Mr Christopher Kirkpatrick

Commodity Futures Trading Commission

1155 21st Street NW

Three Lafayette Centre

Washington DC 20581

22 March 2017

Dear Mr Kirkpatrick

Variable Notional Swaps (“VNS”) denominated in CHF, CZK, DKK, HKD, HUF, NZD, SGD and ZAR (“The Currency 

Set”)

Pursuant to CFTC regulation §39.5(b), LCH Limited (“LCH”), a Derivatives Clearing Organization (“DCO”) registered 

with the Commodity Futures Trading Commission (the “CFTC”), is submitting Variable Notional Swaps (“VNS”) 

denominated in CZK, DKK, HUF, NZD and ZAR for determination of whether mandatory clearing should apply. In 

October 2016, the CFTC expanded the clearing requirement to include fixed-floating interest rate swaps 

denominated in Swiss francs, Hong Kong dollars, and Singapore dollars with compliance dates set for 2017 and 2018.

Hence, this submission for determination only applies to the remaining currencies of The Currency Set.

Background

VNS are interest rate swaps (“IRS”) in which the notional of the trade can vary through the life of the trade. 

However, the notional for each leg of the swap for each coupon period must be defined and fixed at inception of the 

trade (generally VNS are designed to match a specific client’s financing requirements). Any VNS may, therefore, be 

replicated using a static portfolio of vanilla interest rate swaps. VNS are currently cleared by SwapClear in the 

following currencies and indices:

• Euro (EUR) EURIBOR

• UK Sterling (GBP) LIBOR 

• US Dollar (USD) LIBOR

• Japanese Yen (JPY) LIBOR

• Canadian Dollar (CAD) BA-CDOR

• Australian Dollar (AUD) BBR-BBSW

• Norwegian Krone (NOK) NIBOR

• Polish Zloty (PLN) WIBOR

• Swedish Krona (SEK) STIBOR

In response to Clearing Members’ and clients' feedback, LCH now intends to increase the eligibility of the VNS 

products denominated in The Currency Set. The currencies which this submission for determination applies to are

noted as follows with their indices:

• Czech Republic Koruna (CZK) PRIBOR

• Danish Krone (DKK) CIBOR

• Hungarian Forint (HUF) BUBOR

• New Zealand Dollar (NZD) BBR

• South African Rand (ZAR) JIBAR
The tenor of the VNS will not exceed the maximum tenor of the IRS currently eligible for clearing in SwapClear. 

Further, SwapClear has not introduced changes to its risk management or operations in order to launch these 

products.

Factors for determination

The existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data

The volumes traded and cleared in the VNS product are relatively small in comparison with those of the vanilla IRS 

market. Using publicly available information on SwapClear volumes, the VNS products in the currencies currently 

eligible for clearing represent about 1% of the vanilla IRS market. It is expected that the volume ratios would be 

similar for VNS in the additional currencies.

The following table shows the YTD volume figures as at COB 14th March for each of the currencies where VNS are 

currently eligible, with figures representing USD millions of notional. The VNS numbers as a percentage of total rates 

products in each currency is very low. The total notional of rates products includes OIS and FRAs which significantly 

boost the total and so the percentage of VNS to straight “IBOR” IRS is also shown. It can be seen that the values are 

below 1% in all currencies except CAD which is slightly over.

IRS OIS Basis Zeroes FRAs VNS Rates Total VNS %Total VNS %IRS

USD 21,091,950 53,245,856 3,061,681 12,228 38,428,601 66,808 115,907,124 0.058% 0.317%

GBP 3,101,816 2,360,084 329,785 20,710 4,351,953 12,686 10,177,034 0.125% 0.409%

EUR 18,221,636 13,345,977 157,605 4,722 16,175,040 40,630 47,945,609 0.085% 0.223%

JPY 3,500,179 147,491 200,955 0 28,674 82 3,877,381 0.002% 0.002%

AUD 2,122,581 2,038,910 99,738 768 954 4,262,951 0.022% 0.045%

CAD 1,649,569 701,928 58,483 1,931 18,193 2,430,104 0.749% 1.103%

NOK 220,646 568 654,439 547 876,200 0.062% 0.248%

PLN 280,522 145,130 58 425,710 0.014% 0.021%

SEK 725,776 1,681,679 981 2,408,436 0.041% 0.135%
The YTD volumes for the proposed VNS extension currencies were obtained for IRS and two estimates of the 

expected YTD volume (in USD million equivalent) for each new VNS currencies are computed.

