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LCH Group Holdings Limited | LCH Limited | Banque Centrale de Compensation | LCH.Clearnet LLC

LCH Limited. Registered in England No. 25932 Registered Office: 10 Paternoster Square, London, EC4M 7LSs

VIA CFTC Portal

April 20, 2022

Mr. Christopher Kirkpatrick

Commodity Futures Trading Commission

1155 21st Street NW

Three Lafayette Centre

Washington, DC 20581

RE: LCH Limited Submission Related to Mandatory Clearing Determination – HKD 

OIS and Basis Swaps

Dear Mr. Kirkpatrick:

LCH Limited (“LCH”), a derivatives clearing organization (“DCO”) registered with the 

Commodity Futures Trading Commission (“CFTC”), is submitting (pursuant to CFTC 

regulation §39.5(b)), Overnight Interest Rate Swaps (“OIS”) and Basis Swaps referencing 

the Hong Kong Dollar Overnight Index Average (“HONIA”) rate (together, “Submitted

Swaps”) for a determination of whether mandatory clearing should apply. 

§39.5 Review of swaps for Commission determination on clearing requirement. 

(b) Swap submissions. 

(2) A derivatives clearing organization shall submit swaps to the Commission, to the 

extent reasonable and practicable to do so, by group, category, type, or class of 

swaps.

LCH proposes to clear the Submitted Swaps to a maximum eligibility of 11 years. The

below table identifies the characteristics of the Submitted Swaps; specifically the instrument 

type, currency, legs of the swap, whether variable notional applies, maximum tenor, and 

notional amount.

1

1 All SwapClear contracts are governed by the 2021 ISDA interest rate derivatives definitions (“2021 

Definitions”). However, to accommodate member systems, LCH makes swaps referencing floating rate 

options defined under the 2006 ISDA definitions (HKD-HONIX-OIS-COMPOUND) eligible for clearing. When 

the swap is cleared, LCH applies the equivalent floating rate option under the 2021 Definitions (HKD-HONIAOIS-Compound). Accordingly, a SwapClear contract resulting from a transaction referencing HKD-HONIXOIS-COMPOUND is equivalent to, and fungible with, a SwapClear contract resulting from a transaction 

referencing HKD-HONIA-OIS-Compound, and both are governed by the 2021 Definitions.
Instrument Currency Leg 1 Leg 2 Variable 

Notional

Maximum 

Tenor

Notional Amount

(USD)

OIS HKD Fixed HKD-HONIXOISCOMPOUNDYes 4,050 

days

0.01-

99,999,999,999.99

OIS HKD Fixed HKD-HONIAOIS 

Compound

Yes 4,050 

days

0.01-

99,999,999,999.99

Basis Swap HKD HKD-HONIXOISCOMPOUND HKD-HIBORHKAB Yes 4,050 

days

0.01-

99,999,999,999.99

Basis Swap HKD HKD-HONIAOIS 

Compound

HKD-HIBOR Yes 4,050 

days

0.01-

99,999,999,999.99

§39.5(b)(3)(i) Statement of Eligibility

A statement that the DCO is eligible to accept the swap, or group, category, type, or 

class of swaps for clearing and describes the extent to which, if the CFTC were to 

determine that the swap, or group, category, type, or class of swaps is required to be 

cleared, the DCO will be able to maintain compliance with section 5b(c)(2) of the Act.

LCH is eligible to accept the Submitted Swaps for clearing and will be able to clear the 

Submitted Swaps in compliance with Section 5b(c)(2) of the United States Commodity 

Exchange Act (“Act”), including if the CFTC were to determine that such swaps are required 

to be cleared. LCH has a well-developed rule framework and support infrastructure for 

clearing interest rates swaps. LCH will leverage this existing operational capability to offer 

the clearing of the Submitted Swaps. 

In order to prepare for the launch of these products, LCH will perform testing to ensure that 

it is able to clear these products in a manner which is consistent with the terms on which 

they are traded.

Further to this, LCH will notify its clearing members of a number of changes to the 

procedure documents which will be made in order to support the clearing of the Submitted 

Swaps in the above mentioned tenors. The procedural changes have been certified with the 

CFTC and are available on the LCH website.

