VIA CFTC Portal

30 November 2020

Mr. Christopher Kirkpatrick

Commodity Futures Trading Commission

1155 21st Street NW

Three Lafayette Centre

Washington, DC 20581

Re: Clearing of options on index credit default swaps in respect of North American indices 

Dear Mr Kirkpatrick,

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.

CDX Swaptions initiative

LCH intends to add to the list of eligible instruments swaptions on CDX Investment Grade and High Yield 

indices.

Eligibility to clear swaps and ability to maintain compliance under a mandatory clearing determination 

LCH is launching CDX.NA.IG and CDX.NA.HY index options as part of its CDSClear service, as an extension to 

its current product offering on [...] 2020 subject to any relevant regulatory review or approval process duly 

completed. Under CFTC regulation § 39.5(a)(1), LCH is eligible to clear these swaps and will be able to 

maintain compliance with section 5b(c)(2) of the Commodity Exchange Act in the event.

Factors for determination

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

This index options are currently heavily traded but not yet cleared by any CCP. 

Swaptions eligible for clearing will include physically delivered European style Swaptions with maturities up to 

3 months on the following underlying CDX index CDS. 

• On-The-Run 5 Year CDX.NA.IG and CDX.NA.HY

• On-The-Run-1 5 Year CDX.NA.IG and CDX.NA.HY
2

There are always three option maturities available for clearing on the On-The-Run index Series (1, 2 and 3 

months) and there are three option maturities available for clearing on the On-The-Run-1 index Series (1, 2 

and 3 months) just after the roll, but no new maturities are made available on that index Series after that 

(which is the same framework as for iTraxx Swaptions).

As of June 2020, the outstanding notional of trades eligible for clearing amongst all our market participants is 

$1.7 Billion in CDX.NA.HY Swaptions and $37.08 Billion in CDX.NA.IG Swaptions. Because the US entities 

are the most active on the CDX Swaptions and we currently only have one US member, these numbers 

represent only a fraction of the overall liquidity in this instrument. Additionally it is important to note that due to 

Credit Swaptions’ short expiry cycle (3 months being the most active), open interest is not a good gauge for 

the actual trading. It is also estimated that 80% of traded volumes are transactions executed between clients 

and dealers.

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 Index Swaptions. 

LCH intends to leverage this existing operational capability when extending its offering to cover the CDX 

Swaptions.

In order to prepare for the launch of these Swaptions, LCH has performed testing to ensure that it is able to 

clear CDX Swaptions in a manner that is consistent with the terms on which these contracts are traded. 

As for the other Index Swaptions currently cleared through LCH, the clearing documentation applicable to 

the CDX Swaptions 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

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, Swaptions on CDX.NA.HY and CDX.NA.IG are not yet offered to clearing by any 

other CCP in the US or in Europe, although it is likely to be in the short term, and therefore LCH’s early 

engagement in offering clearing on these instruments will foster competition on this market. 

The fees applicable to the clearing of CDX Swaptions are $15 per million gross notional cleared for General 

Members, $18 per million gross notional cleared for Select Members and $20 per million gross notional 

cleared for Clients. The Introductory and Unlimited Tariff schemes, alongside the Discounted rates will be 

applicable to the cumulative iTraxx and CDX Swaption volumes.The current fees for CDX Swaptions have 

been already rule certified with the CFTC.

1

 

1

https://www.lch.com/system/files/media_root/CDSClear_CIO%20Fee%20Rebate_CFTC%20SelfCert_Formal_1%20April%202019.pdf
3

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 CDX Swaptions is the same as that of any other Credit 

instrument 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.

The clearing documentation applicable to the CDX Swaptions is based on the market standard CDX 

Untranched Transactions Swaptions 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 Americas 

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 to the current framework for Swaptions were required, but a change to the vega margin 

calculation has been introduced. Instead of relying on shocks applied to unobservable parameters of a model, 

a new methodology focusing on the observable changes in volatilities has been developed. 

Applicable rules, manuals, policies or procedures

 
4

• LCH has made some amendments to the CDS Clearing Documentation to take into account the 

clearing of Swaptions on CDX Investment Grade and High Yield indices: Part C of the CDS Clearing 

Supplement has been updated mainly to refer to the applicable documentation to CDX Swaptions;

• Section 5.18 of the Procedures has been updated, extending the scope of the price contribution 

process to CDX Swaptions; and 

• A new Clearing Notice regarding the creation of matched pairs will include the applicable maximum 

notional amounts for CDX swaptions.

