LCH Consultation on Conversion of Outstanding Cleared CAD CDOR Contracts
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Circular No.: |
LCH Circular No. 4277 |
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Date: |
27th October 2023 |
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To: |
All SwapClear Users |
On 1st August 2023, LCH Limited (“LCH”) issued an invitation [1] to all SwapClear users to respond to a consultation regarding the treatment of outstanding cleared CAD CDOR SwapClear Contracts at or around the Index Cessation Effective Date and their potential conversion into (or replacement with) corresponding CORRA-based SwapClear Contracts [2]. The consultation document set out LCH’s proposals and SwapClear requested responses by 29th September [3].
LCH experienced active engagement from both members and clients. We outline the consultation outcome below and note that there are three areas where LCH will adopt minor modifications to our original proposals based on consultation feedback. The three areas are: (i) Basis Swaps splitting; (ii) CAD CDOR trades that follow the IMM CAD roll convention; and (iii) the timing of the conversion event.
We also provide further details with regards to the feedback received and LCH’s conversion approach here.
Summary of Consultation Outcome
CAD CDOR Conversion event
Respondents to our consultation unanimously supported a CAD CDOR conversion event on or shortly before 28th June 2024, leveraging the core functionality successfully deployed in past conversions.
Input Interest Rate Swap (IRS) Contracts involving CAD CDOR legs with Regular Compounding
All respondents supported the approach proposed by LCH for the conversion of IRS where the CAD CDOR leg involves regular compounding.
Treatment of CAD CDOR/CDOR and CAD CDOR/CORRA Basis Swaps
Whilst all respondents supported the proposed mandatory service-wide basis swap splitting event, some participants expressed the preference for the basis splitting event to not coincide with the conversion. As a result, LCH will be moving forward with the following modifications to its original proposals:
- SwapClear will extend the Unilateral Basis Splitting Tool (UBST) functionality (developed in the context of USD conversion) to CAD basis swaps, enabling all users to unilaterally split their outstanding CAD basis swaps independently ahead of conversion; and
- any in-scope CAD basis swaps that are outstanding at the point of conversion will be split by LCH in a mandatory event occurring on the same date as the CAD CDOR conversion event.
CAD CDOR Zero Coupon Swaps (ZCS)
LCH proposed a conversion process that replicated the approach taken for the conversion of ZCS in the context of the USD LIBOR conversion. All respondents agreed with this approach.
Treatment of CAD CDOR trades that follow the IMM CAD roll convention
Whilst many respondents agreed with LCH’s proposals, several participants with material exposures in this contract type indicated a preference for a different approach and raised comments that are relevant beyond a CAD CDOR conversion process.
As a result, LCH will be moving forward with the following modifications to its original proposals:
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LCH will perform the conversion of the IMM CAD CDOR trades into IMM CAD CORRA trades by adhering to the standard LCH conversion logic, by maintaining the original effective date and termination date into the conversion output bookings; and
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LCH will address the IMM CAD roll convention/definition changes separately from and likely subsequent to the wider CAD conversion event. LCH will issue a further communication on this in due course.
Timing
Several respondents expressed concern about the date originally proposed by LCH and expressed a support for a different conversion date due to operational reasons. The majority of these respondents indicated a preference for a marginally later conversion date. As a result, LCH CDOR conversion will now be scheduled to take place on Saturday 8th June 2024 (i.e. one week later than originally proposed), with the contingency date to remain as Saturday 15th June 2024.
Post conversion solutions
The majority of respondents agreed with the approach proposed by LCH which entails the withdrawal of the clearing eligibility for CDOR trades following the conversion date.
Further details on comments received and on LCH’s conversion approach are provided here.
Next Steps
Based on the feedback received, LCH intends to move forward with the approaches articulated above for the purpose of the CAD CDOR conversion, which SwapClear participants can now treat as final. Further briefing calls will be arranged by LCH to allow users to familiarise themselves with the CAD CDOR conversion process, and LCH will release additional operational details accordingly.
The approach and process described herein is 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 CADConversion@lseg.com and lchsales@lseg.com.
[1] https://www.lch.com/membership/ltd-membership/ltd-member-updates/lch-co…
[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.lch.com/resources/rulebooks/lch-limited