VIA ELECTRONIC EMAIL

31 July 2020

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 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.

iTraxx MSCI ESG Screened Europe Index initiative

LCH intends to add to the list of eligible instruments iTraxx MSCI ESG Screened Europe indices from series 33 

onwards on 5Y tenor, denominated in EUR.

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

LCH is launching iTraxx MSCI ESG Screened Europe indices as part of its CDSClear service, as an extension to 

its current product offering on the second half of August 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 Act in the event.

Factors for determination

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

This index is a sub-index of the iTraxx Europe Main index CDS. A combination of the following datasets from 

MSCI ESG Research is used to determine the composition of the iTraxx MSCI ESG Screened Europe Index.

• MSCI ESG Business Involvement Screening Research

• MSCI ESG Climate Change Metrics

• MSCI ESG Controversies

• MSCI ESG Ratings
2

The MSCI ESG Research data as of the last Business Day of the month prior to the month in which Roll Date 

occurs will be used. This index is constituted of those iTraxx Europe Main index that successfully pass the

screening.

While the iTraxx MSCI ESG Screened Europe index is a new instrument, it is a sub-index of the iTraxx Europe 

Main index CDS, which is heavily traded. Series 33 is the first index launched and was made available to 

trade for the first time on June 22, 2020, the delay between the creation date of March 20th and the first 

trading date was due to the COVID-19 pandemic, and we do expect liquidity to build up rapidly. 

Since June 22,2020, we have seen the index consistently priced by four different banks, we were able to 

observe quotes of 55.5bps (versus 67bps on iTraxx Europe Main), with a bid/ask spread of 3.5bps (versus 

0.5bps on iTraxx Europe Main, the spread is expected to narrow as trading picks up. Two trades for a total 

notional of 47 million were executed bilaterally.

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 MSCI ESG 

screened Europe indices.

In order to prepare for the launch of iTraxx MSCI ESG Screened Europe indices, LCH has performed testing to 

ensure that it is able to clear iTraxx MSCI ESG Screened Europe indices in a manner that is consistent with 

the terms on which iTraxx MSCI ESG Screened Europe indices contracts are traded. 

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

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 MSCI ESG Screened Europe indices are not yet offered to clearing by 

any other CCP neither in the US nor in Europe, although it is likely to be in the short term, and therefore 

LCH’s early engagement in offering clearing on this instrument will foster competition on this market and 

could down the line lead the European authorities to submit the iTraxx MSCI ESG Screened Europe indices to 

mandatory clearing.
3

The fees applicable to the clearing of iTraxx MSCI ESG Screened Europe 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 CFTC2.

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 MSCI ESG Screened Europe indices 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 iTraxx MSCI ESG Screened Europe 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

 

1

https://www.lch.com/index.php/services/cdsclear/fees

2

https://www.lch.com/sites/default/files/media/files/LCH_CDSClear_Fee%20changes_Sel f%20Cert_Modi fed_Formal_16Dec2019.pdf;

https://www.lch.com/system/files/media_root/LCH_CDSClear_Client%20Fee%20Incentive%20scheme_CFTC%20SelfCertification_Formal_17%20O

ct%202018.pdf
4

Risk parameters have been adjusted, as reflected in its Reference Guide: CDS Margin Framework to take into 

account the introduction of the iTraxx MSCI ESG Screened Europe indices:

(i) removing references to specific indices in the document and replacing them with a generic 

reference to an index, 

(ii) removing the fixed 24% value and changing the spread shock formula for it to be applicable 

more generically to both iTraxx Main index and any of its sub index including financial Single 

Names.

Applicable rules, manuals, policies or procedures

No changes.

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

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

françois.faure@lch.com

+33 1 70 37 65 96
5

APPENDIX

Notice of the submission to CDSClear members
Memo

To Clearing Members

From CDSClear

Date 29 June 2020

Subject CFTC Clearing Mandate Determination for iTraxx MSCI ESG Screened Europe 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 is a sub-index of the iTraxx Europe Main index CDS, a combination of the following datasets 

from MSCI ESG Research is used to determine the composition of the iTraxx MSCI ESG Screened Europe 

Index.

• MSCI ESG Business Involvement Screening Research

• MSCI ESG Climate Change Metrics

• MSCI ESG Controversies

• MSCI ESG Ratings

The MSCI ESG Research data as of the last Business Day of the month prior to the month in which Roll 

Date occurs will be used. This index is constituted of those iTraxx Europe Main index that successful pass 

the screening.

While the iTraxx MSCI ESG Screened Europe index is a new instrument, it is a sub-index of the iTraxx 

Europe Main index CDS which is heavily traded. Serie 33 is the first index launched and was made 

available to trade for the first time on June 22nd 2020, the delay between the creation date of March 20th

and the first trading date was due to the COVID-19 pandemic, and we do expect liquidity to build up 

rapidly. 

Since 22nd June 2020, we have seen the index consistently priced by four different banks, we were able to 

observe quotes of 55.5bps (versus 67bps on iTraxx Europe Main), with a bid/ask spread of 3.5bps (versus 

0.5bps on iTraxx Europe Main, the spread is expected to narrow as trading picks up. Two trades for a total 

notional of 47 million were executed bilaterally.
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 MSCI 

ESG screened Europe indices.

In order to prepare for the launch of iTraxx MSCI ESG Screened Europe indices, LCH has performed testing 

to ensure that it is able to clear iTraxx MSCI ESG Screened Europe indices in a manner that is consistent 

with the terms on which iTraxx MSCI ESG Screened Europe indices contracts are traded. 

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

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 MSCI ESG Screened Europe indices are not yet offered to clearing by 

any other CCP neither in the US nor in Europe, although it is likely to be in the short term, and therefore 

LCH’s early engagement in offering clearing on this instrument will foster competition on this market and 

could down the line lead the European authorities to submit the iTraxx MSCI ESG Screened Europe indices 

to mandatory clearing.
The fees applicable to the clearing of iTraxx MSCI ESG Screened Europe 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 CFTC2.

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 MSCI ESG Screened Europe indices 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 iTraxx MSCI ESG Screened Europe 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.

1 https://www.lch.com/index.php/services/cdsclear/fees

2 https://www.lch.com/sites/default/files/media/files/LCH_CDSClear_Fee%20changes_Self%20Cert_Modifed_Formal_16Dec2019.pdf

https://www.lch.com/system/files/media_root/LCH_CDSClear_Client%20Fee%20Incentive%20scheme_CFTC%20SelfCertification_Fo

rmal_17%20Oct%202018.pdf
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

Risk parameters have been adjusted, as reflected in its Reference Guide: CDS Margin Framework to take 

into account the introduction of the iTraxx MSCI ESG Screened Europe indices:

(i) removing references to specific indices in the document and replacing them with a 

generic reference to an index, 

(ii) removing the fixed 24% value and changing the spread shock formula for it to be 

applicable more generically to both iTraxx Main index and any of its sub index including 

financial Single Names.

Applicable rules, manuals, policies or procedures

No changes.