Assessment of LCH Limited's SwapClear Service 2. Other Material Developments

During the assessment period, there were a number of other material developments relevant to the Bank's supervision of LCH Ltd's SwapClear service to the Australian market. Some of these have been driven by changes to SwapClear's global product offering, risk management arrangements and governance, while others are the result of changes to the regulatory environment and international developments.

2.1 COVID-19

A pandemic environment, such as that created by COVID-19, has the potential to cause substantial operational disruption at financial market infrastructures (FMIs); it could affect the ability of the FMI, its participants and service providers to offer service continuity, fulfil risk management obligations, and to recover normal operations in the event of an outage. COVID-19 presented similar types of challenges to LCH Ltd's SwapClear service, including disruptions to normal working arrangements, increases in trading activity, and heightened volatility in financial markets.

LCH Ltd has managed the operational and financial risk management challenges associated with the COVID-19 pandemic very well. In March, LCH Ltd responded to the increased risk posed by the spread of COVID-19 by successfully activating business continuity measures to maintain operations while minimising risks to staff. This involved transitioning almost all of its workforce to remote working arrangements, with only a small number of critical staff required to attend an LCH Ltd office for routine physical maintenance or in the event of an operational incident.[3]

The SwapClear service has operated without disruption throughout the pandemic, and successfully cleared a record US$142 trillion in notional values across almost 800,000 trades in March with no degradation in performance or stability (Appendix A). Internal incidents for the SwapClear service have been at historically low levels, and the incidents that have occurred were unrelated to COVID-19 operating arrangements.

LCH Ltd did not make any unscheduled margin calls or unplanned changes to the SwapClear margin models due to the pandemic environment. As the pandemic unfolded, heightened market volatility and increased trading activity flowed through to higher initial margin levels and larger variation margin flows (Appendix A). Margin backtesting breaches, which are an indicator of whether current price volatility is captured in a central counterparty's (CCP's) margin model, increased at the SwapClear service during the March quarter but remained within LCH Ltd's threshold (which is more conservative than the regulatory minimum).[4]

There were a few episodes of late margin payments from some participants that experienced operational constraints when their staff were working from home. These issues were closely monitored by LCH Ltd and have been resolved as participants have adapted to working remotely.

With many of LCH Ltd's and participants' staff working remotely, LCH Ltd has been reviewing its processes for managing a default to ensure they remain effective. In light of this, LCH Ltd has established and tested remote working contingency arrangements for the Rates Service Default Management Group (DMG) in the event it is unable to convene physically.[5] LCH Ltd also made rule changes to enable it to effectively operate the DMG in circumstances where not all DMG members can be convened.[6] No SwapClear participant was called into default during the assessment period.

The Bank will continue to maintain a close engagement with LCH Ltd on matters related to the impact of the COVID-19 pandemic over the coming assessment period.

2.2 Brexit

LCH Ltd's SwapClear service is licensed in Australia under section 824B(2) of the Corporations Act 2001, which provides licensing for an overseas-based CS facility subject to requirements and supervision in its home country that are considered sufficiently equivalent to those in Australia. LCH Ltd is incorporated in the UK, and is primarily regulated by the BoE under UK and EU legislation.

The UK officially left the EU on 31 January 2020. A transition period, under which EU law continues to have effect in the UK, lasts until 31 December 2020.[7] During this transition period, LCH Ltd will continue to be supervised under the European Market Infrastructure Regulation (EMIR).[8] As LCH Ltd's home regime will remain unchanged during this period, there will be no impact on SwapClear's operations in Australia.

In September, the European Commission announced an 18-month, time-limited equivalence decision to enable UK CCPs, including LCH Ltd, to provide their services to the EU after the end of the transition period.[9] This decision is contingent on close cooperation between the BoE and the European Securities and Markets Authority (ESMA), and is open to reassessment following any changes to the UK's regulatory or supervisory framework affecting the provision of clearing services. This decision will give ESMA time to conduct a comprehensive review of the importance of UK CCPs to the EU. Following this announcement, ESMA completed the tiering and recognition assessments required for recognition of LCH Ltd as a foreign or ‘third-country’ CCP under EMIR.[10]

The Australian Securities and Investments Commission (ASIC) and the Bank will similarly consider any changes to LCH Ltd's home regime and the sufficient equivalence of the regime at the end of the transition period; LCH Ltd can continue to operate in Australia while this assessment is being undertaken. To date, legislative and regulatory changes in the UK are ‘not intended to make policy changes, other than to reflect the UK's new position outside the EU, and to smooth the transition’.[11] Subject to there being no significant changes to this approach, the Bank expects the regime to be sufficiently equivalent.

