Q LCH.CLEARNET 


Mr Christopher Kirkpatrick 

Commodity Futures Trading Commission 

1155 21st Street NW 

Three Lafayette Centre 

Washington DC 20581 

12 November 2015 

Dear Mr Kirkpatrick 

Australian Dollar Overnight Index Swaps 

Pursuant to CFTC regulation §39.5(b), LCH.Clearnet Limited ("LCH.Clearnet"), a derivatives clearing 

organization ("DCO") registered with the Commodity Futures Trading Commission (the "CFTC"), is 

submitting Australian Dollar Index Swaps ("AUD OIS") for determination of whether mandatory clearing 

should apply. 

There is currently no mandate in place for any interest rate swaps in AUD, however the Australian 

Securities & Investments Commission ("ASIC") has recently held a public consultation 1 in which it proposed 

the mandatory clearing of certain AUD IRS, including OIS, by certain categories of Australian and foreign 

entities, to come into effect in April 2016. From a systemic risk standpoint and for all concerned (market 

participants, regulators, market infrastructure providers and CCPs) we strongly recommend that any 

consideration for clearing obligations in any currency looks to maintain a consistent view on all products 

between all relevant regulators. 

Background 

LCH .Clearnet is launching AUD OIS as part of its SwapClear service, as extensions to its current product 

offering on December i h, 2015. LCH .Clearnet is eligible to accept these swaps and would be able to 

maintain compliance in the event that these swaps were required to be cleared. 

AUD OIS is a standard swap with one leg paying fixed, and the other leg paying the AONIA rate. The fixed 

rate of the trade may either be annual, or zero coupon in date structure. The floating rate is tied to AUDAONIA-OIS-COMPOUND as per ISDA definition. 

Factors for determination 

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

data 

The 2013 BIS Triennial Survey2 shows a doubling of daily turnover in AUD to $76billion, overtaking 

Japanese Yen, and making AUD the 41

h largest IRS market in terms of notional traded. On an assumed 

250 business days a year, this gives an estimated notional trade per annum of $19trillion. These figures 

are broadly in line with an independent survey executed by the Australian Financial Markets Association3 

1 http://download.asic.gov.au/media/3252197 /cp231-published-28-may-2015.pdf 2 http://www.bis.org/publ/rpfx13ir.pdf 3 http://www.afma.com .au/data/afm r/2014%20afmr. pdf 
Q LCH.CLEARNET 


who estimated a total notional of swaps in AUD of AUD18trillion, of which approximately 40% are OIS 

contracts. 

LCH.Clearnet has cleared AUD 2,885billion notional in AUD LIBOR swaps, year to date, with US persons. 

For USO swaps LCH.Clearnet finds that clearing volume in OIS is about 80% of that of LIBOR and 

therefore LCH.Clearnet forecasts full year clearing in AUD OIS by US persons, allowing for a graduated 

take up of the new product, will be circa AUD 2trillion notional per year. 

Pricing data for AUD AONIA is readily available from conventional sources, e.g. Bloomberg and Reuters. 

LCH.Clearnet already sources and uses an AUD AONIA curved for the discounting of all currently eligible 

AUD · swap products. The curve construction and sourcing will remain unchanged, but now used for 

projection of the index rate as well as for general discounting. 

The availability ofrule 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.Clearnet already has a well-developed rule framework and support infrastructure for clearing interest 

rate swaps. LCH.Clearnet intends to leverage this existing operational capability when extending its 

offering to cover AUD OIS. 

In order to prepare for the launch of AUD OIS, LCH.Clearnet will perform testing to ensure that is able to 

clear these products in a manner which is consistent with the terms on which AUD OIS is traded. 

Further to this, LCH.Clearnet has consulted its Clearing Members on a number of minor rule changes which 

will be made in order to support the clearing of AUD OIS. The LCH.Clearnet rule changes will be certified 

with the CFTC and are available on the LCH.Clearnet website. 

