Memo 

To Clearing Members 

From CDSClear 

Date 25 September 2019 

Subject CFTC Clearing Mandate Determination for iTraxx Europe Subordinated Financials Index CDS 

Introduction 

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

(“DCO”) with the Commodity Futures Trading Commission (the “CFTC”), is making the present submission 

for determination of whether mandatory clearing should apply. 

Factors for determination 

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

data. 

In Q1 2019 ICE CLEAR CREDIT and ICE CLEAR EUROPE had a total open interest of €6.9 billion in 

iTraxx Subordinated Financials Index CDS with a total of €7.7 billion in terms of Notional volume. 

Looking at the currently eligible iTraxx Subordinated Financials Index CDS trade notional registered in 

DTCC’sTIW amongst LCH SA’s existing members, we have a total of €6 billion. 

Looking at the currently eligible Single Name bilateral trade notional registered in DTCC’s TIW amongst

LCH SA’s existing members, we have a total of €18.3 billion. It is interesting to note that these notional 

volumes doubled between 2017 and 2018 from €2 billion to €4 billion respectively. This trend has continued 

with a total of €8.5 billion traded as of September 12, 2019.

These figures are all one sided. 

Pricing data is available from Markit and other standard price sources. However, to ensure that LCH always

has access to the best prices, even on illiquid products, we have implemented a process whereby members 

of the CDSClear service (with open interest in a product) contribute prices on a daily basis. These prices 

are aggregated to create our settlement prices. 

The availability of rule framework, capacity, operational expertise 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 CDS indices. LCH 

intends to leverage this existing operational capability when extending its offering to cover iTraxx Europe 

Subordinated Financials indices. 

In order to prepare for the launch of iTraxx Europe Subordinated Financials, LCH has performed testing to 

ensure that it is able to clear iTraxx Europe Subordinated Financials indices in a manner which is consistent 

with the terms on which iTraxx Europe Subordinated Financials indices contracts are traded. Testing for 
iTraxx Europe Subordinated Financials indices has included involvement from clearing members who will 

be actively clearing the product from its go-live. 

As for the other CDS indices currently cleared through LCH, the clearing documentation applicable to the 

CDS cleared contract is based on the market standard documentation. 

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

contract and the resources of the derivatives clearing organization available to clear the contract 

For any newly cleared product, the CCP’s default management protocols, processes and technology are 

modified to allow clearing of the new product. 

The CCP’s risk management framework has been calibrated to handle an expected volume of activity.

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

To the best of our knowledge, iTraxx Europe Subordinated Financials indices are already offered to 

clearing by two clearing houses, one in the US and one in the UK. The extension of the CDS Clearing 

service offered by LCH should allow more competition on this market and could down the line lead the 

European authorities to submit the iTraxx Europe Subordinated Financials indices to mandatory clearing. 

The fees applicable to the clearing of iTraxx Europe Subordinated Financials indices will be the same as 

the fees applicable to other European indices cleared on the platform as denominated in EUR1. The current 

fees for Euro denominated products have been certified with the CFTC.

The existence of reasonable legal certainty in the event of insolvency of the relevant derivatives 

clearing organization 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 iTraxx Europe Subordinated Financials is the same as 

that of any other CDS currently cleared by LCH. 

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

under French law and has provided opinions on the treatment of cleared swaps customer funds as part of 

its DCO registration in 2013.

Product specifications, including copies of any standardized legal documentation, generally 

accepted contract terms, standard practices for managing any life cycle events associated with the 

swap, and the extent to which the swap is electronically confirmable.

 

1 https://www.lch.com/index.php/services/cdsclear/fees
The clearing documentation applicable to iTraxx Europe Subordinated Financials indices is based on the 

market standard iTraxx Europe Untranched Transactions Standard Terms Supplement published by 

Markit. This covers the standardized legal documentation and generally accepted contract terms. 

Standard practices for managing any life cycle events are based on the credit events as defined under the 

2014 ISDA Credit Derivatives Definitions as applicable, and as determined by the ISDA EMEA 

Determination Committee. 

Only standardized CDS are eligible to clearing and as a result they are all electronically confirmable.

Participant eligibility standards, if different from the derivatives clearing organization’s general 

participant eligibility standards 

The participant eligibility standards have not been modified. 

Pricing sources, models, and procedures, demonstrating an ability to obtain sufficient price data to 

measure credit exposures in a timely and accurate manner, including any agreements with clearing 

members to provide price data and copies of executed agreements with third party price vendors, 

and information about any price reference index used, such as the name of the index, the source 

that calculates it, the methodology used to calculate the price reference index and when and where 

it is published publicly 

LCH will continue using a price contribution process as described under Section 5.18 of the CDS Clearing 

Procedures. All members are required to contribute on contracts on which they have open interest. 

Risk management procedures including measurement and monitoring of credit exposures, initial 

and variation margin methodology, methodologies for stress testing and back testing, settlement 

procedures, and default management procedures 

No changes. 

Applicable rules, manuals, policies or procedures

LCH has made some amendments to the CDS clearing documentation to take into account the introduction 

of the iTraxx Europe Subordinated Financials. In particular: 

- the CDS Clearing Supplement has been updated to take into account the characteristics of iTraxx Europe

Subordinated Financials indices, 

- Section 4 of the Procedures has been amended to adapt eligibility criteria to the clearing of iTraxx Europe 

Subordinated Financials indices,

A description of the manner in which the derivatives clearing organization has provided notice of 

the submission to its members and a summary of any views on the submission expressed by the 

members 

The proposed CDS clearing documentation provided to the legal working group of CDSClear members and 

submitted to consultation for the iTraxx Europe Subordinated Financials initiative will be rule certified with 

the CFTC and will be available on LCH’s website.