The scope of derivatives covered by the obligation and the timing of the implementation track the draft regulation proposed by European Securities and Markets Authority (ESMA) in September 2017, which we detailed in our earlier publication, a copy of which is here.

The European Commission stated that, to ensure the smooth functioning of the financial markets, the rules should enter into force as a matter of urgency and so did not delay implementation to a date after 3 January 2018 despite ESMA's earlier statement that it "would not be opposed" to a brief delay in implementation.

In summary, the trading obligation will apply from 3 January 2018 to derivatives where both parties are "Category 1" or "Category 2", including derivatives where one of the two parties is based outside the EU but is the equivalent of a Category 1 or Category 2 entity.

  • Category 1 entities are clearing members for the relevant class of derivatives.
  • Category 2 entities are financial counterparties and alternative investment funds that are subject to the obligation to clear derivatives and whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives for January, February and March 2016 was above €8bn.

For other entities subject to the obligation to clear derivatives, the trading obligation will take effect at the same time as the clearing obligation takes effect. This means:

  • 21 June 2019 for financial counterparties and alternative investment funds that are subject to the obligation to clear derivatives, but which do not fall within Categories 1 or 2; and
  • for all other entities that are subject to the obligation to clear derivatives, the dates are 21 December 2018 for interest rate swaps and 9 May 2019 for credit derivatives.

The derivatives subject to the trading obligation are specified maturities of fixed-to-floating interest rate swaps denominated in EUR, USD, and GBP; and on-the-run and first off-the-run five year iTraxx Europe Main and iTraxx Europe Crossover index CDS.