Rates Reform: LIBOR Fallback and Conversion Fees

Dear SwapClear User,

LCH Limited ("LCH") expressed its intention to charge a Fallback Fee and a Conversion Fee [1] in circulars 4138 and 4146. This circular details the structure and timeline for both fees and includes the amount payable for the Fallback Fee.

In line with regulatory guidance, LCH strongly recommends that participants consider proactively transitioning away from fallen-back benchmarks.

The Fallback Fee applies to cleared contracts for which an index cessation event has occurred. It aims to encourage early transition before the LCH conversion processes are run, thereby mitigating LCH’s concerns in relation to ongoing risk and default management.

The Conversion Fee applies to cleared contracts for which a rate will cease and where LCH converts the cleared contract to one referencing a risk-free rate. The conversion process is designed as a last resort for those participants which are otherwise unable to transition away from fallen back rates. The fee will allow LCH to recover the costs of designing, building and running the conversion process and should also discourage over-reliance on the conversion tool.

As previously stated, other tools and processes are available to market participants to discontinue their reliance on rates that have fallen back. Ahead of the conversion events, LCH will make users aware of alternative options available to minimise the use of the LCH conversion tool and the associated cost of conversion.

LIBOR Fallback Fees

The following charges will apply to cleared contracts in both SwapClear Clearing Member House and Client accounts; 30-days’ notice will be provided for any amendment to these fee amounts.

Effective 30^th September 2021, LCH will apply a monthly fee for outstanding* CHF / EUR / GBP / JPY LIBOR contracts as of the last good business day of that month. For the avoidance of doubt, no charges will apply for USD LIBOR contracts from this date.

* (i) FRAs will not be subject to Fallback Fees. (ii) Any LIBOR-LIBOR basis swaps that may need to be split into two interest rate swaps by LCH prior to conversion will not be double charged.

Fee per outstanding contract

Conversion Fees

LCH will apply a conversion fee to SwapClear Clearing Member House and Client contracts which cannot otherwise be converted and so will be converted by the LCH conversion tool. The conversion processes in 2021 will encompass CHF / EUR / GBP / JPY LIBOR and EUR EONIA contracts. LCH is proposing the following dates:

·         For EUR EONIA, conversion shall apply to SwapClear Contracts outstanding at COB on Friday 15^th October 2021 and will be conducted over that weekend;

·         For CHF, EUR & JPY LIBOR, conversion shall apply to SwapClear Contracts outstanding at COB on Friday 3^rd December 2021 and will be conducted over that weekend;

·         For GBP LIBOR, conversion shall apply to SwapClear contracts outstanding at COB on Friday 17^th December 2021 and will be conducted over that weekend

A fee will apply per contract included in an LCH conversion process and rates will be communicated at a future date.

Should you have any questions, or if you require further information, please do not hesitate to contact LIBOR@lseg.com or MembershipSales@LCH.com.