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EU chasing its tail with first clearing RTS

On 29 January 2015, ESMA released its formal opinion on the draft RTS covering the clearing obligation of interest rate swaps.

This is the latest exchange in a ping pong game between ESMA and the European Commission.

On 1 October 2014, ESMA originally submitted the draft RTS to the European Commission, but on 18 December 2014 the Commission returned a modified version of the RTS to ESMA. This opened a period of six weeks during which ESMA could amend the draft RTS on the basis of the Commission`s proposed amendments and resubmit it in the form of a formal opinion.

ESMA`s opinion focuses on two changes introduced in the modified version of the RTS, namely 1) amendments to the date on which the frontloading obligation starts to apply and 2) a new provision on the treatment of non-EU intragroup transactions.


Subject to minor adjustments, ESMA backs the modifications on the frontloading section. ESMA is of the view that it would allow for an increased flexibility and enable a more pragmatic implementation by postponing the start date of the frontloading obligation (discussed here).

Non-EU intragroup transactions

EMIR foresees that intragroup transactions may be exempt from the clearing obligation, provided that certain conditions are met. When a transaction involves a counterparty from the same group, but established in a third country, the exemption depends on the adoption by the Commission of an implementing act declaring that the legal, supervisory and enforcement arrangements of that third country are substantially equivalent to EMIR.

The Commission proposed in the modified RTS that for a maximum period of three years, any third country shall be deemed equivalent in the context of an application for the intragroup clearing exemption by financial counterparties. Accordingly, such application may be made in the absence of a decision on equivalence by the Commission, irrespective of the likelihood of such equivalence decision being made in the future. Although ESMA appreciates the objective to delay the date of application of the clearing obligation for certain intragroup transactions, it considers that the tool proposed by the Commission is not appropriate from a legal perspective.

ESMA presents six red flags with the Commission`s approach, including ESMA`s understanding that “it is not empowered to regulate third country equivalence in any manner, since it is an exclusive competence of the Commission”. Should the Commission maintain its approach based on deemed equivalence, future draft RTS submitted by ESMA on clearing obligations of CDS and FX NDF would be affected by the same fundamental hurdles, leading to further delays. ESMA stands ready to provide technical advice on this issue.

In light of the strong return of service by ESMA against the Commission, the approach to the clearing obligation of intragroup transactions may be revisited before the first RTS on clearing obligations is adopted.

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