On July 17, 2014, the European Securities and Markets Authority (“ESMA”) published a letter from the European Commission (dated July 8, 2014) in response to ESMA’s letter on May 8, 2014 regarding the frontloading issue under the European Market Infrastructure Regulation (“EMIR”). Frontloading is the requirement under EMIR for OTC derivatives to be cleared which are entered into after a central counterparty (“CCP”) has been authorized/recognized under EMIR to clear certain classes of derivative but before the application of the clearing obligation. The European Commission acknowledges the issues that the frontloading obligation might present but points out that EMIR provides for the potential adjustment of the application of the frontloading obligation through the determination of minimum remaining maturities as adapted for each asset class. The Commission’s view is that the frontloading obligation should not be applied before parties could reasonably foresee that contracts would need to be cleared due to the frontloading obligation. Further market participants will only be able to foresee that obligation once the regulatory technical standards (“RTS”) on the clearing obligation are published in the Official Journal of the European Union. ESMA’s consultation paper on proposed draft RTS on the clearing obligation, released last week, effectively eliminates this as an issue: (i) for derivatives which have at least one non-financial counterparty as a party; (ii) for any transactions entered into prior to the publication in the Official Journal of an RTS specifying an asset class subject to the clearing obligation; and (iii) for instruments of less than six months maturity as at the time of publication in the Official Journal of the European Union of the relevant RTS.
The European Commission’s letter is available at: http://www.esma.europa.eu/content/European-Commission-response-ESMAletter-regarding-frontloading-requirement-under-EMIR.
You may also like to see our related client note on the clearing obligation under EMIR, “Timing and Scope of EU Clearing Obligation for Derivatives” available at: http://www.shearman.com/~/media/Files/NewsInsights/Publications/2014/07/Timing-and-Scope-of-EU-Clearing-Obligation-for-Derivatives-FIAFR-071614.pdf.