On 29 January 2015, the European Securities and Markets Authority (ESMA) published its opinion (Opinion) on draft regulatory technical standards (RTS) on the clearing obligation for interest rate swaps under the European Market Infrastructure Regulation (EMIR)1. Annex 1 to that Opinion contains a second version of ESMA’s draft RTS on the clearing obligation (ESMA Modified RTS).
ESMA submitted its first version of its draft RTS on interest rate swaps (Initial Draft RTS) to the European Commission on 1 October 2014. The Initial Draft RTS set out ESMA’s proposals regarding the classes of interest rate swaps that would be subject to mandatory clearing as well as the different dates from which the clearing obligation would take effect for the four different categories of counterparties identified. They also provided for the application of frontloading. As noted in our October EMIR Update on Clearing Obligations (available here) the Commission had three months in which to endorse the Initial Draft RTS following their submission.
On 18 December 2014, the Commission notified ESMA of its intention to endorse the Initial Draft RTS with amendments, and submitted to ESMA a modified version of the RTS (Commission Modified RTS). The Commission’s amendments focused mainly on postponing the start date for frontloading and the treatment of non-EU intragroup transactions. In an accompanying letter, the Commission also identified the need to clarify the method of calculating the threshold for investment funds in order to determine which funds fall within category 2 of the counterparties subject to the clearing obligation. For further information, see our related update (available here).
The Commission’s notification triggered a six week period in which ESMA could amend its Initial Draft RTS on the basis of the Commission’s proposed amendments and resubmit it to the Commission in the form of a legal opinion. As indicated above, ESMA has now published its Opinion.
Content of ESMA’s Opinion
In its Opinion, ESMA expresses its support for the ultimate objectives of the Commission’s proposed amendments; however it also proposes a number of new amendments, in particular regarding:
- the frontloading requirement;
- the treatment of non-EU intragroup transactions; and
- the calculation of the threshold for investment funds.
ESMA explains that the Initial Draft RTS proposed starting the frontloading requirement on the date the RTS are published in the EU’s Official Journal, because this reflected the framework on frontloading agreed between ESMA and the Commission in correspondence between May and July 2014. However, ESMA considers that the Commission’s amendments, which provide for staggered start days depending on the category of counterparty, allow for increased flexibility and a more pragmatic implementation and concurs with them while proposing certain modifications aimed at better reflecting the Commission’s justifications for its amendments.
Non-EU Intragroup Transactions
EMIR exempts intragroup transactions from the clearing obligation, once certain conditions are fulfilled. In the case of transactions involving a non-EU counterparty, one of these conditions is that the counterparty is established in a third country in respect of which the Commission has adopted an implementing act recognising the equivalence of that country’s legal, supervisory and enforcement arrangements with the EMIR clearing obligation. As the Commission has not yet adopted such an implementing act, no intragroup transaction between an EU and a non-EU counterparty can benefit from the exemption. Consequently, in order to allow the Commission sufficient time to adopt an equivalence decision, the Commission Modified RTS stipulated that for a maximum of a three-year period, any third country should be deemed equivalent.
In its Opinion, ESMA lists a number of difficulties with this stipulation both from a legal and a practical perspective. However, it states that it stands ready to explore with the Commission a way of delaying the date of application of the clearing obligation for certain intragroup transactions.
Threshold for Investment Funds
The Commission had proposed that the RTS include a recital clarifying that, in applying the quantitative threshold to determine if an investment fund falls within a certain category of counterparty, such threshold should be calculated per single fund, instead of at group level. In its Opinion, ESMA agrees but notes that there is no reference to this in the Commission Modified RTS and so it has added a recital to the ESMA Modified RTS and amended Article 2 accordingly.
The Commission may now proceed to adopt the ESMA Modified RTS with the amendments it considers relevant (which may involve, as regards one or more of the issues identified above, reinstating the approach taken in the Commission Modified RTS) or reject it. Any adoption by the Commission of the RTS must simultaneously be notified by it to the European Parliament and the Council, which then have a three-month period in which to object to the RTS, extendible by a further three months (which periods are reduced to one month, where the adopted RTS is the same as the ESMA Modified RTS). In the absence of such an objection, the RTS adopted by the Commission will be published in the EU’s Official Journal and will enter into force on the date set out in the RTS (currently 20 days following such publication). However, if either the Parliament or the Council objects, the RTS will not enter into force, thereby further delaying the start of mandatory clearing within the EEA. As there is no legislatively prescribed timeline for dealing with such an eventuality, the potential extent of any such delay is unclear.