On November 5, the European Securities and Markets Authority (ESMA) published a consultation paper relating to indirect clearing arrangements (CP). The CP consists of a review of the existing regulatory technical standards under the European Markets Infrastructure Regulation (EMIR RTS) applicable to indirect clearing of over-the-counter (OTC) derivatives as well as further consideration of the proposed regulatory technical standards under the new Markets in Financial Instruments Regulation (MiFIR RTS) applicable to indirect clearing of exchange-traded derivatives (ETDs). The MiFIR RTS on indirect clearing were notably absent from the package of final proposals for RTS and implementing technical standards for MiFIR and the revised Markets in Financial Instruments Directive (MiFID II) published by ESMA in September 2015.

First introduced in EMIR, the phrase “indirect clearing arrangements” refers to circumstances in which a clearing member provides clearing services to an “indirect client”, that is, a client of the clearing member’s direct client. Mindful of the need to ensure greater access to clearing to meet the G20 obligations to clear standardized OTC derivatives, and in order to establish a common European framework for indirect clearing, the EMIR RTS set out certain requirements applicable to indirect clearing arrangements, primarily to ensure adequate levels of protection to indirect clients in the event of the default of the clearing member, or the clearing member’s direct client. However, due to certain operational and other challenges in complying with the EMIR RTS on indirect clearing, clearing members have struggled to bring to market a viable indirect clearing solution for OTC derivatives.

The MiFIR RTS on indirect clearing attempted to mitigate certain of these challenges for the ETD markets. However, the approach to indirect clearing of ETDs proposed by ESMA was criticized by industry groups. The CP therefore represents an attempt by ESMA to reconsider indirect clearing arrangements for both the ETD and OTC markets in a comprehensive and coordinated fashion, in order to produce a common approach to indirect clearing for both markets. ESMA’s proposals in the CP focus primarily on account structure and segregation models for indirect clients as well as the obligations on liquidation or porting of indirect client positions and assets as part of default management activities.

Comments on the CP must be received by December 17, 2015. The CP is available here.