USD BSBY Cessation

Under circular number 4306 [1], LCH Limited (“LCH”) set out its revised plans in relation to outstanding SwapClear Contracts [2] that specify USD-BSBY (as defined in the ISDA Definitions) (“USD-BSBY”) as a floating rate option (each, a “BSBY Contract”).

LCH now wishes to set out the specifics of its plans:

1.    BSBY Alternative Rate

With effect on and from Monday 8 July 2024 (or such other date as notified by LCH to its SwapClear participants), each open BSBY Contract shall be construed such that, from and including the first Reset Date occurring after the Cessation Date (as defined below) (and notwithstanding anything to the contrary in the SwapClear Contract Terms), any reference to USD-BSBY shall be replaced for all purposes with the BSBY Alternative Rate (as defined below) for the Designated Maturity applicable to such floating rate option, pursuant to section 1.8.10 of its SwapClear Procedures and section 2.1.9(j) of the FCM Procedures.

For these purposes:

“Cessation Date” means the final date on which the administrator for USD-BSBY publishes or provides a rate for USD-BSBY; and

“BSBY Alternative Rate” means, in respect of a day, a floating rate option, and the Designated Maturity applicable to such floating rate option, the rate equal to

(i)    the LCH spread adjustment specified below for such Designated Maturity, rounded to one decimal place; plus
(ii)    compounded SOFR, as determined by LCH for such day:  

2.    Termination 
LCH has determined that, under section 1.8.11 of the SwapClear Procedures and section 2.1.9(m) of the FCM Procedures, an Index Cessation Event has occurred in respect of the rate relating to USD-BSBY and that that is likely to affect the normal course of business. 

Further, LCH will terminate, on Saturday 2 November 2024, all BSBY Contracts that are outstanding as at 19:00 (New York time) on Friday 1 November 2024, at the termination valuations determined by LCH, pursuant to section 1.8.11 of the SwapClear Procedures and section 2.1.9(m) of the FCM Procedures. Termination amounts will either be payable to, or by, SwapClear Clearing Members that were a party to any such terminated BSBY Contract. 

3.    Removal of eligibility
Upon termination of all BSBY Contracts as described in point 2 above, any SwapClear Transaction that specifies USD-BSBY as a floating rate will no longer be eligible for clearing with the LCH SwapClear Service.

4.    LCH daily valuation of BSBY Contracts 
With effect on and from Monday 8 July 2024 (or such other date as notified by LCH to its SwapClear participants) until termination of all BSBY Contracts, LCH will calculate the daily net present value of each open BSBY Contract, where such BSBY Contract will be construed as described in point 1 above, for the purposes of determining the daily variation margin or NPV Payment obligations (as applicable) in respect of each BSBY Contract. 

Notwithstanding the above, LCH continues to strongly encourage SwapClear participants to actively consider reducing and/or closing out their exposures in relation to BSBY Contracts.

The process described in this circular remains subject to risk governance and legal and compliance review. Should you have any comments or questions, please do not hesitate to contact LCHSales@lseg.com.
 

[1] https://www.lseg.com/en/post-trade/clearing/membership/ltd-membership/ltd-member-updates/usd-bsby-cessation-0

[2] References to SwapClear Contracts, the SwapClear Service, SwapClear Clearing Members and SwapClear participants includes FCM SwapClear Contracts, the FCM SwapClear Service, FCM Clearing Members participating in the FCM SwapClear Service and FCM participants, respectively. Words which begin with a capital letter, but are not defined, in this circular shall have the meaning specified in the LCH rulebook, which is located at https://www.lseg.com/en/post-trade/clearing.

[3] The LCH spread adjustment has been calculated as the median from a 5-year historical distribution of spreads between the USD-BSBY fixing of the relevant Designated Maturity and the corresponding SOFR average over the equivalent period. LCH has determined that the appropriate historical period runs from the date 5 years prior to the announcement of permanent USD-BSBY cessation by its administrator, being 15 November 2023. For the time series of realised compounded SOFR rates, please see https://fred.stlouisfed.org/series/SOFRINDEX.