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ESMA updates EMIR frontloading Q&A

ESMA has updated its EMIR Q&A Level 3 text on OTC derivatives, CCPs and trade repositories. The update clarifies how the frontloading and clearing obligations apply to swaps created via the exercise of a swaption. Coming a scant three business days before the start of frontloading, the update continues the EMIR practice of just in time regulatory manufacturing. Excerpted below:

Article 4 of EMIR – Clearing obligation

 (a) Article 4(1)(b) of EMIR requires to clear the OTC derivative contracts (pertaining to a class of OTC derivatives that has been declared subject to the clearing obligation) that are entered into or novated either on or after the date from which the clearing obligation takes effect or during the frontloading period detailed in Article 4(1)(b)(ii) and under certain conditions. What type of trade novations are covered in this article?

(b) Does the clearing obligation apply to a swap which results from the exercise of a swaption?

 OTC Answer 20

(a) All types of trade novations are covered, i.e. each time a counterparty (being a CCP or another counterparty) steps into the trade and become a new counterparty to the trade.

(b) A swap which results from the exercise of a swaption is subject to the clearing obligation when any of the following conditions are met:

(i) the swap and the corresponding swaption are entered into on or after the date on which the clearing obligation takes effect; or

(ii) the swap is entered into on or after the date on which the clearing obligation takes effect and the corresponding swaption is entered into on or after the date on which the frontloading obligation starts to apply and before the date on which the clearing obligation takes effect; or

(iii) the swap and the corresponding swaption are entered into on or after the date on which the frontloading obligation starts to apply and before the date on which the clearing obligation takes effect, and the swap has a remaining maturity which is higher than the minimum remaining maturity defined in the RTS on the clearing obligation.

The table below summarises the different cases:

Before “frontloading

window”

During “frontloading

window”

On or after date on

which the clearing

obligation takes effect

Is the swap resulting

from the swaption

subject to the clearing

obligation?

    Swaption entered into and

exercised

Yes (i)
  Swaption entered into   Yes (ii)
  Swaption entered into and

exercised

  Yes if the swap has a

remaining maturity

above the minimum

remaining maturity

defined in the RTS (iii)

Swaption entered into Swaption exercised   No
Swaption entered into   Swaption exercised No
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