In the last issue of Exchange – International, we reported that the European Commission had adopted rules on central clearing for interest rate derivatives. These rules prescribe the mandatory clearing of certain over- the-counter (OTC) interest rate derivative contracts through central counterparties (CCPs) pursuant to the European Markets Infrastructure Regulation (EU) 648/2012 (EMIR).

Commission Delegated Regulation (EU) 2015/2205 of 6  August  2015   (Delegated  Regulation), which prescribes these rules, has now been published in the Official Journal of the EU, making it legally binding. This comes following passage of the Delegated Regulation through the co-legislative procedure in the European Parliament and the Council.

Classes of OTC derivatives subject to EMIR Clearing Obligations

The Delegated Regulation provides that certain classes of OTC interest rate swap derivative contracts (IRSs) are to be subject to the EMIR clearing obligation. As reported in the last issue of Exchange – International, IRSs denominated in euro, pound sterling, Japanese yen or US dollars are covered. The contracts to which the rules relate are fixed-to-float IRS (IRS or ‘plain vanilla’ derivatives), float-to-float swaps (basis swaps), forward rate agreements and overnight index swaps.

The date on which the clearing obligation takes effect in respect of an IRS depends on the categorisation of the counterparties to the contract. The counterparty categories and their corresponding clearing obligation dates are as follows:

  • Category 1 – comprises counterparties which, for at  least one of the classes of IRS, are, on 21 December 2015, clearing members of a CCP authorised or recognised before 21 December 2015 to clear at least one of those classes of IRS. The clearing obligation shall take effect for counterparties in Category 1 on 21 June 2016.
  • Category 2 – comprises counterparties which do not belong to Category 1; belong to a group whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives for January, February and March 2016 is above €8 billion; and are either financial counterparties  (FCs) as defined by Article 2(8) of EMIR, or non- financial counterparties (NFCs) that are alternative investment funds (AIFs) as defined in the Alternative Investment Fund Managers Directive (2011/61/EU). The clearing obligation date for Category 2 counterparties is 21 December  2016.
  • Category 3 – comprises counterparties which do not belong to Category 1 or Category 2; and are either   FCs, or AIFs that are also NFCs. Category 3 ‘sweeps     up’ the remaining FCs and AIFs that are also NFCs  which do not have large enough portfolios of derivatives to fall within Category 2. The obligation  shall come into effect for Category 3 counterparties   on 21 June 2017.
  • Category 4 – comprises NFCs that do not fall within Categories 1-3 above. The Clearing Obligation Date   for Category 4 counterparties will be 21 December 2018.


On 18 November 2015, the European Securities and Markets  Authority  (ESMA)  published  a  note  on  the delay of the implementation of the amended Markets in Financial Instruments Directive (MiFID II). In the note, ESMA identifies possible delays in the expected real applicability of certain MiFID II provisions, particularly those related to the development of IT systems by regulators and market participants that need to interact with one another. Specifically, ESMA notes acute concerns about the start date for IT systems which are required to record and interact on market reference   data, transaction reporting, transparency parameters and publication and position reporting.

According to the note, allowing for the shortest possible delay in the next stages of the co-legislative procedure, the current calendar leaves less than nine months  (March 2016-January 2017) for the development, programming, testing and deployment of the systems needed for MiFID II implementation. In relation to the most complex systems, ESMA classes this nine-month timeframe as “way too short”.

ESMA suggests four principles for managing an implementation delay from a technical and legal point of view:

  • give legal certainty, as early as possible, to the entities subject to MiFID;
  • minimise the delay as from the original start date;
  • avoid re-adjustments to the date (move it only once); and
  • define dates that maximise the possibility of simultaneous launch for all the markets/Member States.

ESMA proposes three courses of action in tackling the forecasted implementation delays and strongly favours a Level 1 fix.

  • A Level 1 fix: postponing for a few months the application date of some articles.
  • A Level 2 fix: fixing the applicability date at a later time than the applicability date of Level 1.
  • A Level 3 fix: agreeing between all national competent authorities, and publishing at ESMA level, an implementation date that would be later than the one contained in the Level 2 provisions.