The effect on mitigation of systemic risk, taking into account the size of the market for such 

contract and the resources of the DCO available to clear the contract 

In general, we recommend a delay between a new product with additional risk factors (e.g. such as OIS 

swaps in specific currencies) becoming eligible for clearing and it being considered for clearing obligation. 

There are a number of arguments in support of this approach, which apply in general: 

1. 	 As a result of current participant exemptions, the clearing obligation would apply to certain market 

participants but exempt others. A clearing obligation could therefore create asymmetries, with 

those parties who are exempt from clearing forcing their counterparties into a mismatched cleared 

book relative to the portfolio-wide balance they maintain. If clearing is not mandated they retain the 

flexibility to clear only the trades which help them manage their counterparty risk; 

2. 	 For any newly cleared product, the CCP's default management protocols, processes and 

technology will have been modified to allow clearing of the new product. Although extensive testing 

will have taken place, this is not substitute for running the service with a live book of cleared trades 

for a period of time to fully ensure the robustness of the setup and to stimulate improvement 

wherever necessary; and 

3. 	 The CCP's risk management framework will have been calibrated to handle expected volume of 

activity. Actual positions may be larger and more concentrated than research indicates. A 

mandatory clearing obligation would limit the amount of control the CCP has to restrict large sized 

risks from being cleared. 

The effect on competition, including appropriate fees and charges applied to clearing 

2 
Q LCH.CLEARNET 


AUD AONIA swaps are cleared out to 3 years by Australian Securities Exchange ("ASX"). At LCH.Clearnet 

the same product will be portfolio margined with other currencies and indices which will in most cases offer 

a margin offset for the product when compared to the margin on a standalone basis. LCH.Clearnet expects 

to clear a portion of the market; despite the fact it is already offered. 

LCH.Clearnet's fees for AUD OIS will be in line with the fees charged for existing currencies in the service. 

The existence of reasonable legal certainty in the event of the insolvency of the relevant DCO 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 AUD OIS is in all material respects the same as that of 

the IRS already cleared by LCH.Clearnet. 

Insofar as legal certainty in the event of the insolvency of the DCO is concerned, LCH.Clearnet would be 

wound up under English law and has recently provided an updated an updated opinion on the treatment of 

cleared swaps customer funds to the CFTC. 

Further Information (§39.5(b)(iii-viii) 

Product terms of AUD OIS are market standard and follow the 2008 ISDA Derivatives Definitions4

. 

Participant eligibility standards for AUD OIS are the same as for existing SwapClear Clearing Members. 

There are no additional price sources required as prices are readily available from the price sources 

already used by LCH.Clearnet. 

No major risk management changes are necessary for LCH.Clearnet to offer AUD OIS clearing; however 

minor adjustments will be made for each as follows: 

• 	 AUD is already included in the SwapClear liquidity survey, and liquidity add-ons will be charged 

based on the estimates provided by Clearing Members and according to the current methodology 

for AUD OIS; 

• 	 Historical and hypothetical stress testing scenarios have been added to the scenario framework 

used for default fund sizing to capture AUD OIS focussed scenarios. 

LCH.Clearnet will make a number of minor changes to its Rulebook to enable clearing of AUD OIS, in the 

following sections: 

• 	 FCM Procedures 

• 	 Procedures Section 2C (SwapClear) 

• 	 FCM Product Manual 

•· 	 SCM Product Manual 

The rule changes will be submitted to the CFTC pursuant to §40.6(a), following consultation with 

LCH.Clearnet Clearing Members. 

LCH.Clearnet engages it's Clearing Members in the design and testing of new products at an early stage, 

through regular meetings and working groups. Clearing Members have been formally consulted on the 

changes which LCH.Clearnet is required to make to its Rulebook. Clearing Member feedback has been 

4 http://www.isda.org/publications/pdf/2008-inflation-defs.pdf 

3 
()LCH.CLEARNET 


Incorporated Into the final changes. Notice of this submission was given to SwapClear Clearing Members 

on November 4, 2015, a copy of this notice is provided at Appendix A. Furthermore, this submission is 

publicly available at: 

http://www.lchclearnet.com/rules-regulations/regulatorv-responses 

LCH.Clearnet intends to launch these products with its Clearing Members and clients on December i 11, 

2015. 

