LCH Conversion of Outstanding Cleared ILS TELBOR Contracts
|
LCH circular number: |
4314 |
|
Date: |
June 26, 2024 |
|
To: |
All SwapClear Users |
LCH Limited (“LCH”) strongly supports the continuing industry-wide efforts to transition from existing benchmarks to risk-free rates (“RFRs”), and its SwapClear service has played an active role in the transition of a number of benchmarks in recent years. The most recent example is the conversion of SwapClear’s CAD CDOR Contracts [1] into CORRA-equivalents, which was completed by SwapClear in June 2024 [2].
On 16 April 2024, the Bank of Israel announced that the publication of all tenors of ILS TELBOR will permanently cease immediately following a final publication on 30 June 2025 [3]. Concurrently, ISDA confirmed that such announcement constituted an Index Cessation Event under the ISDA IBOR Fallbacks Supplement and Fallback Protocol [4] and BISL published the fixed spread adjustments that are relevant within the SHIR-based fallback arrangements [5].
The above statements are relevant to SwapClear, which offers clearing services for ILS TELBOR swaps. Through this circular we therefore articulate the intended approach and timeline regarding the treatment of outstanding cleared ILS TELBOR SwapClear Contracts at or around the Index Cessation Effective Date [6] and their conversion into (or replacement with) corresponding SHIR-based SwapClear Contracts.
ILS TELBOR conversion scope and target design principles
By adhering to the same logic and core conversion functionality successfully deployed by SwapClear in the past, the ILS TELBOR conversion process will entail the following design principles:
- Any ILS TELBOR trade outstanding at the point of conversion and relying on a fixing occurring after 30 June 2025 will be in scope of the conversion event.
- The in-scope TELBOR trade (“Input Contract”) will be replaced by a SHIR equivalent trade (“Output Contract”), having the following characteristics:
1. The fixed leg of the Output Contract will preserve all the details of the fixed leg of the Input Contract.
2. The floating leg of the Output Contract will feature SHIR as underlying index and will be booked under the ISDA 2021 definitions.
3. The SHIR floating leg of the Output Contract will preserve as many details of the floating leg of the Input Contract as possible, such as notional, effective date, termination date, roll convention, business day convention, day count fractions and payment calendar(s).
4. The relevant BISL spread adjustment will be populated on the SHIR leg of the Output Contract in addition to any contractual spread [7].
5. A 2-day payment lag will be applied to the SHIR floating leg of the Output Contract, as per underlying SHIR OIS conventions [8]
6. Overlay bookings will be used as an operational device to achieve cashflow continuity/preservation on each trade that involves payments in respect of ILS TELBOR settings that are already fixed at the point of conversion or that will fix ahead of the Cessation Date.
Cash compensation
LCH will calculate cash compensation payable by, or to, a SwapClear Clearing Member or FCM Clearing Member in relation to the difference in present value between the in-scope TELBOR trade (Input Contract) and the SHIR-equivalent trade (Output Contract), which in this context includes the present value of any overlay bookings.
Timing
SwapClear will perform the ILS TELBOR conversion in a single event expected to be conducted on Saturday 17 May 2025, based on the population of TELBOR contracts that will be outstanding on EOD Friday 16 May 2025 [9].
Prior to the conversion event in production, the conversion process will be tested through a dress rehearsal event to take place in LCH’s Member Test environment expected to be conducted on Saturday 8 March 2025.
Eligibility
SwapClear Transactions [10] that reference ILS TELBOR will no longer be eligible for clearing with the SwapClear service from and including the first Monday following the date of the conversion event.
Prior ILS PAI/PAA and discounting switch
Ahead of and separate from the ILS TELBOR conversion process, SwapClear will perform a non-compensated transition to ILS SHIR from a cashflow discounting perspective and for the purpose of adopting ILS SHIR in the calculation of the Price Alignment Interest (PAI) and Price Alignment Amount (PAA) on ILS-denominated SwapClear Contracts [11]. SwapClear will communicate the date of such transition to its users via a separate notification.
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 key events relevant to the ILS TELBOR transition. Similar to past RFR conversions, LCH will apply charges in relation to the conversion process described above and it will issue a separate communication in this regard.
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 ILSConversion@lseg.com.
[1] “SwapClear Contract” includes an “FCM SwapClear Contract” for the purposes of this circular. 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
[3] https://www.boi.org.il/en/communication-and-publications/press-releases/16-4-20242en/
[4] https://www.isda.org/a/ObwgE/ISDA-TELBOR-Cessation-Guidance.pdf
[6] As defined in ISDA’s Fallbacks Supplement.
[7] SwapClear offers clearing services for ILS TELBOR swaps having a floating leg index tenor of 3 months (3M). The 3M spread adjustment issued by BISL relevant for SwapClear conversion purposes is therefore -0.00901%.
[8] From an economic perspective, LCH converts IBOR trades to their corresponding RFR-based contracts using the same interest calculation period as the original IBOR contract and applies a payment lag as per the OIS conventions. Also, fixing centre will be ILTA and fixings will follow the SHIR (vanilla) OIS conventions, i.e., no offsets/lags/backward shifts.
[9] The contingency date for the ILS TELBOR conversion event is expected to be Saturday 7 June 2025.
[10] “SwapClear Transaction” includes an “FCM SwapClear Transaction” for the purposes of this circular. SwapClear Transaction and FCM SwapClear Transaction have the meaning assigned to them in the General Regulations and FCM Regulations, respectively, which are available at https://www.lch.com/resources/rulebooks/lch-limited
[11] As defined in SwapClear’s procedures available at https://www.lch.com/resources/rulebooks/lch-limited