2.3 Benchmark reform

Following recommendations made by the Financial Stability Board (FSB) in 2014, there has been substantial international work to reform the benchmark reference rate regime based on interbank offered rates (IBORs). This has involved the establishment of alternative risk-free rates (RFRs) and, in some cases, reforms to existing reference rate methodologies, such as the Bank Bill Swap Rate (BBSW) in Australia.[12] With widespread recognition that some existing reference rates, such as LIBOR, will be discontinued, a key focus over the past few years has been on developing more robust fall-back methodologies for IBORs and agreement on ‘pre-cessation triggers’ (where a regulatory body determines an existing benchmark to be non-representative).[13]

As the largest clearer of over-the-counter (OTC) interest rate derivatives (IRD) globally, LCH Ltd has an important role in facilitating benchmark reforms. LCH Ltd has been supporting international initiatives through its work to increase its offering of products referencing RFRs, to switch to discounting in RFRs, and to automatically adopt fall-back arrangements in the event of a pre-cessation trigger. LCH Ltd has been working to mitigate the operational risks associated with a pre-cessation event involving a large-scale conversion of IBOR swaps to RFR swaps, as the end-of-day processing of newly-registered RFR swaps is computationally more intensive than for IBOR swaps.

Trading activity in products referencing new RFRs has continued to increase, but remains low as a share of total OTC IRD registered in most currencies.[14] During the assessment period, SwapClear began clearing swaps referencing the Euro Short-Term Rate (€STR) in October 2019, the New Zealand short-term rate (NZIONA) in November 2019, and the Singapore Overnight Rate Average (SORA) in May 2020, and accepts a range of products for clearing referencing other new RFRs, such as the Secured Overnight Financing Rate (SOFR). Additionally, LCH Ltd transitioned its discounting and calculation of price alignment for swaps settled in EUR to €STR in July 2020 and for swaps settled in USD to SOFR in October 2020. The Bank will continue to monitor global work on benchmark reform initiatives, including at LCH Ltd.

2.4 Changes to governance arrangements

During the assessment period, LCH Ltd and LCH Group Holdings Limited (LCH Group) implemented a number of changes to simplify governance arrangements and to remove the risk of duplication in board decision-making. This involved terminating the Relationship Agreement between LCH Group and LSEG, making the LCH Group Board an internal-only board, and disbanding most of the LCH Group Board Committees.[15],[16]

LCH Ltd also implemented changes to the LCH Ltd management structure designed to improve leadership and oversight. The LCH Ltd Local Management Committee (LMC) has been replaced with two teams:

  • The LCH Ltd Management Team: provides support and advice to the Chief Executive Officer (CEO) of LCH Ltd on strategy, setting common objectives, priorities and leading the commercial agenda.
  • The LCH Ltd Operating Committee: oversees the operational management of LCH Ltd, acting as an advisory to the LCH Ltd Management Team.

There were also a number of changes made to the reporting lines of senior SwapClear executives:

  • The Head of SwapClear and Listed Rates now reports directly to the CEO of LCH Ltd.
  • The Head of Operations for Rates, Repos and Equities now reports directly to the CEO of LCH Ltd.
  • The Head of Risk for Rates now reports to the Head of SwapClear and Listed Rates.

Additionally, LCH Ltd appointed a new Chief Technology Officer (CTO) in July 2020. LCH Ltd's previous CTO moved to the role of Chief Information Officer of LSEG. There were also a number of changes in the directors of LCH Ltd.

2.5 Refinitiv acquisition

In August 2019, LCH Ltd's ultimate parent company, LSEG, announced its proposed acquisition of Refinitiv. Refinitiv is a market data and trading provider, and the acquisition is expected to enhance LSEG's product offering in data and analytics. LSEG shareholders approved the transaction in November 2019.