Should you have questions please contact me at daniel.maguire@lchcleamet.com . 

Yours sincerely 

cc. Parisa Abadi 

4 

Q LCH.CLEARNET 

Appendix A 

Notice of this submission provided to Swap Clear Clearing Members 

5 
(}LCH.CLEARNET 


-~-----·~--

0 LCH.CLEARNET 

Notice SwapClear I 

LCH.Clearnet Ltd: SwapClear 4th November 2015 

To SwapClear Clearing Members 

From David Horner, Head of SwapClear Business Risk 


Subject AUD OIS submission for determination of clearing requirements 


Pursuant to CFTC regulation §39.S(b), LCH.Clearnet Limited ("LCH.Clearnet"), a 

derivatives clearing organization ("DCO") registered with the Commodity Futures1 

Trading Commission (the "CFTC"), is submitting Australian Dollar Index Swaps ("AUD 

OIS") for determination of whether mandatory clearing should apply. As described in 

more detail below, LCH.Clearnet will recommend a delay between these new products 

being launched and any decision to make clearing mandatory. 

There is currently no mandate in place for any interest rate swaps in AUD, however the 

Australian Securities & Investments Commission ("ASIC") has recently held a public 

consultation[1l in which it proposed the mandatory clearing of certain AUD IRS, including 

OIS, by certain categories of Australian and foreign entities, to come into effect in April 

2016. From a systemic risk standpoint and for all concerned (market participants, 

regulators, market infrastructure providers and CCPs) we strongly recommend that anyl 

consideration for clearing obligations in any currency looks to maintain a consistent view 

on all products between all relevant regulators. 

As per CFTC regulation §39.S(b)(viii), LCH.Clearnet is required to notify members of its 

submission. This note does not constitute a notification that the products are live fo I 

clearing. A notice announcing the live data and arrangements for the formal product 

launch will be published separately. 

The existence ofsignificant outstanding notional exposures, trading liquidity, ann1 

l

1

J http://download.asic.qov.au/media/3252197/cp231 -published-28-may-2015.pdf 

6 
()LC.H.CLEARNET 


adequate pricing data 

The 2013 BIS Triennial Surveyl

2

J shows a doubling of daily turnover in AUD to 

$76billion, overtaking Japanese Yen, and making AUD the 4th largest IRS market in 

terms of notional traded. On an assumed 250 business days a year, this gives an 

estimated notional trade per annum of $19trillion. These figures are broadly in line with 

an independent survey executed by the Australian Financial Markets Association131 who 

estimated a total notional of swaps in AUD of AUD18trillion, of which approximate! 

40% are OIS contracts. 

Pi-icing data for AUD AONIA is readily available from conventional sources, e.g. 

Bloomberg and Reuters. LCH.Clearnet already sources and uses an AUD AONI 

curved for the discounting of all currently eligible AUD swap products. The curve 

construction and sourcing will remain unchanged, but now used for projection of the 

index rate as well as for general discounting. 

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 contrac 

is then traded 

LCH.Clearnet already has a well-developed rule framework and support infrastructure 

for clearing interest rate swaps. LCH.Clearnet intends to leverage this existing 

operational capability when extending its offering to cover AUD OIS. 

LCH.Clearnet has consulted its Clearing Members on a number of minor rule changes 

which will be made in order to support the clearing of AUD OIS. The LCH.Clearnet rule 

changes will be certified with the CFTC and are available on the LCH.Clearnet website. 

