH SwapClear to use prevailing market rates for generic MXN 28D-TIIE swaps as inputs into our cash compensation calculator at the point of conversion.