On 10 November 2015 the European Securities and Markets Authority (ESMA) published its final report containing final draft regulatory technical standards (RTS) for the central clearing of interest rate OTC derivatives in additional currencies under Regulation No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR). The report follows from ESMA’s consultation on a first version of the draft RTS.
The European Commission has up to three months from the date on which ESMA submitted the final draft RTS to endorse them. Provided that there is no objection from the European Parliament and the Council, the RTS will enter into force and become effective 20 days after their publication in the Official Journal of the European Union (OJEU).
Classes of interest rate OTC derivatives in additional currencies subject to the clearing obligation
EMIR introduces the obligation to clear certain classes of OTC derivatives with central counterparties. Interest rate OTC derivatives in NOK, PLN and SEK are the third set of OTC derivatives to be submitted by ESMA to the European Commission following the draft RTS submitted in relation to interest rate swaps denominated in EUR, GBP, JPY and USD (the G4 currencies) and certain classes of credit derivative. ESMA proposes that the following classes of interest rate derivative are made subject to mandatory central clearing:
Fixed-to-float interest rate swaps classes
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Forward rate agreement classes
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ESMA has determined that the above interest rate derivative classes are suitable for clearing in keeping with the underlying objectives of EMIR following consultation and an analysis of relevant interest rate derivative transactions that are currently offered for clearing by central counterparties (CCPs) authorised or recognised in the European Union.
ESMA also considered fixed-to-float interest rate swap transactions denominated in CZK, DKK and HUF but did not bring transactions of this type within the mandatory clearing obligation. In doing so ESMA considered the volume of transactions in each of these currencies relative to the wider market together with the systemic risk associated with those transactions, the currencies and the local financial services sector relevant to the currencies.
The final draft RTS provide an implementation schedule to market participants for whom central clearing of the defined IRS classes will become mandatory. ESMA distinguishes four categories of market participants and envisages the following phase-in periods for each of them:
- Category 1 (Clearing members): will start centrally clearing interest rate derivatives in the additional currencies that are subject to the clearing obligation six months after the RTS enter into force.
- Category 2 (Financial counterparties (FCs) and alternative investment funds (AIFs) that are non-financial counterparties above the clearing threshold (NFC+s) which, in each case, are not included in Category 1 and which belong to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives over a certain three-month period is above €8 billion): will start centrally clearing interest rate derivatives in the additional currencies subject to the clearing obligation 12 months after the RTS enter into force.
- Category 3 (FCs and other AIFs which are not included in Category 1 or 2): will start centrally clearing interest rate derivatives in the additional currencies subject to the clearing obligation 21 months after the RTS enter into force.
Category 4 (NFC+s not included in Categories 2 and 3): will start centrally clearing interest derivatives in the additional currencies subject to the clearing obligation three years after the RTS enter into force.
All market participants captured by the RTS will need to put in place appropriate clearing arrangements as soon as possible and in any event before the relevant phase-in period ends.
Further consultation papers and reports are likely to be published in due course in respect of other asset classes. For our briefing on the draft RTS for the clearing of interest rate swaps denominated in the G4 currencies please click here, for our briefing on the draft RTS in relation to clearing of foreign exchange non-deliverable forwards please click here and for our briefing in relation to the draft RTS for the central clearing of credit derivatives please click here.