In-depth Markets: Derivatives

European Market and Infrastructure Regulation (EMIR): the European Commission has adopted draft legislation introducing a clearing obligation for certain interest rate derivatives

Published on August 25, 2015

In order to implement the central clearing obligation for over-the-counter (OTC) derivatives, designed to make transactions more secure and provided for in the EMIR regulation, the European Commission has adopted initial enforcement measures. These relate to certain interest rate derivatives and specify the time frame.

On 6 August 2015, the European Commission adopted the new delegated regulation aimed at defining and implementing a central clearing obligation within the framework of the EMIR regulation on OTC derivatives, central counterparties and trade repositories. By clearing a transaction between a buyer and a seller, the clearing house bears the counterparty risk, thereby preventing one participant's difficulties from jeopardizing the whole market.

The clearing obligation will apply to certain interest rate swaps denominated in euro, pounds sterling, Japanese yen or US dollars. It will gradually come into force according to different categories of stakeholder (clearing members, non-financial counterparties, funds, etc.) over a period of three years.

What contracts does this concern?

The interest rate derivatives subject to this clearing obligation will be:

  • Fixed-to-floating interest rate swaps;
  • Basis swaps;
  • Forward Rate Agreements (FRA);
  • Overnight Index Swaps.

These contracts will also have to meet certain conditions, in particular concerning their remaining maturity and reference indices, which are specified in the delegated regulation.

The regulation will be phased in gradually

This delegated regulation will come into force over the next few months subject to its validation by the European Parliament and the Council of the European Union. Depending on the category to which the counterparty to the contract belongs, the clearing obligation will apply within a period of between six months (for clearing members) and three years (for certain non-financial counterparties whose positions exceed a clearing obligation threshold) from the date the delegated act comes into force.

Other categories of contracts concerned in the future

A register kept up to date by the European Securities and Markets Authority (ESMA) will make it possible to clearly identify contracts subject to the clearing obligation. Central clearing must be conducted within a clearing house authorized under EMIR.

Interest rate derivatives are the first category of OTC derivative contracts to be subject to the clearing obligation. Plans are in place to subject other categories of contracts, such as credit derivatives, to this obligation at a later date.

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