IRS 0.5% Estimate 1% Estimate

CHF 397,155 1,986 3,972

CZK 194,301 972 1,943

DKK 79,763 399 798

HKD 299,491 1,497 2,995

HUF 237,749 1,189 2,377

NZD 666,573 3,333 6,666

SGD 559,076 2,795 5,591

ZAR 299,083 1,495 2,991

There have been approximately 70 business days (averaging out holidays) so far this year. The above figures are 

converted to average daily volumes using a divisor of 70.This gives a reasonable estimate of the below average daily 

volumes that can be expected when the products are live and on the basis that all members are submitting VNS 

trades in the new currencies. 

0.5% Estimate 1% Estimate

CHF 28 55

CZK 13 27

DKK 6 11

HKD 21 42

HUF 17 33

NZD 46 93

SGD 39 78

ZAR 21 42
Further, data to value VNS in The Currency Set is readily available from conventional price sources, e.g. Bloomberg 

and Reuters. VNS trades consist of a fixed versus floating leg; VNS are priced as the sum of the discounted cash flows 

of both legs, using the same methodology as for IRS. 

The availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure 

to clear the contract on terms that are consistent with the material terms and trading conventions on which the 

contract is then traded

LCH already has a well-developed rule framework and support infrastructure for clearing IRS. LCH intends to leverage 

this existing operational capability when extending its offering to VNS in The Currency Set.

In order to prepare for the launch of the above products, LCH will perform testing to ensure that is able to clear 

these products in a manner which is consistent with the terms on which they are traded. 

Further to this, LCH notified its Clearing Members of a number of minor rule changes which will be made in order to 

support the clearing of VNS in The Currency Set. The rule changes have been certified with the CFTC and made 

available on the LCH website.

The effect on mitigation of systemic risk, taking into account the size of the market for such contract and the 

resources of the DCO available to clear the contract

The US and EU have already implemented a clearing mandate for interest rate swaps products, where the definition 

contains VNS. In October 2016, the CFTC expanded the clearing requirement to include fixed-floating interest rate 

swaps denominated in Swiss francs, Hong Kong dollars, and Singapore dollars with compliance dates set for 2017 and 

2018. LCH is aware that Canada has also proposed a clearing mandate for VNS products.

The products above do not introduce any novel risks to LCH, as the operational capability to manage the product, 

albeit in other currencies, is already in place. Further expanding the clearing offering will allow participants to 

manage a larger proportion of their risk via a CCP. LCH expects a significant number of current SwapClear Clearing 

Members to start clearing VNS in the additional currencies, once the service is live.

Further, in the event of a default, VNS products would be managed in conjunction with other products using 

portfolio level macro hedges to remove the primary risk of the defaulter ahead of an auction. The introduction of 

these products has no impact on the LCH’s ability to manage defaults or the Clearing Members’ ability to bid in an

auction in a default scenario. 

The effect on competition, including appropriate fees and charges applied to clearing

CME Clearing and Eurex Clearing already support VNS in the currencies which each CCP clears. LCH would expect to 

clear a proportion of the VNS products traded in the market that closely matches the proportion it clears in the 

vanilla IRS market. 

LCH’s fees and charges for the above products will be in line with those charged for existing SwapClear contracts.

The existence of reasonable legal certainty in the event of the insolvency of the relevant DCO or one or more of its 

clearing members with regard to the treatment of customer and swap counterparty positions, funds and property

The level of legal certainty around the clearing of VNS in CZK, DKK, HUF, NZD, and ZAR is in all material respects the 

same as that of the IRS already cleared by LCH.

