OTC Clearing

The European Commission has issued a proposal on the regulation of OTC derivatives, central counterparties and trade repositories.

The proposal will apply to all OTC derivatives, whether based on commodities, climatic variables, interest rates or even good old securities. Technically it’s all the derivative contracts set out in (4) to (10) in Annex I, Section C of the MiFID (see pages L145/41 & L145/42 of the MiFIDlink) that are traded over-the-counter.

In brief there will be a ‘clearing obligation'(Article 3) and a ‘reporting obligation'(Article 6).

The first will require financial counterparties to clear all ‘eligible’ (to be determined) OTC derivative contracts with a central counterparty. The second obligation will require financial counterparties to report details (to a ‘trade repository’) of any OTC derivative contracts that they have entered into by the following working day.

There will be some exemptions for non-financial firms who use OTC derivatives for hedging purposes.

Like the controversial AIFM Directive, this proposal now has to be considered by both ‘ECOFIN’ and ‘ECON’ – please see Regulatory Roundup #15 for a (brief) explanation of the EU legislative process that will be followed.

Currently the intention is that the requirements, or what arises from the debates between ECOFIN and ECON, will be in place by 31st December 2012.