The first Delegated Regulation to implement the clearing obligation under EMIR1 was adopted by the European Commission (the “Commission”) on 6 August 2015 (the “Delegated Regulation”). It lays down the classes of OTC derivative contracts that are subject to the clearing obligation and four different categories of counterparties for which different phase-in periods apply. The Delegated Regulation also deals with the application of the front-loading requirements.
EMIR requires certain OTC derivatives to be centrally cleared and mandates the European Securities and Markets Authority (“ESMA”) to propose the classes of OTC derivatives to which the central clearing obligation will apply as well as the date from which that obligation will take effect for each of the different types of counterparties identified.
As set out in our briefing note of 3 February 2015, available here, ESMA submitted the first version of its draft regulatory technical standards (“RTS”) on the clearing obligation for interest rate swaps (“IRS”) to the Commission on 1 October 2014. The Commission subsequently submitted a modified version of the RTS to ESMA on 18 December 2014. On 29 January 2015 ESMA adopted a formal Opinion on the Commission’s proposed amendments which annexed a second version of ESMA’s draft RTS: ESMA published a revised version of this Opinion on 6 March 2015. The Commission’s Delegated Regulation is in line with ESMA’s Opinion.
Classes of OTC Derivatives Contracts
Annex 1 of the Delegated Regulation sets out the classes of IRS that must settle in a single settlement currency in either euro, pounds sterling, Japanese yen or US dollars, namely:
- float-to-float swaps, known as ‘basis swaps’, referencing either EURIBOR or LIBOR with a maturity of 28 days to 50 years;
- fixed-to-float IRS, known as ‘plain vanilla’ interest rate derivatives, referencing either EURIBOR or LIBOR, with a maturity of 28 days to 50 years;
- forward rate agreements, referencing either EURIBOR or LIBOR, with a maturity of three days to three years; and
- overnight index swaps classes, referencing the Euro OverNight Index Average, FedFunds or the Sterling Overnight Index Average, with a maturity of seven days to three years.
Contracts concluded with covered bond issuers or cover pools for covered bonds are excluded from the mandatory clearing obligation subject to the fulfilment of certain conditions relating to: usage, cover pool registration/recording obligations, termination in resolution or insolvency, ranking of counterparty claims as compared to claims of covered bond holders, and compliance by the collateral pool with collaterisation requirements.
Categories of Counterparties
The Delegated Regulation sets out four different categories of counterparties to which the clearing obligation applies and specifies the phase-in periods for each. Specific phase-in periods also apply to intra-group transactions concluded between a counterparty established in a Member State and another group member established in a third country, which fulfil certain conditions (“Intra-group Transactions”).
The different categories and phase-in periods are as follows:
Category 1: clearing members of a recognised or authorised CCP for at least one of the classes of IRS covered by the Delegated Regulation – 6 months after the Delegated Regulation enters into force;
Category 2: financial counterparties as defined in EMIR (“FCs”), and alternative investment funds as defined in the Alternative Investment Fund Managers Directive2 (“AIFs”), that are non- financial counterparties as defined in EMIR (“NFCs”), which belong to a group whose aggregate month-end average of outstanding gross notional amount of non- centrally cleared derivatives is above EUR 8 billion for each of the three months after the Delegated Regulation is published in the Official Journal, excluding the month of publication – 12 months after the Delegated Regulation enters into force;
Category 3: FCs and AIFS not falling within categories 1 or 2 – 18 months after the Delegated Regulation enters into force; and
Category 4: NFCs not falling within another category – three years after the Delegated Regulation enters into force.
Where the counterparties to a contract belong to different categories, the later of the dates applicable to those categories applies.
In the case of Intra-group Transactions, the relevant period depends on whether or not an equivalence decision pursuant to EMIR has been adopted for the relevant third country in which the group counterparty is established. If such a decision has been adopted, then clearing is required from the later of 60 days after the adoption of the equivalence decision and the date from which the clearing obligation takes effect under categories 1, 2 or 3, as appropriate. If no such decision has been adopted, then clearing is required three years after the Delegated Regulation enters into force.
Under EMIR, the clearing obligation applies to contracts concluded on or after the date on which a CCP was first authorised under EMIR, which occurred on 18 March 2014, but before the date the clearing obligation takes effect, provided this is justified by the remaining maturity of such contracts at that date.
The Delegated Regulation specifies minimum maturities ranging from six months to 50 years and frontloading will be required with an effective date of either two or five months after the Delegated Regulation enters into force.
The frontloading obligation will only apply to category 1 and category 2 entities. It does not apply to NFCs, and the minimum remaining maturity for category 3 entities has been set at a level so as to exclude all trades from the frontloading requirement.
The European Parliament and the Council of the EU must now review the Delegated Regulation. As the Parliament is in recess until the end of August, it appears that October is the earliest that the Delegated Regulation can be expected to be published in the Official Journal of the European Union, assuming that neither the Parliament or the Council raise an objection to it. It will enter into force 20 days after its publication.
The provisional version of the Delegated Regulation may be accessed here.