Derivatives Clearing Obligation – Amendments to Reflect USD Interest Rate Benchmark Reform: Amendment to BTS 2015/2205
This Policy Statement (PS) contains the final policy of the Bank of England (the Bank) on the proposed addition of Overnight Index Swaps (OIS) referring to the Overnight Collateral Funding Rate (SOFR) to the scope of contracts subject to the Derivatives Clearing Obligation (DCO) and to remove contracts referencing USD Libor. The policy proposed by this bank was set out in the consultation document published on June 9, 2022 entitled “Derivatives clearing obligation – modifications to reflect USD interest rate benchmark reform: Amendments to BTS 2015/2205” (the June CP).
The Bank’s final policy maintains the June PC’s proposal to add SOFR OIS contracts with an original maturity between 7 days and 50 years to the DCO from 31 October 2022 and to subsequently remove contracts referencing Libor usd. In the June CP, we proposed to align the date when Libor USD contracts will be removed from the DCO with the contractual conversions of the central counterparties (CCPs) of these contracts (which we believe would take place in the spring of 2023). In accordance with this proposal, contracts referencing USD Libor will be removed from the DCO on April 24, 2023.
The Bank’s final policy was implemented through amendments to Commission Delegated Regulation (EU) 2015/2205 of 6 August 2015 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on products over-the-counter (OTC) derivatives. , central counterparties and trade repositories with regard to regulatory technical standards on the clearing obligation (hereinafter Binding Technical Standards (BTS) 2015/2205).
This PS also provides the Bank’s comments on the responses to the June PC.
The PS is relevant for financial and non-financial counterparties that are subject to DCO under the European Market Infrastructure Regulation (EMIR) onshore, and for central counterparties.
In the June CP, the Bank proposed to introduce a clearing obligation for OIS referencing SOFR in the BTS onshore 2015/2205 from 31 October 2022 and to remove contracts referencing USD Libor from the DCO from the date of the contractual conversions of the CCPs into these contracts (which we believe would take place in the spring of 2023). The Bank’s proposal was a consequence of the substantial increase in volume and liquidity of SOFR OIS contracts traded since the start of 2022. Recognizing the interplay between broader interest rate benchmark reform and the political objective of the DCO, the Bank has defined two objectives:
- maintain globally unchanged the level of activity on OTC derivatives covered by the DCO; and
- to avoid jeopardizing the transition to quasi-risk-free rates (RFR).
In line with these objectives, the Bank proposed that the SOFR OIS contract type in the DCO cover broadly the same range of maturities as the USD Libor contracts it was to replace. However, the minimum maturity for the SOFR OIS contract type has been proposed at 7 days (as opposed to 28 days for USD Libor contracts) to reflect the differences in the types of transactions in which these contracts have historically been used.
In the June CP, the Bank proposed to align the date of withdrawal of contracts referencing USD Libor from the DCO with the date on which CCPs would contractually convert outstanding USD Libor contracts, which was to take place in the spring 2023. Since the publication of the June CP, a number of CCPs have confirmed their plans for these contractual conversions. In particular, LCH Ltd confirmed that it plans to convert these contracts over two weekends: 22-23 April 2023 and 20-21 May 2023;Footnote  while CME Group is consulting on its proposal to do so over the weekend of May 20-21, 2023.Footnote 
1.2: Summary of responses
The Bank received four PC responses. Responses were generally supportive of proposals to add SOFR OIS listing contracts to the DCO on October 31, 2022 and to align the removal of USD Libor listing contracts with contract conversion by CCPs in spring 2023. One respondent offered a earlier date for the removal of USD Libor but also supported the option to align with the first weekend of conversion by a major CCP. These responses are discussed in more detail in Section 2.
1.3: Changes to Draft Policy
Where the final rules differ from the June PC draft in a way which the Bank believes is significant, the Financial Services and Markets Act 2000 (FSMA)Footnote  requires the Bank to publish details of the difference together with a cost-benefit analysis.
The Bank will not make any material changes to the Final Rules that would require the requirements set out above to be met.
The Bank has amended BTS 2015/2205 using the powers of the Bank under Article 5(2)(a) of EMIR and under Section 138P and related provisions of Chapter 2A of the FSMA.
The standardization instrument in the appendix is now complete. The instrument includes specific dates on which each of the COD amendments will come into effect.
The policy set out in this PS has been designed in the context of the UK’s exit from the European Union (EU) and the end of the transition period. Unless otherwise stated, any reference to EU or EU derived legislation refers to the version of such legislation which forms part of retained EU law.Footnote 
1.5: Next steps
This is the last of the planned changes to the COD in light of the move to RFRs. The Bank will continue to monitor the expanded DCO.
2: Responses to CP feedback
As part of the process of drafting any normative instrument, the Bank is required by the FSMA to carry out a public consultation, to take into consideration all statements made to the Bank and to publish a report, in general terms, of these statements and the Bank’s response thereto.Footnote 
The Bank has taken into account the comments received on the PC. This section presents the Bank’s responses to these comments and the final decisions.
2.1: Modification of the scope of the clearing obligation
The Bank has proposed to change the contract types subject to DCO by adding the contract type in the OIS class referring to SOFR with an original maturity of 7 days to 50 years and removing the contract type referring to Libor USD.
All respondents supported the proposal to add the SOFR OIS contract type to the DCO and the removal of Libor USD. All respondents were also in favor of the proposed maturity range of 7 days to 50 years for the SOFR OIS contract type.
2.2: Dates of changes
The Bank has proposed October 31, 2022 as the effective date for adding SOFR OIS to the DCO. Respondents supported this date, although one noted that while not a problem in itself, some market participants might find a notice period of less than three months. The Bank concluded that it was not necessary to change the date of its proposal.
Regarding the removal of USD Libor, respondents generally supported aligning the effective date with contractual conversion by central counterparties. One respondent proposed to phase out USD Libor on March 6, 2023, before any CCP conversion date, but also supported aligning the phase-out date with the earlier of the CCP conversion dates.
As noted above in Section 1.1, some of the larger CCPs undertake their contract conversions over multiple weekends. The Bank has decided to align the removal of the USD Libor referencing contracts from the DCO with the first of these conversion dates, Monday April 24, 2023. In order to ensure market certainty, this date will not change, regardless of the potential changes to CCPs. ‘ contractual conversions announced after this PS.
2.3: Responses out of scope of the CP proposal
One respondent asked that the impact of a clearing obligation for OIS referencing SOFR on the derivatives trading obligation (DTO) under MiFIR be kept in mind and analyzed, noting concerns about potential negative impacts. The same respondent also asked for confirmation as to whether transactions no longer subject to the DCO would automatically be removed from the scope of the DTO.
The DTO is a competence of the Financial Conduct Authority (FCA) under the UK Markets in Financial Instruments Regulations (UK MiFIR). The Bank has spoken with the FCA about the proposed changes to the DCO to ensure that timely changes can be made to the scope of the DTO, if required. The FCA recognizes the link between the DCO and the DTO and will take the necessary steps to remove these instruments from the scope of the DTO, when they are excluded from the DCO. In addition, the FCA continues to monitor liquidity and market developments in USD products and will in due course consider whether the OIS referencing SOFR as a class of derivatives is sufficiently liquid to be included in the DTO and will consult separately on any proposed changes to the scope of the DTO. DTO. Any specific questions or comments regarding the application of the DTO should be directed to FCA directly.