ESMA is proposing to prolong the phase-in of the clearing obligation for the smallest financial counterparties until 21 June 2019. This is in recognition of the difficulties that those counterparties are facing in establishing clearing arrangements as well as their limited impact in terms of systemic risk.
By way of background, the EMIR Regulation 648/2012 requires certain classes of over-the-counter (OTC) derivatives to be cleared through a central counterparty (“CCP”). Three Delegated Regulations on the clearing obligation (“Delegated Regulations”) have already entered into force and each of these classifies counterparties into four categories with a different application date for each counterparty. The smallest groups of FCs fall within Category 3 (“Category 3 FCs”), as do funds that are non-FCs. Currently, the clearing obligation set out in the three Delegated Regulations applies to Category 3 FCs as follows:
- OTC interest rate derivatives denominated in EUR, GBP, JPY, and USD – 21 June 2017;
- OTC index credit default swaps – 9 February 2018; and
- OTC interest rate derivatives denominated in NOK, PLN and SEK – 9 February 2018.
On 13 July 2016 ESMA published a consultation paper on the clearing obligation for Category 3 FCs, in which it (a) outlined the difficulties they are facing in getting access to CCP clearing, and (b) proposed providing these FCs with an additional two year phase-in period. ESMA published its Final Report on the clearing obligation for Category 3 FCs on 14 November, in which it confirmed its intention to extend the clearing obligation. The proposed application date under each of the Delegated Regulations is now 21 June 2019.
According to ESMA, this new phase-in period takes into account on-going regulatory developments which should facilitate access to CCPs by Category 3 FCs, including the proposed:
- delegated legislation on indirect clearing arrangements which is expected to increase the possibility for Category 3 FCs to indirectly access CCPs; and
- changes to the international leverage ratio framework which may make clearing more attractive for credit institutions; currently clearing activities significantly increase capital requirements, meaning that many credit institutions will not offer it.
ESMA’s Final Report has now been submitted to the European Commission, which has three months to decide whether or not it intends to endorse the draft regulatory technical standards set out in Annex 3 of that report. The draft RTS must then be submitted to the Council of the EU and the European Parliament under the non-objection procedure and, presuming neither objects, published in the EU’s Official Journal before entering into force.
You may access the Final Report here.