The European Securities and Markets Authority (ESMA) has published a consultation on draft regulatory technical standards (RTS) for the central clearing of foreign exchange non-deliverable forwards (FX NDFs) under Regulation No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR). The consultation period runs until 6 November 2014.

ESMA is inviting all interested stakeholders to respond to the consultation paper. It is particularly interested in hearing from financial counterparties (FCs) and non-financial counterparties (NFCs) of OTC derivatives transactions who will be subject to the clearing obligation, as well as central counterparties (CCPs).

The input from stakeholders will help ESMA in finalising the RTS which will be submitted to the European Commission for endorsement in the form of a legally binding instrument directly applicable in all member states of the European Union.

Central clearing – a reminder

With the overarching objective of reducing systemic risk, EMIR introduces the obligation to clear certain classes of OTC derivatives.

In accordance with the clearing obligation procedure set out in EMIR, ESMA must develop and submit to the European Commission for endorsement draft technical standards specifying:

  • the class of OTC derivatives that should be subject to the clearing obligation
  • the date or dates from which the clearing obligation takes effect, including any phase in and the categories of counterparties to which the obligation applies
  • the minimum remaining maturity of the OTC derivative contracts subject to clearing.

Key terms

The draft RTS establish a clearing obligation on certain classes of FX NDFs. It is proposed to subject 11 FX NDF classes to the clearing obligation. All classes have a maturity range of between three days and two years.

The draft RTS define an implementation schedule for counterparties subject to the clearing obligation. These counterparties will have to start clearing following the entry into force of the RTS in accordance with an associated phase-in period. The categories mirror the final draft RTS on interest rate derivatives and are defined as follows:

  • Category 1: Clearing members.
  • 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.
  • Category 3: FCs and other AIFs which are not included in Category 1 or 2.
  • Category 4: NFC-s not included in Categories 2 and 3.

Category 1 entities have a phase-in of six months; Category 2 firms have a phase-in of 12 months; Category 3 entities have a phase-in of 18 months, and Category 4 has a phase-in of 33 months.

Counterparties in Categories 1 and 2 will also have to frontload those contracts which they have concluded between the date of publication of the RTS in the Official Journal of the European Union and the respective starting date of the clearing obligation.

Next steps

All interested stakeholders should respond to the consultation paper via the ESMA website.

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.

Further consultation papers and reports are likely to be published in due course in respect of other asset classes.