Eurex Clearing
Dear Clearing Member,
With Eurex Clearing Circular 022/21, Eurex Clearing announced its intention to actively convert the remaining cleared legacy Libor-based IRS (including FRAs) and basis swap trades to standard and liquid risk-free rate (RfR) OIS trades before the fallback provisions are triggered.
Having successfully transitioned in December 2021 all CHF, GBP and JPY Libor trade references to the RfR index underlying their respective fallbacks, Eurex Clearing intends to preserve the applied approach also for the upcoming USD Libor Index Conversion.
A detailed explanation of the conversion from an operational and methodological perspective is outlined in Section 3 of the "Eurex Clearing - Libor Trade Conversion Booklet" which can be found in the Member Section of Deutsche Börse Group under the following path:
Please note that the timelines in the booklet still refer to the CHF, GBP and JPY Libor transitions and will be updated to the USD Libor ones in due course.
This newsflash lists the planned high level details of the upcoming USD Libor Index Conversion.
A. Timeline
Eurex Clearing plans to execute the conversion of all OTCClear transactions referencing USD Libor index on a single date before 30 June 2023 with exact timeline subject to cleared market convergence and still to be announced.
B. Legal form of the conversion
Eurex Clearing will reflect the conversion as an amendment of the relevant trades. The conversion will legally convert the Floating Rate Option of the USD Libor trade to the SOFR index underlying its fallback. The corresponding changes to the Clearing Conditions and FCM Regulations of Eurex Clearing AG were published with Eurex Clearing Circular 081/21.
C. Operational form of the conversion
The conversion will be executed as a termination of each original (Libor) trade and a novation of one or more replacement trades for each original (Libor) trade. In what follows, we will denote group of replacement trades for each original trade as the “amended trade”.
D. Libor fixings before cessation
The amended trade will preserve USD Libor coupons that have a fixing but have not settled yet as well as USD Libor coupons that have a fixing after the operational conversion but before the USD Libor cessation date of 30 June 2023.
E. Libor based settlements
The roll dates and accrual periods of the SOFR floating coupons of the amended trade are the same as the USD Libor trade. Coupons that require a Libor fixing after 30 June 2023 are calculated without observation period shift by compounding the SOFR index over the USD Libor coupon periods. The settlement of these coupons is aligned with SOFR OIS conventions, i.e., having 2 business days payment offset.
F. Conversion spreads
The conversion preserves the economic equivalence of the amended trade with the original trade by adding the relevant (not compounded) spread adjustment specified in the respective fallback provisions and published by Bloomberg Index Services Limited. No rounding or other modifications to that spread apply. In specific, below spreads will be applied:
Eurex Clearing does not have any outstanding transactions referencing the 12M USD Libor index.
G. Treatment of fixed leg
The terms and conditions of the fixed leg of the amended trade are preserved from the original Libor trade.
H. Cash compensation
A one-off cash compensation on trade level is introduced and carried out by Eurex Clearing as calculation agent to mitigate the associated residual change in net present value between the Libor trade and the amended trade.
I. Treatment of irregular periods
Irregular stub periods having linear interpolation specified are calculated compounding SOFR over the length of the calculation period and adding a spread adjustment. This spread is not calculated by interpolating between the Bloomberg spreads for the tenors which are next shorter and next longer than the length of the calculation period but reflect the spread adjustment associated with the regular tenor of the floating leg. The value transfer caused by the divergence with the treatment specified in the ISDA fallback provision is included in the cash compensation.
J. Pre- and post-conversion trade specification
In order to preserve fixings and settlements as well as the fixed leg cash flows in all trade type cases, the amended trade might comprise more than one individual replacement trade. In case of a conversion of an interest rate swap, it comprises three individual replacement trades. In case of a Libor basis swap having no compounding, it comprises one replacement trade. Notable exception of the conversion mechanism is the treatment of Libor basis swaps having compounding specified on at least one leg. Such swaps will be terminated on the conversion weekend with a termination fee equal to the net present value of the trade and no replacement trade.
For avoidance of doubt, Libor swaps that do not have any Libor coupons fixing after the index cessation are not affected by the conversion process. Further on, no booking fees will be charged by Eurex Clearing for the replacement trades as well as no conversion fees will be charged for trades amended in the conversion process.
Below table lists the replacement trades which constitute the amended trade grouped by trade type of the original trade.
1 Both the fixed and the float leg of the trades 2) and 3) will have in this case as maturity the end of the last USD Libor floating coupon having a fixing before 30 June 2023.
2 Opposite trade in all examples is used in the sense of having mirrored fixed leg to the shortened Libor trade, i.e. if the Libor trade pays fixed coupons the opposite trade will receive the same fixed coupons.
3 If a compounding period of an IRS swap requires any Libor fixing after 30 June 2023, this period is replaced in the amended trade as a whole with compounded SOFR plus the spread adjustment related to the USD Libor index . The maturity of trades 2) and 3) is set to the end of the previous Libor coupon. In case of compounding with a zero coupon pay frequency, the replacement trade compounds over the whole calculation period. Currently Eurex Clearing has no such zero coupon compounding swaps.
4 In the case of the basis swap trade type, both floating legs of the replacing trade will have as maturities the end of the last respectively Libor floating coupons having a fixing before 30 June 2023.
Upon completion of the conversion, USD Libor floating-rate references will no longer be eligible for the EurexOTC Clear service.
Please note that some points of the outlined process and considerations are subject to future adjustments and changes based on Member feedback.
If you have questions or comments, please contact your Clearing Key Account Manager or send an e-mail to client.services@eurex.com.
Kind regards,
Your Client Services Team
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