Amendments to the Clearing Conditions and FCM Regulations of Eurex Clearing AG

1. Introduction

This circular contains information with respect to amendments to the Clearing Conditions of Eurex Clearing AG (Clearing Conditions) and the FCM Regulations of Eurex Clearing AG (FCM Regulations) regarding the following topics:

A.    Extension of maximum remaining term for USD-denominated Overnight Index Swaps 
B.    Introduction of Secured Overnight Financing Rate (SOFR) swaps 
C.    Discounting switch from EONIA to €STR for EUR-denominated EurexOTC Clear derivatives 
D.    Validation for bunched order allocation trades
E.    Amendments to the Pledge Agreements / Full Title Transfer Agreement to account for changes to the references to General Terms and Conditions (GTC) of Clearstream Banking AG (CBF)

The amendments under the items A to D will come into effect as of 24 July 2020.

The amendments under the item E will come into effect as of 7 July 2020.

2. Required action

Clearing Members, Basic Clearing Members, Disclosed Direct Clients, FCM Clearing Members, vendors and other affected contractual parties should take the amendments to the Clearing Conditions and FCM Clearing Conditions into consideration.

3. Details

A.  Extension of maximum remaining term for USD-denominated Overnight Index Swaps (OIS)

With EurexOTC Clear Release 10.1, the Transaction Type specific novation criteria of Eurex Clearing will be enhanced to allow for USD-denominated overnight index swaps a maximum remaining term (from the date of novation to the termination date) of 50 years and 10 Business Days.

To reflect the changes and amendments, the following provisions of the Clearing Conditions and FCM Regulations will be amended as outlined in the Attachments 1 and 2:

• Chapter VIII Part 2 Number 2.1.5.1 of the Clearing Conditions
• Chapter II Part 2 Number 2.1.5.1 of the FCM Regulations

B.    Introduction of Secured Overnight Financing Rate (SOFR)-based swaps

Eurex Clearing will offer clearing eligibility for SOFR-based OIS, SOFR-USD LIBOR basis swaps and SOFR-EFFR basis swaps. SOFR-based swaps will  use the Effective Federal Funds Rate (EFFR) for discounting and PAI/PAA until the general transition from EFFR- to SOFR-based discounting for discounting and PAI/PAA takes place, which is currently envisaged for the weekend from 16 to 19 October 2020 (see Eurex Clearing Circular 044/20). 

Addition with respect to certain definitions and floating rate calculation will be made to the following provisions as outlined in Attachments 1 and 2:

• Chapter VIII Part 1 Number 1.7, Part 2 Number 2.2.5 and 2.2.7 Clearing Conditions 
• Chapter II Part 1 Number 1.7, Part 2 Number 2.2.5 and 2.2.7 FCM Regulations

C.    Discounting switch from EONIA to €STR for all EUR-denominated EurexOTC Clear derivatives

As part of the transition from EONIA to €STR as the new euro risk-free rate and as previously communicated, Eurex Clearing will implement for its EurexOTC Clear service the switch from EONIA to €STR-flat (without a spread) as follows:

1.  Transition of the Price Alignment Interest (PAI) and Price Alignment Amount (PAA) and the discounting based on EONIA to €STR-flat (without a spread) in a single step for all EUR-denominated OTC derivatives including but not limited to forward-rate agreements, interest-rate swaps, overnight-index swaps, and inflation swaps denominated in euro.

2.  Compensation for changes in the present values of EUR OTC derivatives resulting out of the transition by a euro cash credit or debit (e.g. via one-time cash fee instructions on trade level). To mitigate profit-and-loss impacts (positive and negative) resulting from variation margin changes induced by the discounting switch, a mandatory and automatic euro cash debit or credit will be instructed as a fee, ensuring that the discounting switch does not create winners and losers. The published document “EurexOTC Clear – process and methodology of the EONIA to €STR discounting switch” describes the methodology behind the compensation and lists and describes all steps in the compensation process. It also specifies all Member and public reports that are relevant for the transition, enabling each Member to reconcile the compensation. The document is available in the Eurex Clearing Member Section, under the following path:

Risk & Collateral Management > Benchmark Transition Information > EUR: EONIA-€STR Transition

As announced in Eurex Clearing Circular 016/20, in order to provide further transparency regarding the discounting switch, Eurex Clearing has prepared an additional version of the margin tool Cloud Prisma Margin Estimator (CPME) that uses the €STR curve for discounting euro-denominated cashflows. 

Through this tool, Members can calculate the trade Net Present Value (NPV) and portfolio initial margin on arbitrary portfolios under €STR discounting and compare the values to those under EONIA discounting in the current Production version of CPME.

The two CPME versions are available under the following links:

CPME Production (EONIA discounting):    https://eurexmargins.prod.dbgservice.com/

CPME What-if (€STR discounting):    https://whatif.eurexmargins.prod.dbgservice.com/

For further information on the discounting switch, see Eurex Clearing Circular 096/19 and 016/20 and Eurex Clearing Readiness Newsflash of 5 May 2020.

