EU Commission Approves IRS Clearing Under EMIR
The EU Commission has today adopted delegated legislation mandating the central clearing of certain interest rate swaps (IRS). The mandate covers IRS denominated in EUR, GBP, JPY and USD in the form of:
- Fixed-to-float IRS;
- Float-to-float IRS;
- Forward rate agreements (“FRA”); and
- Overnight index swaps (“OIS”).
(“Covered Transaction Types”). Certain Covered Transaction Types executed in the context of covered bond issuances are exempt from the requirement to clear.
The rules still have to be scrutinised by the EU Parliament and the EU Council, which have three months to approve. Once approved, the rules will be phased in over three years, as set out below:
| Category | Description | Entry into force |
| 1 | Clearing Members | 6 months after the date of entry into force of the regulation |
| 2 | Financial counterparties and alternative investment funds that are NFCs with aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives exceeding EUR 8 billion | 12 months after the date of entry into force of the regulation |
| 3 | Financial counterparties and alternative investment funds that are NFCs with aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives below EUR 8 billion | 18 months after the date of entry into force of the regulation |
| 4 | Non-financial counterparties that do not belong to Category 1, 2 or 3 | 3 years after the date of entry into force of the regulation |
Where a contract is concluded between counterparties in different categories, the date from which the clearing obligation takes effect for that contract is the later date.
In order to mitigate the effects of ‘frontloading’[1] under Article 4(1)(b)(ii) of EMIR, the minimum maturity below which transactions executed by financial counterparties during the relevant period do not need to be cleared are as specified below:
|
Cat |
Fixed-to-float |
Float-to-float | FRA |
OIS |
||||||||
| X[2] | Y[3] | Z[4] | X | Y | Z | X | Y | Z | X | Y | Z | |
| 1 | 50y | 6m | 6m | 50y | 6m | 6m | 3y | 6m | 6m | 3y | 6m | 6m |
| 2 | 50y | 50y | 6m | 50y | 50y | 6m | 3y | 3y | 6m | 3y | 3y | 6m |
| 3 | 50y | 50y | 50y | 50y | 50y | 50y | 3y | 3y | 3y | 3y | 3y | 3y |
Further legislation mandating the central clearing of other classes of OTC derivatives will follow soon.
[1] The obligation to clear OTC derivatives of a class which has been declared subject to the clearing obligation and which are entered into on or after the date on which a CCP has been authorised to clear to clear that class, but before the date on which the clearing obligation comes into force
[2] Contracts entered into or novated before the date that is two months after the date of entry into force of the regulation
[3] Contracts entered into or novated after the date that is two months after the date of entry into force of the regulation but before the date that is five months after the date of entry into force of the regulation
[4] Contracts entered into or novated after the date that is five months after the date of entry into force of the regulation
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