Treatment of IMM CAD SwapClear Contracts

Background

Under ISDA’s 2021 interest rate derivatives definitions (2021 Definitions), which are applicable to SwapClear Contracts [1], “IMM CAD” roll dates in respect of a calculation period are defined as “the last trading day of the Canadian Derivatives Exchange (Bourse de Montréal) 3-Month Canadian Bankers’ Acceptance Futures contract” (BAX Contract). Bourse de Montréal has amended the “last trading day” of BAX Contracts expiring after 28 June 2024 from the second London banking day preceding the third Wednesday of the settlement month to the third Wednesday of the settlement month [2]. This change causes the “IMM CAD” roll date applicable to SwapClear Contracts to differ for calculation periods occurring before 28 June 2024 from those occurring after such date.

In October 2023, LCH Limited (LCH) decided to isolate the CAD CDOR conversion event [3] from the complications resulting from the changes in the “IMM CAD” roll date articulated above and to deal with these changes separately from, and subsequent to, the conversion event. This circular articulates LCH’s approach to address the changes in the “IMM CAD” roll date. The process described below will be implemented after the CAD CDOR conversion event, in line with the different timings mentioned below, and hence is not relevant for CAD CDOR conversion purposes [4].

Treatment of IMM CAD SwapClear Contracts

LCH will implement the following approach for all outstanding IMM CAD SwapClear Contracts (each, an Affected Contract):
1.    Contractually, the terms of each Affected Contract will be amended such that:
     (a)  if an Affected Contract references “IMM CAD” in its terms, this will be construed as a reference to “IMM Settlement Dates” as defined under the 2021 ISDA Definitions [5]; and
     (b)  if not already, its effective date and termination date will be the third Wednesday of the relevant month.
2.    Operationally, each Affected Contract will be re-booked with roll dates as well as an effective date and a termination date in line with the above contractual amendments. 

This approach takes into account various elements that are relevant to the changes in the “IMM CAD” roll date. First, it addresses that ISDA will delete the definition of “IMM CAD” from the 2021 Definitions after the expiry of remaining BAX Contracts in June 2024 [6]. Second, it ensures fungibility and compressibility of Affected Contracts (existing and future). Third, it maximises alignment of Affected Contracts with corresponding CORRA futures traded by our users in a wider hedging context [7]. Finally, it takes into consideration operational and risk management factors that are relevant to the LCH SwapClear service. 

Cash compensation

LCH will calculate cash compensation payable by, or to, a SwapClear member or FCM SwapClear member in relation to any NPV differences between its original Affected Contract and its amended Affected Contract.

Timing

The LCH amendment process will occur on 9 July 2024 for all Affected Contracts. 

Eligibility

Please note that SwapClear Transactions [8] that reference “IMM CAD” will no longer be eligible for clearing with the LCH SwapClear service from and including 1 July 2024. Therefore, SwapClear users that wish to actively manage and/or optimise outstanding SwapClear Contracts that reference “IMM CAD” are requested to do so before this date.

Next Steps

LCH will release further operational details and arrange briefing calls to allow SwapClear users to familiarise themselves with the process articulated above in preparation for the amendment exercise on 9 July 2024. LCH will not apply any charges in relation to the process described above (except that cash compensation will be payable by, or to, a SwapClear member or FCM SwapClear member as described in the paragraph above entitled “Cash compensation”).

The approach and process described herein remains subject to risk governance and legal and regulatory review. Should you have any questions or if you require further information, please do not hesitate to contact RatesClientServices@lch.com and lchsales@lseg.com.