LCH l 'lw \larkct< 

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VIA ELECTRONIC EMAIL 

14 April 2016 

Mr Christopher Kirkpatrick 

Commodity Futures Trading Commission 

1155 21st Street NW 

Three Lafayette Centre 

Washington DC 20581 

Dear Mr Kirkpatrick, 

Pursuant to CFTC regulation 39.5(b), LCH.Clearnet 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. 

COX IG initiative 

LCH intends to add to the list of eligible instruments CDX.NA.IG indices from series 7 onwards on 3Y, 5Y, 

?Y and 10Y tenors, denominated in USO, as well as the related US Single Names constituents 

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

determination 

LCH is launching CDX.NA.IG indices and related single name constituents as part of its CDSClear service, 

as an extension to its current product offering on April 18th, 2016. 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 Act in the 

event. 

Factors for determination 

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

data. 

LCH has reviewed the available data from the DTCC Trade Information Warehouse (TIW) to determine the 

size of the market in CDX.NA.IG indexes. Data available for the week ending 01-Apr-2016 shows that 

there is 215 Bn USO equivalent of net notional outstanding in the CDX.NA.IG indexes across all series. The 

most recent series 26 was issued on 21 March 2016. For this index specifically there is 48 Bn USO 

equivalent of net notional outstanding and 153 Bn USO equivalent of gross notional. 

LCH.Clearnet SA 18, rue du Quatre Septembre, 75002 Paris 

Tel: +33 (0)1 70 37 65 00 Fax: +33 (0)1 70 37 65 01 www.lchclearnet.com 

LCH.Clearnet Group Limited I LCH.Clearnet Limited I LCH.Clearnet SA 

Banque Centrale de Compensation - Societe Anonyme au capital de 113 066 860,26 €Siege social: 18, rue du Quatre Septembre - 75002 Paris, France 

692 032 485 RCS Paris - No TVA GEE: FR 65 692032485 
LCH Tl ll' \I a rl-l'l .. : 

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Public information is not available about trades that have been terminated or compressed. Therefore the 

gross notional number cited above will be lower than the total amount traded on this index because it is 

based on live trades in the TIW only. 

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 CDX.NA.IG 

indices and related US Single Names constituents. 

In order to prepare for the launch of CDX.NA.IG, LCH has performed testing to ensure that it is able to clear 

CDX.NA.IG indices and related US Single Names constituents in a manner which is consistent with the 

terms on which CDX.NA.IG indices and related US Single Names contracts are traded. Testing for 

CDX.NA.IG indices and related US Single Names constituents 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, CDX.NA.IG indices and related US Single Names constituents are already 

offered to clearing by two clearing houses in the US. 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 CDX.NA.IG indices to mandatory clearing. 

The fees applicable to the clearing of CDX.NA.IG indices and related US Single Names constituents will be 

different from the fees applicable to other indices cleared on the platform as denominated in USO 1

. Both the 

current fees as well as the new fees for USO denominated products have been certified with the CFTC. 

1 http://www.lch.com/asset-classes/otc-credit-default-swaps/fees 

2 
LCH I hl' \I t1 rkl'! -.: 

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The existence of reasonable legal certainty in the invent 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.NA.IG indices and related US Single Names 

constituents 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 

The clearing documentation applicable to CDX.NA.IG indices and related US Single Names constituents is 

based on the market standards COX Untranched Transactions Standard Terms Supplement and the COX 

Legacy 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 

either the 2003 ISDA Credit Derivatives Definitions or 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 an 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 

In order to fully capture the risk resulting from the addition of USO denominated CDX.NA.IG Indices and 

related single names constituents, the key principles adopted by LCH CDSClear are as follows: 

3 
LCH 1111' \Jnrhl't': 

Part 11vr 

• European operating hours: US products will be cleared during CDSClear existing European 

business hours (9.00am to 7.00pm CET). A potential extension to US business hours could be 

considered in a later phase. 

• Single risk model for both EU and US products: credit given for netting benefits between the 

two product sets, 

• Pass-through flows will be made in USO (VM, PAI, Upfront cash amounts, Coupons, Loss 

settlements, etc ... ). 

• Stress Loss will be computed in USO and then converted into EUR with a stressed FX Haircut. 

• Initial Margin and add-ons will be called in EUR via either: 

• Historical or simulated FX return in spread margin 

• FX haircut for all other margins: 

o Short Charge: same number of defaults considered, entity net short exposures 

computed in the domestic currency and then converted in EUR 

o Interest Rate Risk Margin: USO and EUR interest rate curves considered as 

independent, margin computed in USO and converted in EUR. 

o Recovery Rate Risk Margin: computed in USO for USO products and then 

converted into EUR 

o Wrong Way Risk Margin: computed in USD for US financials, based on US 

synthetic Financial Index and specific Correlation scenario/parameters. Netting 

with WWR coming from EUR products allowed but offsets capped at 50%. 

o Liquidity Charge: computed in USO for USO products and then converted into 

EUR 

• USO settlement process will be performed via an existing Commercial Bank partner and 

relationship - Bank of New York Mellon - USO payments will be performed during our existing 

collateral slots. 

