[28277]
July 17, 2014
TO: DERIVATIVES MARKETS ADVISORY COMMITTEE No. 47-14CLOSED-END INVESTMENT COMPANY MEMBERS No. 26-14
ICI GLOBAL MEMBERS No. 26-14
INTERNATIONAL MEMBERS No. 25-14
INVESTMENT ADVISER MEMBERS No. 25-14 RE: EU REGULATORS ISSUE CONSULTATION PAPERS ON CLEARING OBLIGATION
On July 11, 2014, the European Securities and Markets Authority (“ESMA”) issued its first round of consultations for central clearing of OTC derivatives within the European Union. [1] The two consultation papers seek views on the draft regulatory technical standards (“RTS”) for the clearing of interest rate swaps (“IRS”) and credit default swaps (“CDS”) under the European Market Infrastructure Regulation (“EMIR”). After the consultation, ESMA will draft its final RTS and submit them to the European Commission for endorsement.
Classes Proposed to be Subject to Clearing Obligation
For IRS, ESMA’s draft RTS propose four classes to be subject to central clearing (on a range of currencies and underlying indices). These classes include: (1) basis swaps; (2) fixed-to-float IRS; (3) forward rate agreements; and (4) overnight index swaps. The following tables provide the classes that are proposed to be subject to the clearing obligation.<</p>
Basis swaps class
Type
Reference Index
Settlement Currency
Maturity
Settlement Currency Type
Optionality
Notional Type
Basis
EURIBOR
EUR
28D-50Y
Single currency
No
Constant or Variable
Basis
LIBOR
GBP
28D-50Y
Single currency
No
Constant or Variable
Basis
LIBOR
JPY
28D-50Y
Single currency
No
Constant or Variable
Basis
LIBOR
USD
28D-50Y
Single currency
No
Constant or Variable
Fixed-to-float interest rate swaps class
Type
Reference Index
Settlement Currency
Maturity
Settlement Currency Type
Optionality
Notional Type
Fixed-to-Float
EURIBOR
EUR
28D-50Y
Single currency
No
Constant or Variable
Fixed-to-Float
LIBOR
GBP
28D-50Y
Single currency
No
Constant or Variable
Fixed-to-Float
LIBOR
JPY
28D-50Y
Single currency
No
Constant or Variable
Fixed-to-Float
LIBOR
USD
28D-50Y
Single currency
No
Constant or Variable
Forward rate agreement class
Type
Reference Index
Settlement Currency
Maturity
Settlement Currency Type
Optionality
Notional Type
FRA
EURIBOR
EUR
3D-3Y
Single currency
No
Constant or Variable
FRA
LIBOR
GBP
3D-3Y
Single currency
No
Constant or Variable
FRA
LIBOR
USD
3D-3Y
Single currency
No
Constant or Variable
Overnight index swaps class
Type
Reference Index
Settlement Currency
Maturity
Settlement Currency Type
Optionality
Notional Type
OIS
EONIA
EUR
7D-3Y
Single currency
No
Constant or Variable
OIS
FedFunds
USD
7D-3Y
Single currency
No
Constant or Variable
OIS
SONIA
GBP
7D-3Y
Single currency
No
Constant or Variable
For CDS, ESMA’s draft RTS propose to subject CDS on the iTraxx Europe Main and the iTraxx Europe Crossover to the clearing obligation. The table below provides the credit OTC classes proposed to be subject to the clearing obligation.
European untranched index CDS class
Type
Sub-Type
Geographical Zone
Reference Index
Settlement Currency
Series
Maturity
Index CDS
Untranched Index
Europe
iTraxx Europe Main
EUR
11 onwards
5Y
Index CDS
Untranched Index
Europe
iTraxx Europe Crossover
EUR
11 onwards
5Y
Phase-in Period
The clearing obligation will take effect following a phased implementation (proposed range from six months to three years after the entry into force of the RTS) depending on the type of counterparty. ESMA proposes three categories of counterparties for these purposes: (1) clearing members; [2] (2) non-clearing members; [3] and (3) non-financial counterparties above the clearing threshold. AIFs that are not captured by the definition of financial counterparties under EMIR (e.g., EU AIFs marketed in the EU without a passport by non-EU alternative investment fund managers) would be included in Category 1 if they are clearing members meeting the relevant conditions or in Category 2. Third-country entities would determine their categories based on the categories to which they would belong if they were established in the European Union.
The date of application of the clearing obligation would be as follows: (1) six months after entry into force of the RTS for Category 1; (2) 18 months after entry into force of the RTS for Category 2; and (3) three years after entry into force of the RTS for Category 3.
Frontloading
EMIR imposes an obligation to clear the OTC derivatives contracts (relating to a class of OTC derivatives that has been declared subject to the clearing obligation) that are entered into after the notification to ESMA of the authorization of a central counterparty (“CCP”) by the national competent authorities and before the date of application of the clearing obligation. For the period between the notification to ESMA and the publication in the Official Journal of the RTS, ESMA proposes to set the minimum remaining maturity level so that no contract will be subject to frontloading. For contracts entered into between the publication in the Official Journal of the RTS and the date on which the clearing obligation takes effect (the date of application), ESMA proposes to require contracts with more than six months before expiration on the date of application of the clearing obligation to be subject to frontloading.
Jennifer S. Choi
Senior Associate Counsel Securities Regulation
endnotes
[1] European Securities Markets Authority, Consultation Paper, Clearing Obligation under EMIR (no. 1) (July 11, 2014), available at http://www.esma.europa.eu/system/files/2014-799.pdf (“IRS Consultation Paper”); European Securities Markets Authority, Consultation Paper, Clearing Obligation under EMIR (no. 2) (July 11, 2014), available at http://www.esma.europa.eu/system/files/2014-800.pdf (“CDS Consultation Paper”). The deadline for comments on the IRS Consultation Paper is August 18, 2014 and on the CDS Consultation Paper is September 18, 2014.
[2] Category 1 (Clearing Members) would include counterparties that, on the date of entry into force of the RTS on the clearing obligation, are clearing members for any of the class of OTC derivatives subject to the clearing obligation under the draft RTS of any CCP authorized to clear at least one of those classes.
[3] Category 2 (Non-Clearing Members) would include any counterparty that falls in neither Category 1 nor Category 3 and includes financial counterparties not included in Category 1 and alternative investment funds (“AIFs”) qualifying as non-financial counterparties subject to the clearing obligation (“NFC+”) not included in Category 1.