Insofar as legal certainty in the event of the insolvency of the DCO is concerned, LCH would be wound up under 

English law.
LCH 

' 

The Marke~ Partner 

Further Information (§39.S(b)(iii-vllll 

VNS swaps are by definition less standardised than vanilla IRS, but their bespoke nature is only applicable to a small 

set of parameters of the trade, such as notional schedules, fixed rates and floating spreads. The trades are executed 

under standard ISDA Derivatives Definitions and are covered by the Financial products Markup Language (FpML) 

standard, which Is a protocol used for sharing information on derivatives and other products. 

The participant eligibility standards for VNS in CZK, DKK, HUF, NZD, and ZAR are the same as those for existing 

SwapClear Clearing Members. 

There are no additional price sources required as the products can be valued using prices that are readily available 

from the price sources already used by LCH. 

No material revisions or adjustments to the existing risk models/parameters and/or liquidity risk management 

framework are required for LCH to offer clearing of the new products. 

LCH will make a number of minor changes to its Rulebook to enable clearing of VNS in CZK, DKK, HUF, NZD, and ZAR 

in the following sections: 

• Product Specific Contract Terms and Eligibility Criteria Manual 

• FCM Specific Contract Terms and Eligibility Criteria Manual 

The rule changes have been submitted to the CFTC pursuant to §40.G(a), following notification to the LCH Clearing 

Members. 

LCH engages its Clearing Members in the design and testing of new products at an early stage, through regular 

meetings and working groups. Clearing Members have been formally notified on the changes which LCH is required 

to make to its Rulebook. 

Notice of this submission under CFTC regulation §39.S(b) was given to SwapClear Clearing Members on 3'd January 

2017 and a copy of this notice is provided at Appendix A. Furthermore, this submission is publicly available at: 

http://www.lch.com/rules-regulations/regulatorv-responses 

LCH intends to launch these products with its Clearing Members and clients no earlier than 2ih March, 2017. 

Should you have questions please contact me at Daniel.Maguire@lch.com. 

Yours sincerely 

Daniel J Maguire 

Global Head of Rates & FXalea:Mll:i 

LCH Limited 

cc. Parisa Abadi 

.. 
Appendix A

Notice of this submission provided to SwapClear Clearing Members
To SwapClear Clearing Members 

From David Horner, Head of SwapClear Business Risk

Date 3 January 2017

Subject VNS in CZK/DKK/HUF/NZD/ZAR submission for determination of clearing requirements

Pursuant to CFTC regulation §39.5(b), LCH Limited (“LCH”), a derivatives clearing organization (“DCO”) registered 

with the Commodity Futures Trading Commission (the “CFTC”), is submitting Variable Notional Swaps (“VNS”) 

denominated in CZK, DKK, HUF, NZD, and ZAR for determination of whether mandatory clearing should apply. VNS 

are currently cleared by SwapClear in EUR, GBP, USD, AUD, CAD, JPY, NOK, PLN and SEK. 

LCH now intends to increase the eligibility of the VNS products to include CZK, DKK, HUF, NZD, and ZAR, as well as 

CHF, HKD and SGD. The CFTC clearing mandate published in October 2016 already covers CHF, HKD and SGD

currencies. Hence, this submission for determination only applies to the remaining currencies. As per CFTC 

regulation §39.5(b)(viii), LCH is required to notify members of its submission. This note does not constitute a 

notification that the products are live for clearing. A notice announcing the live data and arrangements for the 

formal product launch will be published separately. 

Factors for determination

The existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data

The volumes traded and cleared in the VNS product are relatively small in comparison with those of the vanilla IRS 

market. Using publicly available information on SwapClear volumes, the VNS products in the currencies currently 

eligible for clearing represent about 1% of the vanilla IRS market. It is expected that the volume ratios would be 

similar for VNS in the additional currencies.

Data to value VNS in CZK, DKK, HUF, NZD, and ZAR is readily available from conventional price sources, e.g. 

Bloomberg and Reuters. VNS trades consist of a fixed versus floating leg; VNS are priced as the sum of the 

discounted cash flows of both legs, using the same methodology as for IRS. 