With respect to stress-testing, the stress tests considered for the US products just replicate the existing 

scenarios selected for European products as the set of dates has been defined to cover all significant 

stress market moves worldwide. 

Four additional scenarios have been created, aiming at capturing a de-correlation event between US and 

European products as this risk was not already captured in the current stress test framework. 

No change will be made to the default management group. There will be an impact on the window for 

hedging the defaulting member's portfolio, as LCH will need both NY and London to be open to perform the 

hedging. That still leaves at least five full hours per day from noon till Spm London time. This is similar for 

the auction phase. CDSClear has to build the portfolios to be auctioned and can split in sub portfolios if 

deemed necessary. There should not be any additional constraint by adding US products. 

Applicable rules, manuals, policies or procedures 

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

of the CDX.NA.IG indices and related US Single Names.constituents. In particular: 

- the CDS Clearing Supplement has been updated to take into account the characteristics of CDX.NA.IG 

indices and related US Single Names constituents, 

- Section 2 of the Procedures is now incorporating the extraordinary margin which aims to cover the risk of 

any price/spread fluctuations and has been updated to provide that the contigency variation margin can be 

called on a business day that is also a holiday in the New York calendar; 

4 
LCH I lH· \larkl'I.,· 

Pa rl m·r . 

- Section 3 of the Procedures has been amended to provide that cash payment obligations for CDX.NA.IG 

indices and related US Single Names constituents shall be made in USO, through The Bank of New York 

Mellon, 

- Section 4 of the Procedures has been amended to adapt eligibility criteria to the clearing of CDX.NA.IG 

indices and related US Single Names constituents, 

- Section 5 of the Procedures has been updated to provide that the contribution to end of day prices in 

respect of CDX.NA.IG indices and related US Single Names constituents will be only requested on 

business days applicable to those products, 

- the CDS Clearing Rule Book has been amended to reflect the changes listed above and to provide that 

LCH will be entitled to convert any US Dollar amount in Euro in any circumstance preventing the cash 

payments from being performed in US Dollar and will have the possibility to make an additional collateral 

call in US Dollar. 

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 clearing documentation provided to legal working group and submitted to consultation is attached to 

the self certification available on LCH.Clearnet's webitse2

. 

Clearing members have been informed via the attached notice. 

No material comments have been expressed by the clearing members. 

Yours sincerely 

Frank Soussan 

Global Head of CDSClear 

LCH.Clearnet 

2 http://www.lchcleamet.com/documents/731485/762520/LCH.Cleamet-SA-SelfCertification%E2%80%93COX. NA.IG+products.pdf/b27f4f62-00f9-41 c8-b07 a-49dac5125b51 

5 
LCH !'Ill' \hrkl't< 

I'; t J'l lll r 

Memo 

To Clearing Members 

From CDS Clear 

Date 11 April 2016 

Subject CFTC Clearing Mandate Determination for CDX.IG 

Introduction 

Pursuant to CFTC regulation 39.5(b), LCH.Clearnet SA ("LCH"), a derivatives clearing organization ("DCO") 

registered with the Commodity Futures Trading Commission (the "CFTC"), is making the present CDX.IG 

submission for determination of whether mandatory clearing should apply. This is a standard part of the 

regulatory submission for any new product approval. 

As per CFTC regulation §39.5(b)(viii), LCH is required to provide notice to members of its submission. This 

note does not constitute a notification that the product is live for clearing. A separate notice announcing the 

live date and arrangements for the formal product launch will be published shortly. 

Please can you provide feedback on the details below by 14 April 2016. In particular, your views on the 

suitability of this product for a CFTC clearing mandate. 

Factors for determination 

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

data. 

LCH has reviewed the available data from the DTCC Trade Information Warehouse (TIW) to determine the 

size of the market in COX IG indexes. Data available for the week ending 01 April 2016 shows that there is 

215 Bn USO equivalent of net notional outstanding in the COX IG indexes across all series. The most 

recent series 26 was issued on 21 March 2016. For this index specifically there is 48 Bn USO equivalent of 

net notional outstanding and 153 Bn USO equivalent of gross notional. 

Public information is not available about trades that have been terminated or compressed. Therefore the 

gross notional number cited above will be lower than the total amount traded on this index because it is 

based on live trades in the TIW only. 

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. 

6 
LCH 'I ht· \larkl'!-..' 

Part lll'r 

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 COX IG indices 

and related US Single Names constituents. 