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 amended CDS Clearing Documentation has been provided to the legal working group of the 

CDSClear clearing members.

Clearing members have also been informed via the notice attached in Appendix.

No specific comments have been expressed by the clearing members.

Yours sincerely

Francois Faure

Chief Compliance Officer

+33 1 70 37 65 96
5

APPENDIX

- Notice sent to CDSClear members

9 5(b)_Member_Consultation_Memo.pdf
Memo

To Clearing Members

From CDSClear

Date 08 October 2020

Subject CFTC Clearing Mandate Determination for Swaptions on North American 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.

This index options are currently heavily traded but not yet cleared by any CCP. 

Swaptions eligible for clearing will include physically delivered European style Swaptions with maturities up 

to 3 months on the following underlying CDX index CDS. 

• On-The-Run 5 Year CDX.NA.IG and CDX.NA.HY

• On-The-Run-1 5 Year CDX.NA.IG and CDX.NA.HY

There are always three option maturities available for clearing on the On-The-Run index Series (1, 2 and 3 

months) and there are three option maturities available for clearing on the On-The-Run-1 index Series (1, 2 

and 3 months) just after the roll, but no new maturities are made available on that index Series after that 

(which is the same framework as for iTraxx Swaptions).

As of June 2020, the outstanding notional of trades eligible for clearing amongst all our market participants is 

$1.7 Billion in CDX.NA.HY Swaptions and $37.08 Billion in CDX.NA.IG Swaptions. Because the US entities 

are the most active on the CDX Swaptions and we currently only have one US member, these numbers 

represent only a fraction of the overall liquidity in this instrument. Additionally it is important to note that due 

to Credit Swaptions’ short expiry cycle (3 months being the most active), open interest is not a good gauge 

for the actual trading. It is also estimated that 80% of traded volumes are transactions executed between 

clients and dealers.
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 Index Swaptions. 

LCH intends to leverage this existing operational capability when extending its offering to cover the CDX 

Swaptions.

In order to prepare for the launch of these Swaptions, LCH has performed testing to ensure that it is able to 

clear CDX Swaptions in a manner that is consistent with the terms on which these contracts are traded. 

As for the other Index Swaptions currently cleared through LCH, the clearing documentation applicable to 

the CDX Swaptions 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

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, Swaptions on CDX.NA.HY and CDX.NA.IG are not yet offered to clearing by 

any other CCP in the US or in Europe, although it is likely to be in the short term, and therefore LCH’s early 

engagement in offering clearing on these instruments will foster competition on this market. 

The fees applicable to the clearing of CDX Swaptions are $15 per million gross notional cleared for General 

Members, $18 per million gross notional cleared for Select Members and $20 per million gross notional 

cleared for Clients. The Introductory and Unlimited Tariff schemes, alongside the Discounted rates will be 

applicable to the cumulative iTraxx and CDX Swaption volumes.The current fees for CDX Swaptions have 

been already rule certified with the CFTC.

1

1https://www.lch.com/system/files/media_root/CDSClear_CIO%20Fee%20Rebate_CFTC%20SelfCert_Formal_1%20April%202019.pdf
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 CDX Swaptions is the same as that of any other Credit 

instrument 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.

The clearing documentation applicable to the CDX Swaptions is based on the market standard CDX 

Untranched Transactions Swaptions 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 Americas 

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 to the current framework for Swaptions were required, but a change to the vega margin 

calculation has been introduced. Instead of relying on shocks applied to unobservable parameters of a model, 

a new methodology focusing on the observable changes in volatilities has been developed. 
Applicable rules, manuals, policies or procedures

• LCH has made some amendments to the CDS Clearing Documentation to take into account the 

clearing of Swaptions on CDX Investment Grade and High Yield indices: Part C of the CDS Clearing 

Supplement has been updated mainly to refer to the applicable documentation to CDX Swaptions;

• Section 5.18 of the Procedures has been updated, extending the scope of the price contribution 

process to CDX Swaptions; and 

• A new Clearing Notice regarding the creation of matched pairs will include the applicable maximum 

notional amounts for CDX swaptions.