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Part IHT 

VIA ELECTRONIC EMAIL 

Mr Christopher J. Kirkpatrick 

Secretary 

Commodity Futures Trading Commission 

1155 21st Street NW 

Three Lafayette Centre 

Washington DC 20581 

Dear Mr Kirkpatrick, 

December 14th, 2017 

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

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

submission for determination of whether mandatory clearing should apply. 

Credit Index Options ("CIO") initiative 

LCH intends to add to the list of eligible instruments CIO transactions. 

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

determination 

LCH is launching CIO as part of its CDSClear service, as an extension to its current product offering. LCH 

is proposing that the implementation date of this new clearing service will be on or after December 13th 

2017, subject to any relevant regulatory review or approval process duly completed. LCH has been 

authorised by the CFTC to file CFTC regulation §39.5(a)(1) under which LCH is deemed eligible to clear 

these index options 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 data that was made available by the DTCC Trade Information Warehouse (TIW) to 

determine the size of the market in iTraxx Europe Main and Crossover index CDS Swaptions. Data 

available for the last week of January 2017, for example, shows that there was 157.4 Bn USO equivalent of 

gross notional outstanding for 2,066 trades in the iTraxx Europe Main on-the-run series 5 YR index options 

(1 M, 2M and 3M expiries) and 31 Bn USO equivalent of gross notional outstanding for 539 trades in the 

iTraxx Crossover on-the-run series 5 YR index Swaptions (1 M, 2M and 3M expiries). 

LCH 118, rue du Quatre Septembre I 75002 Paris IT: +33 (0) 1 70 37 65 00 IF: +33 (0) 17037 65 011 lch.com 

LCH.Clearnet Group Limited I LCH.Clearnet Limited I Banque Centrale de Compensation I LCH.Clearnet LLC 

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

692 032 485 RCS Paris I No TVA CEE FR 65 692032485 
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Public information is not available on trades that have been terminated or compressed. Therefore the 

gross notional number cited above will be lower than the total amount traded on these Credit Index Options 

because it is based on live trades in the TIW only. 

Pricing data for Credit Index Options will be calculated by LCH using Clearing Members' end of day price 

contributions in a similar fashion to the existing process for index and single name CDS whereby members 

of the CDSClear service with open interest in a product must contribute prices on a daily basis. Other 

relevant pricing sources (including Markit composite prices) will be also be used. LCH aggregates these 

prices to create the LCH's 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 and single 

name CDS. LCH intends to leverage this existing operational capabil ity when extending its offering to cover 

CIO. 

In order to prepare for the launch of the iTraxx Europe Main and Crossover index options, LCH has 

performed testing to ensure that it is able to clear these Swaptions in a manner which is consistent with the 

terms on which iTraxx Europe Main and Crossover index Swaptions are traded bilaterally. Testing for CIO 

has included involvement from clearing members who will be actively clearing the product from launch. 

As with the other CDS products currently cleared through LCH, the clearing documentation that will be 

applicable to CIO transactions 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 CC P's default management protocols, processes and technology are 

modified to allow clearing of the new product. 

The CC P'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 Main and Crossover index Swaptions are not currently offered 

for clearing. The extension of the CDS Clearing service offered by LCH to cover CIO will, on the one hand, 

contribute to lower systemic risk and, on the other hand, foster greater transparency on this market and 

could, down the line, lead the European authorities to consider submitting the iTraxx Europe Main and 

Crossover index Swaptions to mandatory clearing and trading. 

The fees applicable to the clearing of the iTraxx Europe Main and Crossover index Swaptions to be cleared 

on the platform as denominated in EUR. The applicable fee grid for iTraxx Europe Main and Crossover 

index Swaptions has been filed with the CFTC 1. 

1 http://www.lch.com/docu m ents/731485/762520/cdscl ear_ cio-fee-grid _ cftc-self-certifi ca ti on. pdf/ 

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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 Main and Crossover index Swaptions is the 

same as that of CDS, including iTraxx Europe Main and Crossover indices, 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 and updated versions of jurisdictional and netting legal opinions covering CIO 

will be available as at the date of the launch of the CIO service. 

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 Europe Main and Crossover index Swaptions is based on 

the market standards iTraxx Europe Untranched Transactions Swaption 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 credit events as defined under the 

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

Determinations Committee. Standard practices for managing expiry/exercise are based on the 2006 ISDA 

Definitions. 

Only standardized CIO transactions are eligible to clearing and as a result they are all electronically 

confirm able. 

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. 

Applicable rules, manuals, policies or procedures 

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

the iTraxx Europe Main and Crossover index Swaptions: 

• the CDS Clearing Supplement now includes a new Part (Part C) that covers CIO. 

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• Section 2 of the Procedures is now incorporating CIO within the scope of the margin calculations. 

Additionally volatility fluctuations have been added as a parameter in the Spread Margin 

calculations for CIO. 

• Section 3 of the Procedures has been amended to include payments related to CIO, notably 

Swaption Premium cash payments. 

• Section 4 of the Procedures has been amended to adapt eligibility criteria to the clearing of the 

iTraxx Europe Europe Main and Crossover index Swaptions, 

• Section 5 of the Procedures has been updated extending its scope to CIO and to provide credit 

event management, exercise and settlement processes for CIO and the contribution to end of day 

prices in respect of CIO.- the CDS Clearing Rule Book has been amended to include CIO within its 

scope and reflects the changes listed above. 

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 the legal working group and submitted to consultation for the iTraxx 

Europe Europe Main and Crossover index Swaptions initiative has been filed with the CFTC2 and wi ll be 

available on LCH's website once duly approved by the National Competent Authorities. 

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 

LCHSA 

2 http://www.lch .com/documents/731485/762520/CDSClear _ CIO _RB_ CFTC-Self-Certification%2BAppendix_Final .pdf/3599219eb8be-4630-87ca-50f98a8d8b14 

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