In order to prepare for the launch of COX IG, LCH has performed testing to ensure that it is able to clear 

COX IG indices and related US Single Names constituents in a manner which is consistent with the terms 

on which COX IG indices and related US Single Names contracts are traded. Testing for COX IG indices 

and related US Single Names constituents 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 LCH'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, COX IG indices and related US Single Names constituents are already 

offered to clearing by two clearing houses in the US. 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 COX IG indices to mandatory clearing. 

The fees applicable to the clearing of COX IG indices and related US Single Names constituents will be 

different from the fees applicable to other indices cleared on the platform as denominated in USO. Both the 

current fees as well as the new fees for USO denominated products have been certified with the CFTC. 

The existence of reasonable legal certainty in the invent 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 COX IG indices and related US Single Names 

constituents 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. 

7 
LCH Tlil' \l;1rkt 1 ... : 

1'<1 rt Ill 'l" 

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 COX IG indices and related US Single Names constituents is 

based on the market standards COX Untranched Transactions Standard Terms Supplement and the COX 

Legacy 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 

either the 2003 ISDA Credit Derivatives Definitions or 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 an 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 

In order to fully capture the risk resulting from the addition of USO denominated COX IG Indices and related 

single names constituents, the key principles adopted by LCH CDSClear are as follows: 

• European operating hours: US products will be cleared during CDSClear existing European 

business hours (9.00am to 7.00pm CET). A potential extension to US business hours could be 

considered in a later phase. 

• Single risk model for both EU and US products: credit given for netting benefits between the 

two product sets, 

• Pass-through flows will be made in USO (VM, PAI, Upfront cash amounts, Coupons, Loss 

settlements, etc ... ). 

• Stress Loss will be computed in USO and then converted into EUR with a stressed FX Haircut. 

• Initial Margin and add-ons will be called in EUR via either: 

• Historical or simulated FX return in spread margin 

• FX haircut for all other margins: 

8 
LCH Tlw \lark, t< 

Parl lll'I' 

o Short Charge: same number of defaults considered, entity net short exposures 

computed in the domestic currency and then converted in EUR 

o Interest Rate Risk Margin: USO and EUR interest rate curves considered as 

independent, margin computed in USO and converted in EUR. 

o Recovery Rate Risk Margin: computed in USO for USO products and then 

converted into EUR 

o Wrong Way Risk Margin: computed in USO for US financials, based on US 

synthetic Financial Index and specific Correlation scenario/parameters. Netting 

with WWR coming from EUR products allowed but offsets capped at 50%. 

o Liquidity Charge: computed in USO for USO products and then converted into 

EUR 

• USO settlement process will be performed via an existing Commercial Bank partner and 

relationship - Bank of New York Mellon - USO payments will be performed during our existing 

collateral slots. 

With respect to stress-testing, the stress tests considered for the US products just replicate the existing 

scenarios selected for European products as the set of dates has been defined to cover all significant 

stress market moves worldwide. 

Four additional scenarios have been created, aiming at capturing a de-correlation event between US and 

European products as this risk was not already captured in the current stress test framework. 

No change will be made to the default management group. There will be an impact on the window for 

hedging the defaulting member's portfolio, as LCH will need both NY and London to be open to perform the 

hedging. That still leaves at least five full hours per day from noon till 5pm London time. This is similar for 

the auction phase. CDSClear has to build the portfolios to be auctioned and can split in sub portfolios if 

deemed necessary. There should not be any additional constraint by adding US products. 

Applicable rules, manuals, policies or procedures 

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

of the COX IG indices and related US Single Names constituents. In particular: 

- the CDS Clearing Supplement has been updated to take into account the characteristics of COX IG 

indices and related US Single Names constituents 

- Section 2 of the Procedures is now incorporating the extraordinary margin which aims to cover the risk of 

any price/spread fluctuations and has been updated to provide that the contingency variation margin can be 

called on a business day that is also a holiday in the New York calendar; 

- Section 3 of the Procedures has been amended to provide that cash payment obligations for CDX IG 

indices and related US Single Names constituents shall be made in USO, through The Bank of New York 

Mellon 

- Section 4 of the Procedures has been amended to adapt eligibility criteria to the clearing of COX IG 

indices and related US Single Names constituents 

- Section 5 of the Procedures has been updated to provide that the contribution to end of day prices in 

respect of COX IG indices and related US Single Names constituents will be only requested on business 

days applicable to those products 

- the CDS Clearing Rule Book has been amended to reflect the changes listed above and to provide that 

LCH will be entitled to convert any US Dollar amount in Euro in any circumstance preventing the cash 

9 
LCH rlw \ larkl'I < 

1';1 rt lllT 

payments from being performed in US Dollar and will have the possibility to make an additional collateral 

call in US Dollar. 

10