On 27 November 2015, the European Parliament published a press release stating its position on a potential delay of the entry into force of MiFID II. In the press release, the European Parliament announced that it is willing to accept a one year delay of the entry into force of MiFID II, provided that the Commission takes into account the Parliament’s priorities, including the swift finalisation of the implementing legislation. The Parliament also stressed the need for the Commission and ESMA to come up with a clear roadmap on the implementation work and especially for setting up the IT-systems. The Parliament’s position was set out in a letter to the Commission from the Chairman of the Parliament’s Economic and Monetary Affairs Committee and the Parliament’s Rapporteur for MiFID II. The letter further requests regular reports to be made back to the Parliament on the progress towards implementation, including timelines and key milestones.


The European Commission announced on 22 October 2015 that it is referring the Czech Republic, Luxembourg, the Netherlands, Poland, Romania and Sweden to the European Court of Justice (ECJ) for failing to transpose the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) into domestic law.

Background to the BRRD

The BRRD was adopted on 15 April 2014 and published in the Official Journal of the EU on 12 June 2014. It equips national authorities with powers with the aim of avoiding bank failures and, in the event of a failure, minimising the risk of disruption to essential services, damage to the financial system and the need for taxpayer bailouts. The objective of the BRRD is to ensure banks    on the verge of insolvency can be restructured without taxpayers support. Accordingly the BRRD imposes a ‘bail-in’ mechanism to ensure that shareholders and creditors of the banks bear the main costs of  resolution.

The  BRRD  introduces  a  requirement  on  banks  to prepare recovery plans and authorities to prepare resolution plans based on information provided by banks. The BRRD also gives early action powers to authorities such as the ability to require a bank to implement its recovery plan and the ability to replace existing management with a special manager. Authorities are also given the means to ensure the continuity of essential services in the event of a resolution and to manage the failure of a bank in an orderly way. These include a sale of business tool, a bridge institution tool, an asset separation tool and a debt write down (bail-in) tool. The BRRD further introduces mechanisms for cross-border crisis management – allowing co-operation between resolution authorities – and resolution funds that can be drawn on to cover costs of using resolution powers and tools.

Member  States’  failures  in implementation

The deadline for transposing the BRRD rules into national law was 31 December 2014. The Commission, on 28 May 2015, asked the 11 EU Member States who had at that point failed to implement the rules to do  so. By 22 October 2015, full transposition had not   taken place in the Czech Republic, Luxembourg, the Netherlands, Poland, Romania and Sweden, and as a result the Commission decided to refer these Members States to the  ECJ.

The EU’s infringement procedure stipulates that if the ECJ rules against a Member State, the Member State must then take the necessary measures to comply  with the judgment. A daily financial penalty will be imposed until full transposition has taken place, with the amount of such penalty taking into account the payment capacity, duration of non-compliance and degree of seriousness of the infringement of the Member State concerned.   The Commission can decide to withdraw this case in the event that a member State implements the  BRRD.


On 23 December 2015, Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) 648/2012 (Regulation) was published in the Official Journal of the EU. The Council of the EU stated in a press release that the aim of the Regulation is to counter the risk of trading activities developing outside the regulated banking system, or within what is known as the “shadow banking” system. The Financial Stability Board defines the shadow banking system as “the system of credit intermediation that involves entities and activities outside the regular banking system”. Some of the risks of shadow banking that have been identified include the existence of deposit-like funding structures that may lead to runs, a build-up of high, hidden leverage, the circumvention of rules and regulatory arbitrage, and disorderly failures that can  affect the banking sector. The Regulation also contains requirements in relation to the reuse of financial instruments.

This article aims to outline the requirements introduced by the Regulation and the dates by which those requirements are to take effect.

Key requirements imposed by the Regulation

The Regulation requires counterparties to a securities financing transaction (SFT) to (i) report the SFT’s details  to a trade repository upon its conclusion, modification  and termination; and (ii) keep records of the SFT for at least five years following its termination.

