In July 2021, ISDA responded to a Bank of England (BoE) consultation on the inclusion of transactions referencing certain risk-free rates (RFRs) into the clearing obligation. In addition, the BoE released a supplementary consultation on the inclusion of swaps referencing TONA in September, which ISDA responded to on October 26, 2021.
ISDA members support the BoE’s proposal to adapt the derivatives clearing obligation under the UK’s European Market Infrastructure Regulation in the context of interest rate benchmark reform. ISDA members acknowledge the benefits of central clearing, as demonstrated by the current clearing rates for RFR swaps. Introducing a clearing obligation for these products could be a helpful tool to avoid liquidity fragmentation.
However, transactions stemming from post-trade risk-reduction exercises should be exempt from the clearing obligation to enable market participants to manage the risks in their non-cleared portfolios.
While not strictly in scope of this consultation, the effect of a clearing obligation for over-the-counter RFR-linked derivatives on the derivatives trading obligation (DTO) should be kept in mind. This should be carefully and independently analyzed, as it could have a detrimental impact on the market. Transactions not subject to the clearing obligation, such as IBOR swaps, should be removed from the scope of the DTO.
ISDA members also support a clearing obligation for TONA swaps, but recommend sufficient time to enact all changes to systems (internal and external) and control frameworks. ISDA members would welcome confirmation that the BoE or other UK authorities will not use their supervisory power if insufficient notice is provided between the BoE final policy statement and the effective date of the rule.