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ESMA proposes Cat 3 clearing delay

ESMA has today published a consultation paper requesting responses to a proposal which seeks to provide additional time for market participants with limited volume to comply with the clearing mandate under EMIR. If approved, the proposal would delay the compliance date for Category 3 entities by two years. Category 3 comprises FCs and NFC + AIFs whose group aggregate OTC positions are below EUR 8bn.

The clearing mandate is effected by means of three Delegated regulations[1] covering: IRS in the G4 currencies, European Index CDS and IRS in NKO, PLN and SEK. ESMA proposes another  Delegated Regulation amending each of its predecessors by altering the applicable compliance date in respect of Category 3 entities. The Category 3 compliance date for IRS G4 would be 21 June 2019, CDS would be 9 February 2020 and non-G4 IRS would be 3.5 years following entry into force of the relevant Delegated Regulation.

The consultation paper makes it clear that the proposal is in response to difficulties experienced by smaller counterparties in accessing CCPs. Considerations of cost and risk render direct access via clearing membership unfeasible for smaller entities. Increasing regulatory capital costs have fuelled disinclination to service smaller, and less profitable, clients. Over and above these emerging practical realities, the legal and theoretical structure which should underpin indirect clearing is somewhat less than concrete.

As remarked many times before- the EU is no stranger to delay. The market is still waiting for the revised timetable for WGMR non-cleared compliance from the EU, it was perhaps unrealistic to hope that clearing under EMIR would proceed without further adjustment or adjournment. Despite the uncertainty consequent on impermanent regulation, the overall prospects for indirect clearing of OTC derivatives certainly recommend delay and ESMA are to be congratulated for once more prioritising practicality over punctuality.

The consultation closes on  5 September 2016.

[1] Commission Delegated Regulation (EU) 2015/2205, Commission Delegated Regulation (EU) 2016/592, Commission Delegated Regulation (EU) [yyyy/xxx]

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