§39.5(b)(3)(ii) Information Related to the Act’s Swap Submission Review 

Requirements

A statement that includes, but is not limited to, information that will assist the 

Commission in making a quantitative and qualitative assessment of the following 

factors:

(A) The existence of significant outstanding notional exposures, trading liquidity, 

and adequate pricing data.

The Hong Kong Treasury Markets Association (TMA) has been the source and owner of 

HONIA since April 5, 2016. HONIA is a volume-weighted mean of overnight HKD 

unsecured interbank lending transactions executed through a panel of five contributing 

money brokers between 8:00 a.m. and 4:00 p.m. Hong Kong time on a business day.
LCH publishes volume and outstanding notional data and will do so for the Submitted 

Swaps once launched. 

Please see:

Exhibit 1 – LCH Volumes (https://www.lch.com/services/swapclear/volumes).

(B) 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 has a well-developed rule framework and support infrastructure for clearing interest 

rates swaps. LCH will leverage this existing operational capability to offer clearing of the 

Submitted Swaps.

(C) 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.

Central counterparty clearing of a product brings a number of well-established benefits to 

the market in that product, including to its oversight. Clearing imposes rigorous riskmanagement on all counterparties, including the collection of initial margin and the 

exchange of variation margin; it promotes standardization at all stages of trade 

management, which feeds back into improved market liquidity; and it introduces 

transparency, enabling more efficient market surveillance and monitoring of potential 

systemic risks.

The introduction of the Submitted Swaps does not introduce any new or novel risks to the 

SwapClear service, and the policies, procedures and operational aspects of the service 

remain unchanged. 

LCH will use HONIA for HKD product discounting and Price Alignment Interest (“PAI”).

As is the case for all cleared products, it is the view of LCH that clearing the Submitted 

Swaps is beneficial from a systemic risk perspective. Clearing avoids complex bilateral 

relationships and provides for default management of a failed institution to be handled 

centrally by the clearing house. Additionally, since trades are centrally held by LCH, any 

implementation of fallbacks would be conducted under a single rule book, with LCH being 

the determining party. Furthermore, LCH provides a centralized view of risk for its cleared 

products and makes the visibility of risk positions more transparent.

(D) The effect on competition, including appropriate fees and charges applied to 

clearing.

LCH does not believe the clearing of the Submitted Swaps will have any negative impact on 

competition. Other CCPs currently clear HONIA-based Swaps.

LCH’s fees and charges for the Submitted Swaps are in line with those charged for existing 

SwapClear contracts. Please see Exhibit 2 – LCH Fees 

(https://www.lch.com/services/swapclear/fees).
(E) The existence of reasonable legal certainty in the event of the 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.

LCH believes that there is reasonable legal certainty in the event of the insolvency of LCH 

or a clearing member with regard to the treatment of house and customer positions, funds 

and property in connection with the clearing of the Submitted Swaps. Importantly, the level 

of legal certainty around the clearing of Submitted Swaps is in all material respects the 

same as that of the products already cleared in the LCH SwapClear service.

LCH’s Default Rules, contained in its Rulebook, set out that it is entitled to place a clearing 

member in default if it appears to LCH that the clearing member is unable, or is likely to 

become unable, to meet its obligations in respect of one or more contracts. The Default 

Rules set out the steps that LCH may take in respect of a defaulter, including entering into 

contracts to hedge market risk, selling any security, porting customer accounts of that 

clearing member to another clearing member, auctioning the defaulter’s proprietary portfolio 

to other clearing members (to include any customer accounts of that clearing member 

which could not be ported to another clearing member), otherwise closing out any open 

contracts, and generally taking such action as LCH may deem necessary for its protection. 

The sequence of actions will be determined by a number of factors, including size and 

characteristics of the defaulted clearing member’s portfolio and the market environment.

Please see Exhibit 3 – LCH Rules (https://www.lch.com/resources/rulebooks/lch-limited).

Insofar as legal certainty in the event of the insolvency of the DCO is concerned, LCH 

would be wound up under English law.

