Interest Rate Swaps

Our 15 October 2014 EMIR Update on Clearing Obligations (available here ) (the “October Update”) noted that:

  • the European Market Infrastructure Regulation (“EMIR”) clearing obligation had not yet taken effect; and
  • the clearing obligation had been brought closer by the 1 October 2014 issue by the European Securities and Markets Authority (“ESMA”) of final draft regulatory technical standards (“RTS”) for the central clearing of interest rate OTC derivatives (“IRS”) and by the submission of those RTS to the European Commission.

As noted in the October Update, the Commission then had three months within which to endorse the draft IRS RTS. If the Commission were to have done so without amendment, the draft IRS RTS would have been passed to the European Parliament and Council. Had the Commission endorsed the IRS RTS without amendment and objection, the draft IRS RTS were likely to have entered into force during February 2015.

On 18 December 2014 the Commission informed ESMA that the Commission intends to endorse the draft IRS RTS, with amendments. ESMA now has a period of six weeks in which to:

  • amend the draft IRS RTS on the basis of the Commission’s proposed amendments; and
  • re-submit the draft IRS RTS in the form of a formal opinion to the Commission, copying that formal opinion to the European Parliament and to the Council.

If, on the expiry of that six-week period, ESMA has not submitted amended draft IRS RTS, or has submitted draft IRS RTS that are not amended in a way consistent with the Commission’s proposed amendments, the Commission may adopt the RTS with the amendments that the Commission considers appropriate, or reject the draft RTS.

The Commission has stated to ESMA  that the Commission considered that the following amendments were required to the draft IRS RTS:

  • postponement of starting date for frontloading: the Commission proposes to postpone the starting date for frontloading to enable parties to implement required practical arrangements for frontloading and, in particular, proposes that the frontloading obligation will not take effect until:
  • Category 1 parties1: two months after the entry into force of the draft IRS RTS, to enable such parties to confirm, prior to the frontloading obligation taking effect, whether intra-group transactions benefit from the exemption from the clearing obligation in Article 4.2(a) of EMIR;

-   Category 2 parties2: five months after the entry into force of the draft IRS RTS, to enable such parties to carry out threshold calculations to determine whether they fall into Category 2 or 33, provide the appropriate representations to their counterparties and make required changes to systems, controls and internal procedures. It is also proposed to change the threshold calculation period to be the three months after the publication of the draft IRS RTS in the Official Journal, excluding the month of publication;

  • threshold calculation: the European Commission proposes to clarify in a recital to the draft IRS RTS that, for investment funds, the threshold should be calculated per single fund instead of group level provided that, in the event of fund insolvency or bankruptcy, the funds are distinct legal entities that are not collateralised, guaranteed or supported by other investment funds or the investment adviser itself;
  • non-EU intra-group transactions: the clearing obligation should not, for three years, apply to OTC derivatives entered into between two counterparties established in a Member State and in a third country and belonging to the same group. This is intended to allow the Commission sufficient time in which to adopt equivalence decisions pursuant to Article 13 of EMIR4, which decisions cannot be adopted before the draft IRS RTS enter into force.

Credit Derivatives

On 20 November 2014 ESMA informed the Commission that, while it had finalised draft RTS on credit derivatives and was ready to deliver them at any time, ESMA would withhold delivery until the Commission had concluded its assessment process of the draft IRS RTS, the outcome of which could affect the content of the credit derivative RTS.