Furthermore, a party reusing financial instruments received under a collateral arrangement is required to (i) first disclose the risks and consequences and obtain written consent, and (ii) only exercise its right to reuse in accordance with the collateral arrangement’s terms and only with respect to financial instruments that have been transferred from the providing counterparty’s account.

The Regulation also requires managers of undertakings for collective investment in transferable securities (UCITS) and alternative investment fund managers (AIFMs) to disclose their use of SFTs and total return swaps to investors in their half-yearly and annual reports and in their pre-investment disclosures.

For the purpose of reporting and reuse requirements, the Regulation applies to an EU entity’s non-EU branch that is party to an SFT or engaging in reuse, and a non- EU entity that is party to an SFT or engaging in reuse (subject to certain conditions being met).

SFT reporting requirements

Although both counterparties to an SFT have an obligation to do so, a financial counterparty is  responsible for reporting the details on behalf of both counterparties where its counterparty is a non-financial counterparty which on its balance sheet date does not exceed at least two of the thresholds of: (i) a €20 million balance sheet total; (ii) a €40 million net turnover; and (iii) 250 employees on average during the financial year.

Where a UCITS or an alternative investment fund (AIF)    is the counterparty to an SFT, the UCITS manager or AIFM shall be responsible. Furthermore, the reporting obligation may be delegated.

The minimum information to be reported includes the parties, the principal amount, the currency, the assets used as collateral, and whether the collateral is available for reuse.

Reuse  requirements

A counterparty shall only be allowed to reuse financial instruments received under a title transfer or security collateral arrangement if it first discloses to the providing party the risks and consequences of either (i) granting a right of use of collateral provided under a security collateral arrangement; or (ii) concluding a title transfer collateral arrangement. A further condition to the ability to reuse is the requirement to obtain the providing  party’s express written consent to (i) a security collateral arrangement that includes a right of reuse; or (ii) the provision of collateral under a title transfer collateral  arrangement.

The reuse undertaken must also be in accordance with the original security collateral arrangement or title transfer collateral arrangement and the financial instruments received under the arrangement must first be transferred from the account of the providing counterparty.

UCITS and AIF disclosure requirements

UCITS management companies, UCITS investment companies and AIFMs must disclose certain specified information to investors about their use of SFTs and total return swaps. This must be done by UCITS management and investment companies in their half-yearly and annual reports, and by AIFMs in their annual report. The minimum information to be disclosed includes the amount of securities and commodities on loan as a proportion of total lendable assets and the amount of assets engaged in each type of SFT and total return swap expressed as an absolute amount and as a percentage of the fund’s total assets under management.

As  part  of  pre-contractual  disclosure,  UCITS management or investment companies and AIFMs are also subject to a requirement to specify which SFTs and total return swaps they are authorised to use and include a clear statement that those transactions are used.

Consequences  of non-compliance

Competent authorities must be granted the power to impose sanctions for breaches of the SFT reporting   and reuse requirements. However, a breach of the SFT reporting requirement will not affect the validity or enforceability of the SFT itself.

Implementation timetable

The Regulation, including the requirement to keep records of any SFTs for at least five years following the transaction’s termination, will enter into force 20 days after its publication in the Official Journal. However, certain requirements are to take effect from a later  date. The reuse requirements will enter into force six months after the Regulation’s entry into force. These reuse requirements will apply to collateral arrangements existing on that date.

The UCITS and AIFMs’ use of SFTs and total return    swaps reporting and pre-contractual disclosure requirements will enter into force 12 and 18 months   after the Regulation’s entry into force, respectively. The 18 month pre-contractual disclosure requirement applies only to AIFs and UCITs that are already constituted   before the Regulation’s entry into force.

Subject to conditions on the SFTs’ maturity, reporting requirements will enter into force six months after the Regulation’s entry into force in relation to investment firms and credit institutions. The effective date is 15 months for central securities depositories and central counterparties, 18 months for insurance/reinsurance undertakings, UCITS/UCITS managers, AIFs/AIFMs and institutions for occupational retirement provision, and  21 months for non-financial counterparties.