Article: ESMA Proposes The Rules and Products For Mandatory Clearing Under EMIR

11 July 2014 | Bill Hodgson

Before launching into the actual mandate for clearing, ESMA has published its proposed rules at length, here's their description:

The European Securities and Markets Authority (ESMA) has launched a first round of consultations to prepare for central clearing of OTC derivatives within the European Union. The two consultation papers seek stakeholders’ views on draft regulatory technical standards (RTS) for the clearing of Interest Rate Swaps (IRS) and Credit Default Swaps (CDS) that ESMA has to develop under the European Markets Infrastructure Regulation (EMIR).

With the overarching objective of reducing systemic risk, EMIR introduces the obligation to clear certain classes of OTC derivatives in central clearing houses (CCPs) that have been authorised (European CCPs) or recognised (third-country CCPs) under its framework. To ensure that the clearing obligation reduces systemic risk, EMIR specifies a process for the identification of the classes of OTC derivatives that should be subject to mandatory clearing. This includes the assessment of specific criteria that the relevant classes of OTC derivatives have to meet.

ESMA is required to draft RTS on the clearing obligation within six months of the authorisation or recognition of CCPs. ESMA has analysed the classes from several CCP notifications and has determined that some IRS and CDS classes should be subject to the clearing obligation. Following the difference in timing of the corresponding CCP authorisations, the IRS and CDS classes are covered in two separate papers and consultation periods, with a large overlap between the two to give the opportunity to stakeholders to review them and provide feedback at the same time. These two consultation papers may be followed by one or more on other asset classes.

Basis, fixed-to-float, forward rate agreements and overnight index swaps to be centrally cleared
Regarding IRS, ESMA’s draft RTS propose the following four classes, on a range of currencies and underlying indices, to be subject to central clearing: 
•    Basis swaps;
•    Fixed-to-float interest rate swaps; 
•    Forward rate agreements; and
•    Overnight index swaps.

European untranched index CDS to be centrally cleared
Regarding CDS, ESMA’s draft RTS proposes European untranched Index CDS (for two indices) to be subject to central clearing.


Draft standards built on swaps already offered for clearing
ESMA defined the IRS and CDS classes to be subject to central clearing following an analysis of all IRS and CDS classes which are currently offered for clearing by European CCPs. In addition, for equity and interest rate futures and options which are offered for clearing, ESMA decided that a clearing obligation is not necessary at this stage.

Next steps
The IRS Consultation Paper is open for feedback until 18 August 2014 and the CDS Consultation Paper until 18 September 2014. ESMA will use the answers received to draft its final RTSs on the clearing obligation for IRS and CDS and send them for endorsement to the European Commission. The clearing obligation will take effect following a phased implementation, with the current proposal ranging from six months to three years after the entry into force of the RTS, depending on the types of counterparties concerned.

The two consultation papers are attached below, one for Rates and one for Credit, the table below extracted from the Rates paper is interesting in that it excludes Poland from the mandate (at this stage). You have until August 18th to provide further feedback on this proposal.



Does anybody also believes that three years is quite long? Even those insitutions being direct clearing members should get six months time to adopt. Following this consultation paper, the majority of trades will not neet be cleared before summer 2016!

A typical clearing project takes between 3 to 9 months to carry out, so personally I think three years is too long. ;-)

I think this is more a theoretical issue: 95% of the interdealer trades that are clearable are already being cleared today...and that is driven by the RWA relief of cleared trades vs. OTC bilateral trades, i.e. for category 1 counterparties the manadatory clearing will not bring any material change anymore. Even for the category 2 counterparties, it is expected that they will start clearing once the technical standards are out for practicality reasons due to the front loading requirements....catergory 3 is quite irrelevant volumewise

Thanks Albert, does category three represent a long tail of small firms who are currently oblivious of clearing? Is there a substantial implementation opportunity for clearing brokers and consultancies? Bill

it is more a short tail of big firms (multinationals) that will fall under mandatory clearing....maybe the OEMs, big chemical group etc. ....typical midcap cos will not fall under the clearing obligation due to relevant thresholds