§39.5(b)(3)(iii) Product Specifications

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.

Product terms for the Submitted Swaps are market standard and follow 2021 ISDA 

Definitions2 and are also part of the Financial products Markup Language (FpML) standard3

which is a protocol for sharing information on derivatives and other products. The Floating 

Rate Option for HONIA under the 2021 ISDA definitions is HKD-HONIA-OIS Compound.

The terms of the Submitted Swaps can be found in the LCH Product Specific Contract 

Terms and Eligibility Criteria Manual. Please see Exhibit 3 – LCH Rules 

(https://www.lch.com/resources/rulebooks/lch-limited) which includes links to the Product 

Specific Contract Terms and Eligibility Criteria Manuals although they are not part of the 

rulebook. A detailed specification for the Submitted Swaps will be available to members and 

clients in line with those supplied for all existing products.

2 https://www.isda.org/2021/10/04/2021-isda-interest-rate-derivatives-definitions/

3 http://www.fpml.org/coding-scheme/floating-rate-index published on 21st December 2017
§39.5(b)(3)(iv) Participant Eligibility

Participant eligibility standards, if different from the derivatives clearing 

organization's general participant eligibility standards.

The participant eligibility standards for the Submitted Swaps are the same as those for 

existing SwapClear clearing members. 

§39.5(b)(3)(v) Price Discovery

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 how often it is 

calculated, and when and where it is published publicly.

LCH will use two inter-dealer broker (“IDB”) quotes and one non-IDB quote for HKD along 

the curve.

Please see:

Exhibit 4 – LCH Settlement Prices

(https://www.lch.com/services/swapclear/essentials/settlement-prices)

Confidential Exhibit 5 – Contract and Market Acceptability Policy

Confidential Exhibit 6 – SwapClear Zero Coupon Rate Curve Configuration

Confidential Exhibit 7 – SwapClear Zero Coupon Rate Curve Construction Methodology

§39.5(b)(3)(vi) Risk Management 

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.

The clearing of the Submitted Swaps and the use of HONIA for discounting has been 

entirely accommodated within the existing LCH framework for measurement and 

management of risk and for the process of default management. The introduction of a 

clearing mandate for the product would not necessitate any change to these processes. 

Please see: 

Confidential Exhibit 8 – SwapClear & Listed Rates Risk Management Framework

Confidential Exhibit 9 – Default Management Policy

§39.5(b)(3)(vii) Applicable Rules, Manuals, Policies, or Procedures

Please see Exhibit 3 – LCH Rules (https://www.lch.com/resources/rulebooks/lch-limited).

§39.5(b)(3)(viii) Communications to Members Regarding this Submission

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 (a copy of the notice to members shall be 

included with the submission).

LCH engages its clearing members in the design and testing of new products at an early 

stage, through regular meetings and working groups. No material feedback was received in 

relation to this initiative. Prior to clearing the Submitted Swaps, clearing members will be 

notified of required Rulebook changes. Furthermore, this submission related to a mandatory 

clearing determination is publicly available.

4

LCH intends to launch these products with its Clearing Members and clients no earlier than 

April 25, 2022.

Should you have questions please contact me at michelle.weiler@lseg.com.

Sincerely,

Michelle Weiler

US Compliance Officer

LCH Limited

4 https://www.lch.com/resources/regulatory-responses
Exhibits

Exhibit 1 – LCH Volumes (https://www.lch.com/services/swapclear/volumes)

Exhibit 2 – LCH Fees (https://www.lch.com/services/swapclear/fees)

Exhibit 3 – LCH Rules (https://www.lch.com/resources/rulebooks/lch-limited)

Exhibit 4 – LCH Settlement Prices 

(https://www.lch.com/services/swapclear/essentials/settlement-prices)

Confidential Exhibit 5 – Contract and Market Acceptability Policy

Confidential Exhibit 6 – SwapClear Zero Coupon Rate Curve Configuration

Confidential Exhibit 7 – SwapClear Zero Coupon Rate Curve Construction Methodology

Confidential Exhibit 8 – SwapClear & Listed Rates Risk Management Framework

Confidential Exhibit 9 – Default Management Policy