The acquisition is subject to anti-trust and regulatory clearances in a number of jurisdictions. LSEG intends to complete the transaction in the first quarter of 2021, and has stated that it is continuing to make progress on regulatory approvals. These approvals include ongoing competition reviews in a number of jurisdictions, including the EU and Singapore.[17] Competition reviews have been completed in a number of jurisdictions, including the US, Canada and Australia, concluding that the acquisition is unlikely to harm competition.[18]

The acquisition is not expected to result in any changes to the jurisdiction, governance or operation of any regulated LSEG or Refinitiv entity, including LCH Ltd. The Bank will continue to monitor LSEG's acquisition of Refinitiv, including any potential impact on LCH Ltd.

2.6 Product offering

During the assessment period, LCH Ltd made the following changes to its product offering within the SwapClear service:

  • Overnight index swaps (OIS) and basis swaps referencing €STR were introduced following the introduction of €STR in October 2019 (section 2.3).
  • NZD OIS and basis swaps with tenors out to 5.5 years were introduced in November 2019. LCH Ltd also increased the maximum tenor of AUD OIS and basis swaps and ZAR interest rate swaps (IRS) to 31 years.
  • SGD OIS and basis swaps with tenors out to 5.5 years were added in May 2020, referencing SORA.
  • In March, LCH Ltd broadened the eligibility of inflation products to include standard coupon inflation vs fixed which reference the European, French, UK and US inflation indices.[19]
  • ILS IRS and forward rate agreements (FRA) were added in September 2020. These swaps reference the Tel Aviv Inter-Bank Offered Rate (TELBOR) and have a maximum tenor of 11 and 3.25 years for IRS and FRA respectively.
  • In September 2020, LCH Ltd increased the maximum tenors of KRW non-deliverable interest rate swaps (NDIRS) and HUF IRS to 21 years. LCH Ltd also extended its OIS product suite to include the clearing of variable notional OIS (VNOIS) for GBP SONIA, USD SOFR and USD Fed Funds swaps.


LCH Ltd has offices in London, New York and Sydney. [3]

A ‘backtesting breach’ occurs if the initial margin requirement for a portfolio would have been insufficient to cover losses on the portfolio from historical prices movements over a specified period of time. [4]

The Rates Service DMG oversees the default management processes for the SwapClear and Listed Rates services, and consists of LCH Ltd's Head of Business Risk, a director of the Risk Management department, and traders seconded from clearing participants. [5]

For further information, see LCH Limited, 2020, LCH Limited Self-Certification: Amendments to the Rates and ForexClear Default Management Groups. Available at <>. [6]

For further information regarding the transition period, see Brexit in brief – Transition period. Available at <>. [7]

EMIR is the European regulatory regime for CCPs (Appendix B). It is also known as Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories. [8]

For further information, see Commission Implementing Decision (EU) 2020/1308. Available at <>. [9]

For more information on ESMA's decision, see ESMA to Recognise Three UK CCPs from 1 January 2021. Available at <>. [10]

For further information, see The Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018. Available at <>; and The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019. Available at <>. [11]

For further information, see G Debelle, 2019, Progress on Benchmark Reforms at ISDA's 34th Annual General Meeting, Hong Kong. Available at <>. [12]

For further information, see ISDA's website on Benchmark Fallback Consultations. Available at <>. [13]

By contrast, trading activity in products referencing established RFRs, such as the Australian Overnight Index Average (AONIA) and the Sterling Overnight Index Average (SONIA), are large and regularly exceed 50 per cent of the total notional value of trades registered in their respective currencies. [14]

An internal-only board is comprised only of representatives of LSEG and LCH Group, with no independent directors. [15]

For further information, see LCH Limited, 2020, LCH Limited Self-Certification: Governance Arrangements. Available at <>. [16]

Ongoing competition reviews include: an in-depth merger investigation by the European Commission. Available at <>; and a Phase 2 review by the Competition and Consumer Commission Singapore. Available at <>. [17]

Completed competition reviews include: an informal merger review by the Australian Competition & Consumer Commission. Available at <>; an antitrust investigation by the Department of Justice. Available at <>; and a merger review by Competition Bureau Canada. [18]

SwapClear clears inflation products in four indices: UK RPI (50Y), European HICPxT (30Y), French CPIxT (30Y), and US CPI (30Y). [19]