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ESMA Consults on EMIR Clearing Obligation

Introduction

On 12 July 2013, the European Securities and Markets Authority (ESMA) published a discussion paper regarding the clearing obligation under EMIR, and specifically the regulatory technical standards (RTS) ESMA is required to draft pursuant to Article 5(2) which details:

  • the class of OTC derivatives that should be subject to the clearing obligation;
  • the date or dates from which the clearing obligation takes effect; and
  • the minimum remaining maturity of the OTC derivative contracts subject to the clearing obligations referred to in Article 4(1)(b)(ii) of EMIR.

ESMA asks for comments to its discussion paper by 12 September 2013.

The Classes of OTC Derivatives to be Subject to the Clearing Obligation

In order to strike a balance between the requirement to provide sufficient granularity without providing so much specificity as to make the guidance opaque and too easy to evade, ESMA defines classes of derivative by reference to both “key characteristics” and “other characteristics”.  Key characteristics of a class are those characteristics which are shared by all the contracts belonging to the same class.  They are designed to reflect the economic benefit to the user of entering into the OTC derivative contract and are to be defined at the level of the RTS.  In contrast, other characteristics merely impact the mechanics of calculation of an OTC derivative, and are used to differentiate between individual CCP-cleared and non CCP-cleared contracts.  They are more likely to be defined at the level of the Public Register to be maintained by ESMA in accordance with Article 6 of EMIR.  A summary of key characteristics and other characteristics, by broad class of OTC derivative, is provided in Annex 1.  ESMA also maps key characteristics and other characteristics to the set of OTC derivative contracts which are currently cleared in Europe.  The strong impression the reader is left with is that this will be the first set of product types which will be subject to the clearing obligation under EMIR.  Interestingly, in relation to the interest rate derivative class, ESMA concluded that swaptions, caps and floors are not currently cleared by CCPs.

The Date or Dates From Which the Clearing Obligation Takes Effect

ESMA provides a very high level summary of the factors which will be considered in determining the date from which the clearing obligation should take effect.  It notes that the clearing obligation procedure will be triggered by the first CCP authorised to clear a certain class of OTC derivatives, with ESMA having no flexibility to wait until all CCPs clearing the same class have been authorised or recognised under EMIR.  Nonetheless, the discussion paper notes that it could still take from 9 to 16 months from the notification of a class of OTC derivatives to ESMA under Article 5(1) of EMIR to the entry into force of the clearing obligation of this class, not taking into account any phase in requirements.

Preliminary Analysis of the Readiness of Asset Classes Vis-à-Vis the Clearing Obligation

ESMA also provides a high level summary of the current readiness of derivative asset classes for compliance with the clearing obligation, assessed by reference to the following criteria:

  • volume and liquidity
  • level of standardisation
  • availability of data
  • experience in clearing; and
  • existence of a clearing obligation in other jurisdictions.

Annex 1

Class

Key Characteristics

Other Characteristics

Credit Derivatives Index CDS
  •   Product type
  •   Product sub-type
  •   Geographical zone
  • Settlement currency
  • Series
  • Tenor
Single name CDS
  •   Product type
  •   Product sub-type
  •   Geographical zone
  • Settlement currency
  • Underlying
  • Tenor
Interest Rate Derivatives Fixed-to-float
  •   Product type
  •   Floating rate index
  •   Settlement currency
  •   Maturity
  •   Settlement currency type
  •   Optionality
  •   Notional type
  • Payment period
  • Day count fraction convention
  • Rate reset period
Basis swap, FRA, OIS
  •   Product type
  •   Floating rate index
  •   Settlement currency
  •   Maturity
  •   Currency type
  •   Optionality
  •   Notional type
  • Payment period
  • Day count fraction convention
  • Rate reset period
Interest rate option
  •   Product type
  •   Underlying
  •   Settlement currency
  •   Maturity
  •   Currency type
  •   Optionality
  •   Notional type
  • Payment period
  • Day count fraction convention
  • Rate reset period
Equity derivatives Equity OTC derivatives
  •   Product type
    • Vanilla
    • Dividend
    • Volatility
  • Product sub-type
    • Basket
    • Index
    • single name
  • Geographical zone
  •  Settlement currency
  •  Underlying
  •  Maturity
  •  CFD?
  •  Forward/swap?
  •  Option?
Foreign exchange derivatives Non deliverable forwards, cash-settled forwards
  •   Product type
  •   Currency pair
  •   Notional currency
  •   Settlement currency
  •   Maturity
  •   Settlement Type
Commodity derivatives Commodity derivatives
  •   Product type
  •   Product sub-type
  •   Underlying asset
  •   Settlement currency
  •   Settlement type
    •   Cash
    •   Physical
    •   Transaction type
      •   Forward
      •   Swap
      •   option
  •  Underlying asset
  • Settlement currency
  • Settlement type
    • Cash
    • Physical
  • Transaction type
    • Forward
    • Swap
    • Option

 

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