The European Securities and Markets Authority (ESMA) has published a report containing final draft regulatory technical standards (RTS) for the central clearing of interest rate swaps (IRS) under Regulation No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR). The report follows from ESMA’s recent 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 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).
Defined IRS classes
EMIR introduces the obligation to clear certain classes of OTC derivatives with central counterparties. ESMA is required to develop RTS for the central clearing of IRS. ESMA proposes four classes of IRS to be made subject to central clearing:
- Basis swaps denominated in EUR, GBP, JPY and USD
- Fixed-to-float IRS (also referred to as plain-vanilla IRS) denominated in EUR, GBP, JPY and USD
- Forward rate agreements denominated in EUR, GBP and USD
- Overnight index swaps denominated in EUR, GBP and USD.
ESMA has defined the above IRS classes following an analysis of all IRS classes that are currently offered for clearing by central counterparties (CCPs) authorised in the European Union. ESMA notes that the selection of the mandatory IRS classes covers only contracts that the relevant authorised CCPs have accepted for clearing at the time of authorisation.
ESMA acknowledges the possibility that the first submission of IRS classes to the European Commission may be followed by one or more other submissions proposing to add further classes to the scope of the clearing obligation. However, ESMA has not provided a final process for doing so.
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 IRS 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. This category will start centrally clearing IRS 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 IRS 18 months after the RTS enter into force.
- Category 4: NFC-s not included in Categories 2 and 3 will start centrally clearing IRS three years after the RTS enter into force.
Counterparties in Categories 1 and 2 will also have to frontload those IRS contracts which they have concluded between the date of publication of the RTS in the OJEU and the respective starting date of the clearing obligation.
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. For certain market participants this means that they will be required to start centrally clearing IRS in less than a year’s time.
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 foreign exchange non-deliverable forwards please click here.