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In-depth Markets: Derivatives

21 June 2016: start date for the Central Clearing obligation

Published on May 26, 2016

The obligation to centrally clear certain contracts, which is the key obligation under this regulation, will be implemented gradually starting on 21 June 2016. Central clearing has to be carried out in a clearing house authorised under the EMIR framework. Focus on the first derivatives covered and the timeline for the various players.

In order to secure OTC derivative swaps, the EMIR regulation sets out the obligation for all financial counterparties to a derivative contract to centrally clear a range of derivatives deemed sufficiently liquid and standardised by European Securities and Markets Authority (ESMA). Regarding non-financial counterparties, only those whose trading in derivatives other than for hedging purposes is significant are concerned. The counterparty risk will thus be handled via clearing houses authorized in accordance with EMIR, the number of which currently stands at 16 in the Union.

The first derivatives contracts covered

Interest rate derivatives

The initial delegated regulation was published in the Official Journal of the European Union on 1 December 2015. It sets out the obligation to centrally clear the following interest-rate derivatives denominated in euros, pound sterling, Japanese yen and the US dollar:

  • fixed-to-float swaps;
  • basis swaps;
  • Forward Rate Agreements (FRA);
  • overnight-indexed swaps.

These contracts will also have to meet certain conditions, notably regarding their residual maturity and their benchmark indices. These conditions are specified in the delegated regulation.

On 10 November 2015, ESMA also published proposed technical standards aimed at making it mandatory to centrally clear certain interest-rate derivatives denominated in Polish, Norwegian and Swedish currencies, as they are considered systemically important at both the local and European level.

Credit derivatives

On 19 April 2016 was published in the Official Journal of the European Union a second delegated regulation that requires mandatory central counterparty clearing of certain index credit default swaps (CDS):

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

Like the clearing obligation on interest derivatives, the obligation on index CDS will be phased in over three years to give extra time for smaller market participants to comply.

Implementation timeline for the central clearing obligation

Other derivatives

Other derivatives have to be the object of a delegated regulation before they become subject to the central clearing obligation. At this stage, ESMA is not looking to make equity or currency derivatives subject to the central counterparty clearing obligation. Nevertheless, trading of these derivatives is subject to other obligations destined to secure transactions, notably the exchange of collateral between counterparties.

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

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