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Originating department:SwapClear
Company Circular No:LCH.Clearnet Ltd Circular No 2638
 Service Circular No:No 069
Date:16 June 2010
To:All SwapClear Clearing Members

OIS discounting valuation adjustment

Dear Member,

To ensure the most accurate valuation  for risk management purposes, LCH.Clearnet Limited will be using OIS rate curves to discount its SwapClear portfolio

Extensive consultations with SwapClear members indicated that cleared interest rate swap portfolios should be discounted according to an OIS curve rather than a Libor curve, referred to as Discount Risk. This ensures that LCH.Clearnet will be valuing according to market in the event of a SwapClear member default, when the majority of bids for the auction portfolio will be on this basis.

Following analysis by LCH.Clearnet Risk, as endorsed by the LCH.Clearnet Risk Committee and SwapClear Default Management Group, it is apparent that material Discount Risk arises from USD, EUR  and GBP.

Accordingly in the short term LCH.Clearnet will be adjusting the valuation difference for these currency portfolios across the SwapClear membership. N.B. adjustments will be both debits and credits, the net impact to LCH.Clearnet (as variation margin) will be zero.

This adjustment is necessary to ensure LCH.Clearnet reflects accurate valuations of its members exposures and hence mitigate the risk arising.

Method / Timeline

Every week LCH.Clearnet Risk will recalculate the Discount Risk from USD, EUR and GBP across the SwapClear membership and will derive the adjustment required (debit or credit) for each member. This amount will be communicated via email to all members every Friday. The amount will be debited or credited to each membersí currency Buffer T account for value the following Tuesday. Each currency adjustment will be netted with the Tenor Basis adjustment applicable to that currency. The amounts will be visible to members via their Banking report 22.

Any debits or credits will have daily interest credited/debited based on overnight interest rate, although the interest posting will occur monthly.

The first one-off adjustment will be communicated on Friday 25 June 2010 with the postings occurring for value Tuesday 29 June 2010.

Note: it is planned that a fully automated and integrated solution will be delivered as part of the SwapClear replacement programme later in 2010 for both Discount Risk and Tenor Basis risk.

Please do not hesitate to contact Lois Blazy (or your usual SwapClear contact) if you require any further details.

Lois Blazy
Commercial Services
SwapClear
LCH.Clearnet Ltd
+44 (0)207 426 7452
lois.blazy@lchclearnet.com