This circular contains information with respect to amendments to the Clearing Conditions of Eurex Clearing AG (Clearing Conditions) and the FCM Regulations of Eurex Clearing AG (FCM Regulations) regarding the EurexOTC Clear conversion of cleared OTC transactions referencing the USD LIBOR index.
The amendments to the Clearing Conditions and FCM Regulations will come into effect as of 24 April 2023.
2. Required action
Clearing Members, ISA Direct Clearing Members, Disclosed Direct Clients, FCM Clearing Members, vendors and other affected contractual parties should take the amendments to the Clearing Conditions and FCM Regulations into consideration.
3. Details of the initiative
As announced in Eurex Clearing Circular 022/21 and Eurex Clearing Newsflash from 22 September 2022, Eurex Clearing will actively convert the remaining cleared legacy USD LIBOR-based Interest Rate Swaps (IRS) and basis swap trades to standard and liquid SOFR Overnight Index Swap (OIS) trades before the fallback provisions are triggered.
Forward Rate Agreements (FRAs) are out of scope for this transition as Eurex Clearing does not have any outstanding FRA transactions referencing USD LIBOR and with Eurex Clearing Circular 022/21, the clearing eligibility of FRAs referencing USD LIBOR with an expiry on or after 1 April 2023 was revoked.
It is planned to execute the conversion of such EurexOTC Clear trades starting on 21 April 2023 and executed over that weekend.
In this regard, this Eurex Clearing Circular shall be an announcement of the referred Index Conversion pursuant to Chapter VIII Part 1 Number 1.8.4 of the Clearing Conditions and Chapter II Part 1 Number 1.8.4 of the FCM Regulations.
The conversion will be mandatory for all cleared OTC transactions referencing the USD LIBOR floating rates on the above-mentioned date. It will be effective as soon as it is reflected in Eurex Clearing’s systems. Eurex Clearing will legally reflect the conversion as an amendment of the relevant transactions by replacing the references to USD LIBOR floating rates with the SOFR index underlying its fallback.
The cornerstones of the conversion are as follows:
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”.
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 USD 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 two business days payment offset.
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.
Treatment of fixed leg
The terms and conditions of the fixed leg of the amended trade are preserved from the original USD LIBOR trade.
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.
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.
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.
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.
For more information, please refer to Eurex Clearing Readiness Newsflash from 22 September 2022 and to the detailed USD LIBOR trade conversion booklet explaining the LIBOR conversion from an operational and methodological perspective. The booklet is available in the Member Section of Deutsche Börse Group under the following path:
Further, as of 24 April 2023, OTC transactions with a floating rate referencing to USD LIBOR will no longer be eligible for the EurexOTC Clear service.
To reflect the change of eligibility, the following provisions will be amended as outlined in Attachment 1 and 2 together with a minor editorial change:
As of the effective date, the full versions of the Clearing Conditions and FCM Regulations will be available for download on the Eurex Clearing website www.eurex.com/ec-en/ under the following link:
The amendments to the legal framework of Eurex Clearing AG published by this circular are deemed accepted by each affected contractual party of Eurex Clearing AG, unless the respective contractual party objects by written notice to Eurex Clearing AG prior to the relevant effective date(s) as stipulated in this circular. In case of an objection by the respective contractual party pursuant the preceding sentence, Eurex Clearing AG is entitled to terminate the respective contract (including a Clearing Agreement, if applicable). Instead of submitting an objection, the respective contractual party may submit in writing to Eurex Clearing AG comments to any amendments of the legal framework of Eurex Clearing AG within the first 10 Business Days after the publication of the amendments. Eurex Clearing AG shall assess whether these comments prevent the published amendments from becoming effective taking into account the interests of Eurex Clearing AG and all contractual parties.
Unless the context requires otherwise, terms used and not otherwise defined in this circular shall have the meaning ascribed to them in the Clearing Conditions or FCM Clearing Conditions of Eurex Clearing AG, as applicable.
All Clearing Members, ISA Direct Clearing Members, Disclosed Direct Clients and FCM Clearing Members of Eurex Clearing AG, vendors and other affected contractual parties
Front Office/Trading, Middle + Back Office, IT/System Administration, Auditing/Security Coordination
Eurex Clearing Circular 022/21
Eurex Clearing Readiness Newsflash from 22 September 2022
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