The European Securities and Markets Authority (“ESMA”) has published its third final report (“Third Report”) which includes a draft delegated regulation (“Delegated Regulation”) on the EMIR1 clearing obligation. The Delegated Regulation applies the clearing obligation to fixed-to-float interest rate swaps (“IRS”) and forward rate agreements denominated in Norwegian Krone (“NOK”), Polish Zloty (“PLN”) and Swedish Krona (“SEK”) (the “Relevant Currencies”). ESMA has also published a separate final report for the purpose of updating its technical standards on the EMIR reporting obligation.

Third Report - Background

As set out in our previous briefings, EMIR requires certain over the counter (“OTC”) derivatives to be centrally cleared and mandates ESMA to propose the classes of OTC derivatives to which the central clearing obligation will apply, as well as the dates from which that obligation will take effect for each of the different types of counterparties identified.

ESMA published its first final report on the EMIR clearing obligation on 1 October 2014 covering interest rate OTC derivative classes denominated in one of the G4 currencies (see our related briefing here). Subsequently, on 6 August 2015, the European Commission published the first Delegated Regulation on the clearing obligation covering OTC derivative classes denominated in these currencies (the “First Delegated Regulation”), (see our related briefing here). The First Delegated Regulation briefing is currently being considered by the European Parliament and the Council and, if neither objects, central clearing for the G4 currencies is expected to start in Q2 2016.

ESMA published the second final report specifying the OTC credit derivative classes which are to be subject to the clearing obligation on 1 October 2015 (see our related briefing here). This report has not yet been adopted by the European Commission.

The Third Report follows the publication, on 11 May 2015, of a consultation paper in which ESMA proposed applying the clearing obligation to fixed-to-float interest rate swaps denominated in Czech Koruna (“CSK”), Danish Krone (“DKK”), Hungarian Forint (“HUK”), and the Relevant Currencies and forward rate agreements denominated in the Relevant Currencies.

The Delegated Regulation

The Delegated Regulation specifies the classes of OTC derivatives contracts which are to be subject to the clearing obligation, namely fixed-to-float IRS and forward rate agreements denominated in the Relevant Currencies. These classes do not include contracts concluded with covered bond issuers or with cover pools for covered bonds, provided those contracts satisfy specified conditions.

As compared to the consultation paper, the Delegated Regulation only focuses on IRS denominated in the Relevant Currencies on the basis that these pose a greater systemic risk than IRS denominated in CSK, DKK or HUK. ESMA may subject these latter currencies to the clearing obligation at a later date.

ESMA’s approach in the Delegated Regulation mirrors the approach adopted in respect of the G4 currencies in the First Delegated Regulation, in particular with regards to the categorisation of counterparties, phase-in periods, the treatment of intragroup transactions and the scope of the frontloading requirement. The different categories and phase-in periods are as follows:

Category 1: clearing members of central counterparties (“CCPs”) that are authorised or recognised for at least one of the classes of OTC derivatives set out in the Relevant Currencies, or the G4 currencies specified in the First Delegated Regulation - six months after the Delegated Regulation enters into force;

Category 2: financial counterparties (“FCs”) or alternative investment funds (“AIFs”) that are non-FCs (“NFCs”), which belong to a group whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives is above EUR 8 billion for each of the three months after the Delegated Regulation is published in the Official Journal, excluding the month of publication - 12 months after the Delegated Regulation enters into force;

Category 3: FCs and AIFS not falling within categories 1 or 2 - 18 months after the Delegated Regulation enters into force; and

Category 4: NFCs not falling within another category - three years after the Delegated Regulation enters into force.

Where the counterparties to a contract belong to different categories, the later of the dates applicable to those categories applies.

In the case of intra-group transactions involving counterparties in categories 1, 2 or 3, the date the clearing obligation applies depends on whether or not an equivalence decision pursuant to EMIR has been adopted for the relevant third country in which the group counterparty is established. If such a decision has been adopted, then clearing is required from the later of 60 days after the adoption of the equivalence decision and the date from which the clearing obligation takes effect, as appropriate. If no such decision has been adopted, then clearing is required three years after the Delegated Regulation enters into force.

Front-Loading

Under EMIR, the clearing obligation applies to contracts concluded on or after the date on which a CCP was first authorised under EMIR, which occurred on 18 March 2014, but before the date the clearing obligation takes effect, provided this is justified by the remaining maturity of such contracts at that date.

The Delegated Regulation specifies minimum maturities ranging from six months to 15 years and frontloading will be required with an effective date of either two or five months after the Delegated Regulation enters into force.

The frontloading obligation will only apply to category 1 and category 2 entities. It does not apply to NFCs, and the minimum remaining maturity for category 3 entities has been set at a level so as to exclude all trades from the frontloading requirement.

Next Steps

ESMA has sent the Delegated Regulation to the European Commission for endorsement. The European Commission now has three months in which to endorse the Delegated Regulation, which is followed by a nonobjection period by the European Parliament and the Council.

You may access ESMA’s Third Report here.

EMIR Reporting

On 13 November 2015, ESMA published its final report to the European Commission setting out draft technical standards on data reporting under Article 9 of EMIR. The draft technical standards update existing standards set out in Commission Delegated Regulation 148/2013.

You may access the final report here.