BoE has set out a proposal to modify the scope of contracts that are subject to the derivatives clearing obligation to reflect the ongoing reforms to interest rate benchmarks. This consultation paper would result in changes to the EC Delegated Regulation 2015/2205, which supplements EU Regulation 648/2012 on OTC derivatives, central counterparties, and trade repositories with regard to regulatory technical standards on the clearing obligation. As a consequence of the anticipated changes in market activity resulting from interest rate benchmark reform, BoE intends to remove contracts that reference benchmarks that are being discontinued and replace them with the Overnight Index Swaps (OIS), with the same range of maturities, which reference the replacement near risk-free reference rate benchmarks selected for each currency. The consultation ends on July 14, 2021, with BoE intending to publish the amendments to Binding Technical Standards (BTS) 2015/2205 in Autumn.
The proposed changes aim to ensure that the broader policy objective of the clearing obligation continues to be met. This means mitigating the systemic risk that might otherwise arise from no action being taken to amend the scope of the clearing obligation in response to interest rate benchmark reform. Given the aims of interest rate benchmark reform, the changes proposed in this consultation should ensure that the OTC derivatives activity covered by the clearing obligation remains broadly the same once the benchmark transition has been completed. Thus, BoE proposes to modify the contract types that are subject to the clearing obligation in the onshored BTS 2015/2205 as a consequence of the anticipated changes in market activity resulting from interest rate benchmark reform. The changes being proposed at this time are limited to those related to benchmarks, currently within the scope of the clearing obligation, that are being discontinued by January 2022, and include:
- Removing, on October 18, 2021, the contract type referencing Euro Overnight Index Average (EONIA) from the overnight index swaps class and replacing it with the contract type in the overnight index swaps class referencing €STR with an original maturity of 7 days to 3 years
- Removing, on December 06, 2021, the contract type referencing JPY London Inter-bank Offered Rate (LIBOR) from the Basis Swaps and Fixed-to-float interest rate swaps classes
- Removing, on December 20, 2021, the contract type referencing GBP LIBOR from the Basis Swaps, Fixed-to-float interest rate swaps and Forward Rate agreements classes and replacing it with the contract type in the overnight index swaps class referencing Sterling Overnight Interbank Average Rate (SONIA) but with an amended original maturity range of 7 days to 50 years.
These changes will not have retrospective effect. OTC derivatives contracts referencing risk-free rates benchmarks that are concluded between counterparties before the relevant modification dates will not be subject to the clearing obligation. The purpose of this is to provide enhanced legal certainty. As the publication of the most widely used USD settings will cease in June 2023, the proposed changes do not relate to the transition from USD LIBOR at this time. This consultation is relevant to financial and non-financial counterparties that are subject to the clearing obligation under European Market Infrastructure Regulation (EMIR) and to central counterparties. The proposal set out in this consultation has been designed in the context of the UK having now left the EU and the transition period having come to an end. Unless otherwise stated, any references to EU or EU-derived legislation refer to the version of the legislation that forms part of retained EU law.
Comment Due Date: July 14, 2021
Keywords: Europe, UK, Banking, Securities, Interest Rate Benchmarks, Overnight Rate Benchmarks, Overnight Index Swaps, LIBOR, EONIA, SONIA, €STR, Brexit, Clearing Obligation, EMIR, Derivatives, BoE
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