The EONIA-€STR discounting switch will be performed on the weekend of 24 – 27 July 2020. Accordingly, Friday, 24 July 2020, will be the last Business Day with EONIA-based PAI/PAA and discounting; and Monday, 27 July 2020, will be the first Business Day with €STR-based PAI/PAA and discounting. 

To reflect the changes and amendments, the following provisions of the Clearing Conditions and FCM Regulations will be amended as outlined in Attachments 1 and 2:

• Chapter VIII Part 2 Number 2.1.6, 2.1.7 and 2.2.1 Clearing Conditions
• Chapter II Part 2 Number 2.1.6 and 2.2.1 FCM Regulations

D.    Validation for bunched order allocation trades under the Clearing Conditions

Eurex Clearing introduced bunched order clearing for OTC Interest Rate Derivative Transactions in March 2019 (see Eurex Clearing Circular 013/19).

Bunched order clearing is a functionality to facilitate the clearing of OTC Interest Rate Derivative block trades (so-called bunched orders transactions) that are initially booked into a ‘suspense transaction account’ for post-novation allocation to different target transaction accounts. After a bunched order transaction is included into the clearing, the bunched order transaction is allocated from the suspense transaction account to the target transaction accounts of the Clearing Member which clears the transactions of the client to which the bunched order transaction relates. 

The allocation can be performed either A) via a third-party allocation service provider such as an ATS by submitting allocation transactions to Eurex Clearing or B) via post-trade events directly at Eurex Clearing.

For an allocation transaction that is submitted to Eurex Clearing via a third-party allocation service provider that is different from the ATS that submitted the bunched order transaction that is to be allocated, Eurex Clearing will implement a novation criterion that validates: (i) if the respective bunched order transaction is already cleared by Eurex Clearing and (ii) if its notional value is equal to or greater than the notional value of the respective allocation transaction that is to be novated. If (i) or (ii) fails, the allocation transaction will be rejected.

To reflect the changes and amendments, the following provisions of the Clearing Conditions will be amended as outlined in Attachment 3:

• Chapter VIII Part 1 Number 1.2.3 (11) and (12) of the Clearing Conditions 

E.    Amendments to the Pledge Agreements / Full Title Transfer Agreement to account for changes to the references to General Terms and Conditions (GTC) of Clearstream Banking AG (CBF)

CBF amended its GTC and, inter alia, the provision on CBF’s right of pledge that was previously set out in No. XXVII of CBF’s GTC become No. XXX of CBF’s GTC. Consequently, all references in Appendix 7, Appendix 11 and Appendix 14 to the Clearing Conditions of Eurex Clearing as well as Appendix 2 to the FCM Regulations to the provision need to be updated accordingly. Further, it is clarified that any reference to CBF’s or Clearstream Banking S.A.’s GTC shall also refer to any successor provision of the respective reference. 

To reflect the changes and amendments, the following provisions of the Clearing Conditions and FCM Regulations will be amended as outlined in Attachments 4 and 5:

• Appendix 7 to the Clearing Conditions – Pledge Agreement relating to pledges of Eligible Margin Assets in the form of Securities
• Appendix 11 to the Clearing Conditions – Pledge Agreement relating to pledges of Eligible Margin Assets in order to provide Basic Clearing Member Margin in the form of Securities
• Appendix 14 to the Clearing Conditions – Full Title Transfer Agreement relating to the transfer of ownership of Securities to Eurex Clearing AG by using securities accounts of a third party
• Appendix 2 to the FCM Regulations – Pledge Agreement relating to pledges of Eligible Margin Assets in the form of Securities

As of the effective date, the full version of the amended Clearing Conditions and FCM Regulations will be available for download on the Eurex Clearing website www.eurexclearing.com under the following link:

Resources > Rules and Regulations 

The changes and amendments to the legal framework of Eurex Clearing AG published by this circular are deemed accepted by each affected contractual party of Eurex Clearing AG, unless the respective contractual party objects by written notice to Eurex Clearing AG within the first ten (10) Business Days after publication. Any ordinary right of Eurex Clearing AG to terminate the respective contract (including a Clearing Agreement, if applicable) shall remain unaffected.

Unless the context requires otherwise, terms used and not otherwise defined in this circular shall have the meaning ascribed to them in the Clearing Conditions or FCM Clearing Conditions of Eurex Clearing AG, as applicable.
 

Attachments:

1. Amended sections of Chapter VIII of the Clearing Conditions related to topics A to C
2. Amended sections of Chapter II of the Clearing Conditions related to topic C
3. Amended sections of Chapter VIII of the Clearing Conditions related to topic D
4. Amended sections of Appendix 7, Appendix 11 and Appendix 14 to the Clearing Conditions of Eurex Clearing related to topic E
5. Amended sections of Appendix 2 to the FCM Regulations related to topic E

Further information