Bank of England Confirms Changes to Derivatives Clearing Obligation to Reflect Benchmark Reforms09/29/2021The Bank of England has published a Policy Statement and final changes to the contracts subject to the derivatives clearing obligation under the U.K. version of the European Market Infrastructure Regulation. The U.K. onshored European Market Infrastructure Regulation imposes a clearing obligation on U.K. firms that are counterparties to certain OTC derivatives contracts. The clearing obligation applies to Interest Rate Swaps denominated in seven currencies (EUR, GBP, JPY, USD, NOK, PLN and SEK) and to two classes of credit default swap indices (iTraxx Europe Main and iTraxx Europe Crossover). The details are set out in three sets of Binding Technical Standards—Commission Delegated Regulation (EU) 2015/2205, Commission Delegated Regulation (EU) 2016/592 and Commission Delegated Regulation (EU) 2016/1178.
Following its May 2021 consultation, the BoE has confirmed the below changes to the U.K. interest rate clearing obligation under BTS 2015/2055:
- Removal of contracts referencing EONIA and replacing them with contracts referencing €STR, which will apply from October 18, 2021.
- Removal of contracts referencing GBP LIBOR and replacing them with contracts referencing SONIA, which will apply from December 20, 2021.
- Removal of contracts referencing JPY LIBOR, which will apply from December 6, 2021. Following recent developments, the BoE has opened a consultation on introducing on or shortly after December 6, 2021 a clearing obligation for OIS that reference the Tokyo Overnight Average rate (TONA). Details of this consultation can be found in our related post, here.
The implementation dates for the changes reflect the dates that central counterparties are expected to remove the benchmarks from the lists of contracts eligible for clearing and to contractually convert outstanding contracts referencing the discontinued benchmarks.
Noting recent developments regarding the phase out of USD LIBOR, the BoE states that it expects to consult on changes to the IRS contract types for USD LIBOR in 2022.
Noting that the frontloading obligation was removed as part of the EMIR Refit changes and therefore is not part of U.K. EMIR, the BoE has also removed it from BTS 2015/2205.
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