The availability of rule framework, capacity, operational expertise and resources, and credit support infrastructure 

to clear the contract on terms that are consistent with the material terms and trading conventions on which the 

contract is then traded

LCH already has a well-developed rule framework and support infrastructure for clearing IRS. LCH intends to leverage 

this existing operational capability when extending its offering to VNS in CZK, DKK, HUF, NZD, and ZAR.

In order to prepare for the launch of the above products, LCH will perform testing to ensure that is able to clear 

these products in a manner which is consistent with the terms on which they are traded. 

Further to this, LCH notified its Clearing Members of a number of minor rule changes which will be made in order to 

support the clearing of VNS in the specified currencies. The rule changes will be certified with the CFTC and be made 

available on the LCH website.
The effect on mitigation of systemic risk, taking into account the size of the market for such contract and the 

resources of the DCO available to clear the contract

The US and EU have already implemented a clearing mandate for VNS products and in October, the Commodity 

Futures Trading Commission (“CFTC”) proposed a clearing mandate for swaps denominated in CHF, HKD and SGD. 

LCH is aware that Canada has also proposed a clearing mandate for VNS products.

The products above do not introduce any novel risks to LCH, as the operational capability to manage the product, 

albeit in other currencies, is already in place. Further expanding the clearing offering will allow participants to 

manage a larger proportion of their risk via a CCP. LCH expects a significant number of current SwapClear Clearing 

Members to start clearing VNS in the additional currencies, once the service is live.

Further, in the event of a default, VNS products would be managed in conjunction with other products using 

portfolio level macro hedges to remove the primary risk of the defaulter ahead of an auction. The introduction of 

these products has no impact on the LCH’s ability to manage defaults or the Clearing Members’ ability to bid in an 

auction in a default scenario. 

The effect on competition, including appropriate fees and charges applied to clearing

CME Clearing and Eurex Clearing already support VNS in the currencies which each CCP clears. LCH would expect to 

clear a proportion of the VNS products traded in the market that closely matches the proportion it clears in the 

vanilla IRS market. 

LCH’s fees and charges for the above products will be in line with those charged for existing SwapClear contracts.

The existence of reasonable legal certainty in the event of the insolvency of the relevant DCO or one or more of its 

clearing members with regard to the treatment of customer and swap counterparty positions, funds and property

The level of legal certainty around the clearing of VNS in CZK, DKK, HUF, NZD, and ZAR is in all material respects the 

same as that of the IRS already cleared by LCH.

Insofar as legal certainty in the event of the insolvency of the DCO is concerned, LCH would be wound up under 

English law.

Further Information (§39.5(b)(iii-viii)

VNS swaps are by definition less standardised than vanilla IRS, but their bespoke nature is only applicable to a small 

set of parameters of the trade, such as notional schedules, fixed rates and floating spreads. The trades are executed 

under standard ISDA Derivatives Definitions and are covered by the Financial products Markup Language (FpML) 

standard, which is a protocol used for sharing information on derivatives and other products.

The participant eligibility standards for VNS in CZK, DKK, HUF, NZD, and ZAR are the same as those for existing 

SwapClear Clearing Members. 

There are no additional price sources required as the products can be valued using prices that are readily available 

from the price sources already used by LCH.

No material revisions or adjustments to the existing risk models/parameters and/or liquidity risk management 

framework are required for LCH to offer clearing of the new products.

LCH will make a number of minor changes to its Rulebook to enable clearing of VNS in CZK, DKK, HUF, NZD, and ZAR,

in the following sections:
• Product Specific Contract Terms and Eligibility Criteria Manual

• FCM Specific Contract Terms and Eligibility Criteria Manual

The rule changes will be submitted to the CFTC pursuant to §40.6(a), following notification to the LCH Clearing 

Members. 

LCH engages its Clearing Members in the design and testing of new products at an early stage, through regular 

meetings and working groups. Clearing Members have been formally notified on the changes which LCH is required 

to make to its Rulebook. 

Further information will form part of the full §39.5 filing which will be publically available on the LCH website.

LCH looks forward to working with Clearing Members and the CFTC in the determination of clearing requirements. 

Please do not hesitate to contact me regarding any questions raised by this information.

Regards

David Horner

Head of SwapClear Business Risk