On 20 May 2021, the Bank of England (BoE) published a consultation paper setting 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. The BoE explains that its proposals would result in changes to  Commission Delegated Regulation (EU) 2015/2205 of 6 August 2015 supplementing the European Market Infrastructure Regulation (Binding Technical Standards (BTS) 2015/2205).

In summary, the BoE proposes to modify the contract types which are subject to the clearing obligation in the onshored version of BTS 2015/2205 as a consequence of the anticipated changes in market activity resulting from interest rate benchmark reform. The basic premise is to remove contracts that reference benchmarks that are being discontinued and replace them with Overnight Index Swaps, with the same range of maturities, which reference the replacement risk free reference rate (RFR) benchmarks selected for each currency.

The changes being proposed are limited to those relating to benchmarks currently within the scope of the clearing obligation that are being discontinued by January 2022. Specifically to remove contracts referencing:

  • EONIA and replace them with contracts referencing €STR.
  • GBP Libor and replace them with contracts referencing SONIA.
  • JPY Libor.

As the publication of the most widely used USD settings will cease in June 2023, the BoE’s proposed changes do not relate to the transition from USD Libor at this time.

The dates on which each of the modifications to the clearing obligation in the consultation come into force coincide with key dates associated with the broader RFR transition. Specifically, the dates coincide with the contractual conversion of contracts referencing the soon to be discontinued benchmarks by a number of central counterparties (CCPs). This activity is due to take place on different dates depending on the reference benchmark. As such, it is proposed that the modifications to the scope of the clearing obligation will also come into force on different dates that correspond to CCPs’ transition activities.

The details of the proposed contracts to be added to and removed from the clearing obligation alongside the expected dates upon which the changes will come into force are set out in section 2 of the consultation paper.

The deadline for comments on the consultation paper is 14 July 2021.