LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

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

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

VIA CFTC Portal

06 January 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 – TONA Overnight Index 

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 Index Swaps (“OIS”) referencing the market standard Tokyo Overnight Average Rate

TONA”) index (the “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 clears the Submitted Swaps to a maximum eligibility of 41 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

Instrument Currency Leg 1 Leg 2 Variable 

Notional 

Maximum 

Tenor 

Notional Amount 

(USD) 

OIS JPY Fixed JPY-TONA-OISCOMPOUNDYes 15,025

days

1-

10,000,000,000,000

OIS JPY Fixed JPY-TONA-OISCompoundYes 15,025

days

1-

10,000,000,000,000

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 (JPY-TONA-OIS-COMPOUND) eligible for clearing. When the swap is cleared, LCH applies the 

equivalent floating rate option under the 2021 Definitions (JPY-TONA-OIS-Compound). Accordingly, a SwapClear 

contract resulting from a transaction referencing JPY-TONA-OIS-COMPOUND is equivalent to, and fungible with, a 

SwapClear contract resulting from a transaction referencing JPY-TONA-OIS-Compound, and both are governed by the 

2021 Definitions.
LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

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

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

§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 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 welldeveloped rule framework and support infrastructure for clearing interest rates swaps. LCH has

leveraged this existing operational capability to offer the clearing of the Submitted Swaps. When LCH

launched these products, LCH performed testing to ensure it is able to clear the Submitted Swaps in 

a manner which is consistent with the terms on which they are traded.

Further to this, LCH notified its clearing members of a number of minor changes to the procedure 

documents which were 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. 

TONA is published by the Quick Corp in Japan. LCH extended its clearing eligibility to TONA based 

swaps in July 2014.

LCH publishes weekly and monthly volume and outstanding notional data. Pricing data is available 

from large brokers with quotes available out to 40 years.

Please see:

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

Confidential Exhibit 2 – LCH Ltd – TONA Volume

(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 has leveraged this existing operational capability to offer clearing for 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 risk-management on all 
LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

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

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

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 Submitted Swaps have not introduced any new or novel risks to the SwapClear service, and the 

policies, procedures and operational aspects of the service remain unchanged. 

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 CCP. 

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 are also clearing TONA-based swaps. 

LCH’s fees and charges for the above product are in line with those charged for existing SwapClear 

contracts. Please see Exhibit 3 – 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. 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 4 – LCH Rules (https://www.lch.com/resources/rulebooks/lchlimited).
LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

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

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

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, follow 2021 ISDA Definitions2 and are 

also part of the Financial products Markup Language (FpML) standard,3 which is a protocol for 

sharing information on derivatives and other products. The Floating Rate Option for TONA under the

2021 ISDA definitions is JPY-TONA-OIS Compound.

The Product Specific Contract Terms can be found in the LCH Product Contracts Terms and Eligibility 

Criteria Manual. Please see Exhibit 4 – LCH Rules (https://www.lch.com/resources/rulebooks/lchlimited) which includes links to the Product Specific Contract Terms and Eligibility Criteria Manuals 

although they are not part of the rulebook.

§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 currently uses two inter-dealer broker (“IDB”) quotes for TONA along the curve.

Please see:

Exhibit 5 – LCH Settlement Prices (https://www.lch.com/services/swapclear/essentials/settlementprices)

Confidential Exhibit 6 – Contract and Market Acceptability Policy

Confidential Exhibit 7 – SwapClear Zero Coupon Rate Curve Configuration

Confidential Exhibit 8 – SwapClear Zero Coupon Rate Curve Construction Methodology

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
LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

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

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

§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 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 Submitted Swaps would not necessitate any change 

to these processes. 

Please see: 

Confidential Exhibit 9 – SwapClear & Listed Rates Risk Management Framework

Confidential Exhibit 10 – Default Management Policy

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

Please see Exhibit 4 – 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. Prior to clearing the Submitted Swaps, clearing 

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

mandatory clearing determination is publicly available.

4

LCH launched the Submitted Swaps for clearing member and customer clearing on July 28, 2014.

Since that time, the market has been supportive of the Submitted Swaps and volumes have 

increased over time. With the conversion of outstanding JPY LIBOR trades to TONA at LCH in 

December 2021, we expect to see much higher TONA volumes going forward.

As of December 22, 221, 72 clearing members and 863 customers have open interest in the 

Submitted Swaps. 

Please see Confidential Exhibit 2 – LCH Ltd – TONA Volume.

4 https://www.lch.com/resources/regulatory-responses
LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

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

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

Should you have questions please contact me at julian.oliver@lseg.com.

Yours sincerely,

Julian Oliver

Chief Compliance Officer

LCH Limited
LCH | Aldgate House | 33 Aldgate High Street | London EC3N 1EA | T: +44 (0)20 7426 7000 | F: +44 (0)20 7426 7001 | lch.com

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

LCH Group Holdings Limited. Registered in England No. 4743602 Registered Office: Aldgate House, 33 Aldgate High Street, London EC3N 1EA

Exhibits 

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

Confidential Exhibit 2 – LCH Ltd – TONA Volume

Exhibit 3 – LCH Fees (https://www.lch.com/services/swapclear/fees)

Exhibit 4 – LCH Rules (https://www.lch.com/resources/rulebooks/lch-limited)

Exhibit 5 – LCH Settlement Prices (https://www.lch.com/services/swapclear/essentials/settlementprices)

Confidential Exhibit 6 – Contract and Market Acceptability Policy

Confidential Exhibit 7 – SwapClear Zero Coupon Rate Curve Configuration

Confidential Exhibit 8 – SwapClear Zero Coupon Rate Curve Construction Methodology

Confidential Exhibit 9 – SwapClear & Listed Rates Risk Management Framework

Confidential Exhibit 10 – Default Management Policy