The effect on mitigation of systemic risk, taking into account the size of th 

market for such contract and the resources of the DCO available to clear the 

contract 

In general, we recommend a delay between a new product with additional risk factors 

(e.g. such as OIS swaps in specific currencies) becoming eligible for clearing and i 

being considered for clearing obligation. There are a number of arguments in support1 

of this approach: 

1. 	As a result of current participant exemptions, the clearing obligation would apply 

to certain market participants but exempt others. A clearing obligation could 

therefore create asymmetries, with those parties who are exempt from clearing 

forcing their counterparties into a mismatched cleared book relative to the 

portfolio-wide balance they maintain. If clearing is not mandated they retain the 

121 http://www.bis.org/publ/rpfx1 3ir.pdf 

1

3

! http://www.afma.corn .au/data/afmr/2014%20afmr.pdf 

7 
Q LCH.CLEARNET 


flexibility to clear only the trades which help them manage their counterparty risk; 

2. 	For any newly cleared product, the CCP's default management protocols, 

processes and technology will have been modified to allow clearing of the new 

product. Although extensive testing will have taken place, this is not substitute 

for running the service with a live book of cleared trades for a period of time to 

fully ensure the robustness of the setup and to stimulate improvement wherever 

necessary; and 

3. 	The CCP's risk management framework will have been calibrated to handle 

expected volume of activity. Actual positions may be larger and more 

concentrated than research indicates. A mandatory clearing obligation would 

limit the amount of control the CCP has to restrict large sized risks from being 

cleared. 

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

clearing 

AUD AONIA swaps are cleared out to 3 years by Australian Securities Exchange 

("ASX"). At LCH.Clearnet the same product will be portfolio margined with other 

currencies and indices which will in most cases offer a margin offset for the produc1 

w_hen compared to the margin on a standalone basis. LCH.Clearnet expects to clear a 

portion of the market; despite the fact it is already offered. 

LCH.Clearnet's fees for AUD OIS will be in line with the fees charged for existing 

currencies in the service. 

The existence of reasonable legal certainty in the event of the insolvency of the1 relevant DCO 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 AUD OIS is in all material respects the 

same as that of the IRS already cleared by LCH.Clearnet. 

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

LCH.Clearnet would be wound up under English law and has recently provided an 

updated an updated opinion on the treatment of cleared swaps customer funds to the 

CFTC. 

Product terms of AUD OIS are market standard and follow the 2008 ISDA Derivatives 

Definitionsf

41. 

Participant eligibility standards for AUD OIS are the same as for existing SwapClear 

Clearing Members. 

141 http://www.isda.org/publications/pdf/2008-inflation-defs.pdf 

8 
(} LCH.CLEARNET 


There are no additional price sources required as prices are readily available from the 

price sources already used by LCH.Clearnet. 

No major risk management changes are necessary for LCH.Clearnet to offer AUD OIS 

clearing; however minor adjustments will be made for each as follows: 

• 	 AUD is already included in the SwapClear liquidity survey, and liquidity add-ons 

will be charged based on the estimates provided by Clearing Members and 

according to the current methodology ; 

• 	 Historical and hypothetical stress testing scenarios have been added to the 

scenario framework used for default fund sizing to capture both AUD OIS 

focussed scenarios. 

LCH.Clearnet will make a number of minor changes to its Rulebook to enable clearing 

of AUD OIS, in the following sections: 

• 	 FCM Procedures 

• 	 Procedures Section 2C (SwapClear) 

• 	 FCM Product Manual 

• 	 SCM Product Manual 

The rule changes will be submitted to the CFTC pursuant to §40.6(a), following 

consultation with LCH.Clearnet Clearing Members. 

LCH.Clearnet engages it's Clearing Members in the design and testing of new products 

at an early stage, through regular meetings and working groups. Clearing Members 

have been formally consulted on the changes which LCH.Clearnet is required to make 

to its Rulebook. Clearing Member feedback has been incorporated into the final 

changes. 

Further information will form part of the full §39.5 filing which will be publically available 

on the LCH.Clearnet website. 

LCH.Clearnet looks forward to working with Clearing Members and the CFTC in the 

determination of clearing requirements. Please do not hesitate to contact me regarding 

any questions raised by this information. 

Regards 

David Horner 

Head of SwapClear Business Risk 

9