The joint ESAs have issued two draft RTS (as contemplated by Article 42 of the Securitisation Regulation) concerning clearing and collateralisation of derivatives entered into by STS issuers. The proposal is to align the rules with those that already exist for covered bonds. By way of background:

  • article 4 of EMIR requires financial counterparties and NFC+s to clear designated categories of derivatives, and article 11 requires them to provide margin for derivatives that are not subject to mandatory clearing.
  • The designated categories are standard ones, and typically will not include the kinds of bespoke swaps done in a securitisation, in which case clearing is not an issue.
  • Collateralisation could be an issue if the STS issuer were a financial counterparty – but in reality it never would be. There was a proposal back in 2017 to reclassify SSPEs as financial counterparties, but this was withdrawn after the consequences of doing it were appreciated. An SSPE is unlikely to be an NFC+ either, because of the way these are defined.
  • Clearing and collateral are therefore much more relevant to covered bonds, where the issuer would often be a financial counterparty, and to prevent this, RTS made under EMIR exempted them so long as the derivatives were for hedging and subject to a couple of other criteria e.g. the swap must rank at least pari passu with the bonds.

The draft RTS are relevant to STS issues only in those rare cases where an SSPE could otherwise be caught be the clearing or margining requirements, and operate by extending the covered bond exemption to STS issues, which makes sense. Non-STS issues are not covered by them, but even so the clearing and collateral requirements should rarely apply, but it is important to be aware of them so that they are not a trap for the unwary. The consultation runs until 15th June.