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Derivatives Obligations laid down in EMIR: Central clearing

Central clearing obligation (staggered implementation as from June 2016)

Published on December 4, 2015

Since February 2014, several clearing houses have been authorised in compliance with the EMIR regulation. An initial delegated regulation was published in the Official Journal of the EU on 1 December 2015, and other draft technical standards were published by ESMA to facilitate the future implementation of the central clearing obligation. The obligation will take effect gradually starting 21 June 2016. Central clearing will have to be carried out via a clearing house authorised to offer services and activities in the Union in accordance with EMIR.

The first derivative contracts covered

Delegated regulations specify the details of the obligationStarting in July 2014, ESMA has published a number of consultations aimed at defining the derivative contracts that will be subject to the central clearing obligation, from among the contracts for which clearing houses provide clearing. Based on the technical standards proposed by ESMA, the Commission must adopt delegated regulations that impose a clearing obligation by specifying which contracts are covered. These regulations must elicit no objection from either the European Council or the European Parliament.

Interest rate derivatives

On 1 December 2015, an initial delegated regulation was published in the Official Journal of the EU imposing a central clearing obligation on the following interest rate derivatives denominated in euros, pound sterling, Japanese yen and US dollars:

  • fixed-to-float interest rate swaps(also known as plain vanilla) ;
  • float-to-float swaps (also known as basis swaps);
  • forward rate agreements (FRA);
  • overnight index swaps.

These contracts must also meet certain conditions, notably with respect to their remaining maturity and their reference index. These conditions are specified in the delegated regulation.

ESMA: centralising information
A registry kept up to date by ESMA will allow market participants to unambiguously identify the contracts that are subject to a clearing obligation. The ESMA site (links below) will also have a list of EMIR-authorised clearing houses.

On 10 November 2015, ESMA also published proposed technical standards aimed at making it obligatory to use central clearing for certain interest rate derivatives denominated in Polish, Norwegian and Swedish currencies, as they are considered systemically important at both the local and European levels.

Credit derivatives

Furthermore, on 1 October 2015, ESMA sent the European Commission its draft regulatory technical standard for imposing central clearing on certain Index credit default swaps (CDS):

  • Untranched iTraxx Main Index CDS (EUR, 5 years),
  • Untranched iTraxx Crossover Index CDS (EUR, 5 years).

What about other derivatives?

To be subject to the central clearing obligation, they will have to be covered by a delegated regulation. At this point, ESMA does not plan to subject equity derivatives or currency derivatives to the central clearing obligation.

However, trading in these derivatives is subject to other obligations intended to make transactions more secure (see page on risk mitigation techniques).

Implementation timeline

The delegated regulation on interest rate derivatives denominated in euros, pound sterling, Japanese yen and US dollars will enter into force on 21 December 2015. Its application will be staggered over a period of six months to three years from that date, depending upon the category into which the counterparty to the derivative contract falls.

The timeline for application of the central clearing obligation for the interest rate derivatives cited above is as follows: 

 1  Application of the central clearing obligation to contracts traded before the clearing obligation application date.
2 The €8 billion threshold refers to the average gross notional amount of non-centrally cleared derivatives, calculated at the end of the three months following publication of the RTS in the OJ. For funds, the calculation is done at the fund level.

Initial application of the clearing obligation for Index CDS could take place in early 2017 for clearing members, mid-2017 for other financial counterparties, and 2019 for relevant non-financial counterparties.

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