On October 2, the European Securities and Markets Authority (ESMA) finalized and issued a draft regulatory standard (RTS) for the mandatory clearing of certain credit default swaps (CDS) as required under the European Market Infrastructure Regulation (EMIR). The draft RTS follows the first RTS on interest rate derivatives developed by ESMA and adopted by the European Commission (EC) on August 6 and, therefore, has the same provisions regarding the categorization of counterparties.
The classes of CDS that will be subject to the EMIR mandatory clearing requirement are those that settle in euro and are untranched Index CDS with a five-year tenor on Series 17 onwards referencing either iTraxx Europe Main or iTraxx Europe Crossover (Covered CDS).
The draft RTS provide for a phased-in implementation schedule from the date at which the draft RTS for CDS becomes effective to encourage an orderly process of application for the four different categories of market participants as follows:
- Category 1 – clearing members of a recognized or authorized CCP of at least one of the classes of Covered CDS – nine months after the draft RTS becomes effective, which can be no earlier than August 2016;
- Category 2 – financial counterparties (FCs) (as defined under EMIR) and alternative investment funds (AIFs) (as defined under the Alternative Investment Fund Managers Directive) that are non-financial counterparties (NFCs), which belong to a group whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives is above the €8 billion threshold – 15 months after the draft RTS becomes effective, which can be no earlier than February 2017;
- Category 3 – FCs and AIFs whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives is below the €8 billion threshold – 21 months after the RTS becomes effective, which can be no earlier than August 2017; and
- Category 4 – all remaining NFCs – three years after the draft RTS becomes effective, which can be no earlier than to be February 2019.
The draft RTS has been sent by ESMA to the EC, which has three months to endorse it, and will become effective on the 20th day following its publication in the Official Journal of the European Union.
The ESMA draft RTS for CDS can be found here.