The clearing obligation under the European Market Infrastructure Regulation (“EMIR”) will start from 21 June 2016, after which firms will have to centrally clear certain classes of interest rate swaps (“IRS”). This follows the publication of the European Commission’s Delegated Regulation 2015/2205 on the central clearing of IRS in the EU’s Official Journal on 1 December 2015 (the “Delegated Regulation”).
The Delegated Regulation is the first to implement the EMIR clearing obligation. It covers over-the-counter (“OTC”) IRS denominated in the G4 currencies (euro, pounds sterling, Japanese yen and US dollars) that have specific features, including the index used as a reference for the derivative, its maturity, and the notional type (ie the nominal or face amount that is used to calculate payments made on the derivative).
The incoming clearing obligation will cover the following classes of OTC derivative contracts, fixed-to-float IRS, known as ‘plain vanilla’ interest rate derivatives; float-to-float swaps, known as ‘basis swaps’; forward rate agreements; and overnight index swaps. It does not apply to contracts concluded with covered bond issuers or cover pools for covered bonds, provided they meet certain conditions. briefing The clearing obligation will enter into effect for the different categories of counterparties, as follows:
- Category 1: clearing members of a recognised or authorised central counterparty (“CCP”) for at least one of the classes of IRS covered by the Delegated Regulation – 21 June 2016;
- Category 2: financial counterparties as defined in EMIR (“FCs”), and alternative investment funds as defined in the Alternative Investment Fund Managers Directive (“AIFs”), that are nonfinancial counterparties as defined in EMIR (“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 January, February and March 2016 – 21 December 2016;
- Category 3: FCs and AIFs not falling within categories 1 or 2 – 21 June 2017; and
- Category 4: NFCs not falling within another category – 21 December 2018.
Where parties to a contract fall into different categories of counterparties, the clearing obligation will take effect from the later date.
Frontloading will be required with an effective date of 21 February 2016 for Category 1 counterparties and 21 May 2016 for Category 2 counterparties. For further information, see our related briefings here, here and here.
The next clearing obligations are expected to cover index credit default swaps as well as IRS denominated in Norwegian krone, Polish zloty and Swedish krona. The Commission published the relevant draft regulatory technical standards on 1 October 2015 and on 10 November 2015, respectively, and they are currently being considered by the European Parliament and the Council. See our related briefings here and here.
The Delegated Regulation may be accessed here.