Bank of England Proposes Introducing Clearing Obligation for TONA Overnight Index Swaps

The Bank of England has launched a consultation proposing to subject Overnight Index Swaps (OIS) that reference the Tokyo Overnight Average rate (TONA) to the U.K. derivatives clearing obligation under the U.K. version of the European Market Infrastructure Regulation. The BoE has already decided to remove contracts referencing JPY LIBOR from the clearing obligation starting December 6, 2021. Following recent announcements made by the Japanese authorities, the BoE now considers it appropriate to replace contracts referencing JPY LIBOR with contracts referencing TONA. The planned change would apply from December 6, 2021 or shortly thereafter. Responses to the consultation may be submitted until October 27, 2021.

The BoE has also confirmed in a Policy Statement final changes to the derivatives clearing obligation for contracts referencing EONIA and GBP LIBOR. Contracts referencing EONIA will be removed from the clearing obligation and replaced with contracts referencing €STR from October 2021, and from December 20, 2021, contracts referencing GBP LIBOR will be removed and replaced with contracts referencing SONIA.

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. The addition of contracts referencing TONA will be made by amending BTS 2015/2205.

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