The European Securities and Markets Authority (ESMA) issued, on October 1st 2014, its final draft regulatory technical standards (RTS) for the central clearing of Interest Rate Swaps (IRS) which it was required to develop under the European Markets Infrastructure Regulation (EMIR) and it submitted them to the European Commission (the "Commission"), for endorsement.
On December 18th 2014 the Commission published a letter making public its decision to endorse the RTS with certain amendments.
The draft RTS define those types of IRS contracts which will have to be centrally cleared, the types of counterparties covered by the obligation and the dates by which central clearing of IRS will become mandatory for them.
Amongst the changes proposed by the Commission the following ones are of most relevance.
Postponement of the starting date of the frontloading requirement
The Commission proposes to postpone the frontloading requirement until the moment where counterparties will have certainty on whether the contracts they enter into are subject to such requirements.
The proposal is to postpone the requirement until two months after the date of entry into force of the RTS for the counterparties falling into Category 1 of the RTS and five months for the counterparties falling into Category 2 of the RTS.
To summarise the main features of the categories above mentioned:
- Category 1 represents the counterparties that are participants in a clearing house, as long as they participate in the clearing of at least one of the classes of IRS subject to the clearing obligation and the CCP of which they are a member has been authorised or recognised under EMIR to clear at least one of those classes of IRS.
- Category 2 comprises counterparties other than Category 1 counterparties, who belong to a group whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives exceeds €8 billion.
The proposed postponement will allow the Category 1 counterparties to understand whether they benefit from an exemption from the clearing obligation pursuant to article 4.2(a) of the Regulation 648/2012, and, for the Category 2 counterparties, it will give them the necessary time to calculate their threshold to determine whether they are subject to such category.
Clarification of the calculation of the threshold for investment funds
The Commission proposes to include a recital in the draft RTS to clarify that the thresholds for investment funds shall be calculated at the level of a single fund and not at the group level provided that the funds are distinct legal entities that are not collateralised, guaranteed or supported by other investment funds.
Excluding from the scope of the clearing obligation non-EU intragroup transactions
The Commission would like OTC derivatives entered into between two counterparties belonging to the same group to be exempt from the clearing obligation for a period of three years where one of the counterparties is located outside the EU on the basis that equivalence decisions with third parties may only be adopted once the RTS enter into force.