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October 1, 2014

ESMA defines products, counterparties and starting dates for the clearing of interest rate swaps

It's hot news, the start of mandated Clearing grows nearer.

ESMA has finally set the European Union on course to require firms to clear OTC IRS trades. 

Here's the announcement from ESMA:

The European Securities and Markets Authority (ESMA) has today issued final draft regulatory technical standards (RTS) for the central clearing of Interest Rate Swaps (IRS) which it is required to develop under the European Markets Infrastructure Regulation (EMIR).      The RTS define those types of IRS contracts which will have to be centrally cleared, the types of counterparties covered by the obligation and the dates by which central clearing of IRS will become mandatory for them.

 

EMIR introduces the obligation to clear certain classes of OTC derivatives in central clearing houses (CCPs) which are either European CCPs authorised by national authorities or third-country CCPs recognised by ESMA. Central clearing of OTC derivatives is part of the G20 commitments aimed at reducing risk in the global financial system and requires a process for the identification of classes of OTC derivatives that should be subject to mandatory clearing. ESMA’s assessment is based on a number of criteria, including liquidity, price availability and standardisation. 

 

Four IRS classes will need to be centrally cleared

 

ESMA’s IRS RTS define the following four IRS classes to be subject to central clearing:

  • Basis swaps denominated in EUR, GBP, JPY, USD;
  • Fixed-to-float swaps denominated in EUR, GBP, JPY, USD;
  • Forward rate agreements denominated in EUR, GBP, USD; and
  • Overnight index swaps denominated in EUR, GBP, USD.

ESMA defined these IRS classes following an analysis of all IRS classes currently being cleared in the EU by authorised CCPs. Central IRS clearing will apply gradually

 

ESMA’s RTS define the implementation schedule for the counterparties to whom central clearing of the defined IRS classes will become mandatory. These counterparties will have to start central clearing of IRS after the entry-into-force of ESMA’s RTS in accordance with the following phase-in periods:

  1. clearing members (six months after the RTS entered into force);
  2.  financial counterparties and other alternative investment funds (AIFs)  (twelve months after the RTS entered into force);
  3.  financial counterparties and other AIFs with a low level of activity in un-cleared derivatives (18 months after the RTS entered into force);
  4. non-financial counterparties (three years after the RTS entered into force);

In order to properly capture systemic risk, the counterparties included in the first two categories will also have to frontload those IRS contracts they have concluded between the date of publication of the RTS in the Official Journal and the respective starting date of the clearing obligation.

 

Next steps

 

ESMA has submitted today its final draft IRS RTS to the European Commission, which has now up to three months to endorse them. Following the non-objection period of the European Parliament and Council, the RTS will enter into force and become effective 20 days after its publication in the Official Journal.

The ESMA press release is here, and full details here.

Product Scope

The attachment below contains the full details of product scope, here's the tables showing a simple view:

 

CCPs Impacted by the RTS

Timeline

  1. ESMA publish these RTS, today
  2. European Commission have up to 3 months to review these RTS = 1st January 2015
  3. The EC publish these RTS in the Official Journal (timing unknown)
  4. The RTS become effective 20 days after publication = 21st January 2015 = Effective Date [ED]
  5. [ED] + 6 months, direct Members mandated = 21st July 2015
  6. [ED] + 12 months, financial counterparties and other alternative investment funds (AIFs) = 21st January 2016
  7. [ED] + 18 months, financial counterparties and other AIFs with a low level of activity in un-cleared derivatives = 21st July 2016
  8. [ED] + 36 months, non-financial counterparties = 21st January 2018

So in reality, large firms who have already joined clearing are probably unaffected, and smaller firms have until 2016 to prepare, giving them time to choose a CCP, a Clearing Member, and get their systems and operations in place.  Anyone else got comments on this? Let us know below.


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