| LCH circular number: | 4229 |
| Date: | September 29, 2022 |
| To: | All SwapClear Users |
LCH Group (“LCH”), and its SwapClear business, strongly supports the continuing global efforts to transition from existing benchmarks to risk-free rates (“RFRs”). Given the cessation of SGD SOR benchmarks in all tenors beyond 30th June 2023, LCH invited SwapClear participants to respond to a consultation1 in which we proposed potential treatments of LCH-cleared SGD SOR contracts ahead of SOR’s cessation2.
LCH launched the consultation on 10th August 2022 and requested responses by 9th September 2022. We had active engagement from our participants, for which we are grateful, and hereby outline the outcome.
Consultation Outcome
LCH sought feedback on its proposals in a number of specific areas. SwapClear participants were able to express agreement with LCH’s proposal, and could suggest alternative preferences where they disagreed. We summarise the findings in each main area below.
Conversion
Consultation respondents were asked to express their preference for a conversion (of SOR contracts into SORA equivalents) or for an outright termination. Respondents were strongly in favour of conversion.
Standardisation
LCH proposed generating standardised SORA OIS as conversion process outputs, as defined in the consultation document: in summary, these SORA OIS involve no change to their fixed leg; on their floating leg, they retain the accrual periods on the original SGD SOR contract as well as incorporating the relevant MAS Recommended Rate Spread Adjustments, and carry this cashflow profile throughout their remaining life. Respondents were strongly in favour of LCH’s approach.
Cash Compensation
LCH’s proposals for cash compensation aimed to address the two-phase fallback of SOR, first to Fallback Rate (SOR) and then to MAS Recommended Rate. There was strong support for LCH to use MAS Recommended Rate as the economic basis for compensation relating to the second phase of fallback, consistent with LCH’s prior bulk conversion processes. For the first phase, we proposed a determination of prevailing market pricing of SOR/SORA basis swaps immediately prior to conversion. The majority of consultation respondents agreed with this approach, although a minority expressed reservations about the precise mechanism proposed.
Timing
LCH proposed performing the conversion over the weekend following close of business on 9th June 2023. While there were some responses that called for an earlier date, the majority of respondents agreed with LCH’s proposed timing.
Next Steps
Based on the consensus demonstrated in these responses, LCH intends to move forward with its proposals as communicated in the consultation document, with the proviso that LCH is considering small potential refinements to the SOR/SORA price determination process. Further briefing calls will be arranged which are designed to allow firms to familiarise themselves with these details and with the conversion process more generally. These will include greater levels of technical and operational detail, and are designed to enable SwapClear participants to decide whether to make alternative arrangements for their outstanding SOR contracts should they so desire.
LCH will set out in a separate circular the charges it intends to apply to SGD SOR SwapClear Contracts in the run-up to and as part of the conversion process.
The approach and process described herein is subject to ongoing legal & risk governance review and to regulatory review.
Should you have any comments or questions on these outcomes, or if you require further information, please do not hesitate to contact SORconversion@lseg.com.
Privileged and Confidential
LCH asked for additional feedback related to this conversion of outstanding SGD SOR SwapClear Contracts that were not addressed in individual questions. We welcomed these responses where they were offered, and while there was no discernible pattern sufficient to lead LCH to modify its proposed approach, we have engaged with all individual firms to discuss the points raised.
1LCH Consultation on Conversion of Outstanding Cleared SGD SOR Contracts | LCH Group
2LCH_SGD SOR Cessation_Consultation.pdf