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Frontloading fiasco

Even in its largely neutered form, frontloading continues to cause furrowed brows across the industry. Dealers have belatedly woken up to the implication that the new €8bn. threshold for category 2 firms may require trade-monitoring to begin as early as last Monday. While category 1 (clearing members) remains unchanged, category 2 firms will only be subject to the obligation if the 3-month average, month-end aggregate notional amount of uncleared swaps exceeds €8bn., in the 3 months immediately precedent to the beginning of mandatory clearing. This may seem simple enough (!?!), however the date for the onset of clearing has not yet been fixed, thereby making (future) retrospective obligations radically uncertain as to timing. If EMIR clearing  begins as expected in February 2015, the category 2 split is assessed on the notional averages of the previous three months, implying that trades may have to be counted from as early the first business day of November 2014. The threshold calculation determines the applicability of the frontloading mandate for the 12 month period between Category 1 and Category 2 clearing. In reality, the start date of the retroactive monitoring period is even less clear than outlined above- the frontloading obligation technically applies from its publication in the Official Journal, 20 days prior to its application.

The indeterminacy of the timeline only exacerbates existing confusion over frontloading. Retroactive clearing is already akin to re-pricing and confirming the categorisation of clients in foreign jurisdictions will be challenging enough without the need to explain the new threshold. Given that the current arrangements already represent an unusually high degree of reciprocity by ESMA and the structural inflexibility of EU lawmaking, any further adjustments to the rules are unlikely. A fundamental change to the rules, while still retaining the indicated February clearing start date, would require unrealistically rapid trilogue agreement between ESMA, the EC and Parliament; none of whom are known for their cheetah-like rapidity. Perhaps the most optimistic aspect is that the rules are currently so opaque as to make compliance impractical; those who fall foul of the rules will be far from alone.

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