EMIR: Mandatory Clearing

Article 4 of EMIR places a clearing obligation on all OTC derivative contracts which fulfil the conditions therein – but only once ESMA has determined which classes of OTC derivatives should be subject to the clearing obligation (Article 5(2)); see Regulatory Roundup 57 for further details,

On 6 August the European Commission adopted new rules, in the form of a Delegated Regulation, concerning the mandatory clearing of certain OTC derivative contracts through central counterparties (CCPs).

The rules capture the following contracts denominated in EUR, GBP, JPY and USD:

  • Fixed-to-float interest rate swaps, known as ‘plain vanilla’ interest rate derivatives
  • Float-to-float swaps, known as ‘basis swaps’
  • Forward Rate Agreements
  • Overnight Index Swap

The classes of contracts can be found in Annex 1 of the draft Delegated Regulation, although note the exclusions for contracts concluded with covered bond issuers or with cover pools for covered bonds that meet all of the conditions in Article 1(2).

Counterparties subject to the clearing obligation are divided into four categories which are briefly (but please see Article 2 for the precise definitions):

  • Category 1 will include counterparties that are clearing members for at least one of the derivatives in Annex 1
  • Category 2 will capture counterparties not falling within the above and that are financial counterparties (or AIFs that are non-financial counterparties) whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives is above €8bn
  • Category 3 will be financial counterparties (or AIFs that are non-financial counterparties) not belonging to Category 1 or Category 2
  • Category 4 will consist of non-financial counterparties that do not belong to any of the above three categories

Note that where the counterparties are AIFs or UCITS then the €8bn threshold applies individually at fund level.  Reference to Article 3(2)should be made where one counterparty is established in a third country.

The Categories determine when the clearing obligation takes effect (months in brackets commence from the date of entry into force of the Regulation – see below) as follows:

  • Category 1 (6 months)
  • Category 2 (12 months)
  • Category 3 (18 months)
  • Category 4 (3 years)

Where a contract is concluded between two counterparties included in different categories then the clearing obligation takes effect from the later date.

Although having ascertained (a) which OTC derivatives fall within mandatory clearing and (b) when the clearing obligation takes effect there is a twist in EMIR Article 4(1)(b)(ii) in that certain contracts will have a frontloading requirement i.e. such contracts will be subject to clearing before the date the clearing obligation takes effect.

Contracts subject to the frontloading requirement will be those concluded between 18 March 2014 (being the date the first CCP was authorised – Nasdaq OMX) and the date on which the clearing obligation actually takes place unless they have a remaining maturity lower than the minimum maturity set out in Article 4. This minimum maturity ranges from 50 years down to 6 months and is dependent upon both the Category of the counterparties and the classes of contract in question. In practical terms, Category 3 counterparties will not be subject to the frontloading requirement (nor, by their omission, will Category 4 counterparties).

The Delegated Regulation still has to face the EU Parliament and EU Council and as is usual will enter into force on the twentieth day following its publication in the Official journal.

This is the first clearing obligation that has been proposed by ESMA and it is expected that it will propose obligations for other types of OTC derivative contracts in the near future.

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