By Terry Flanagan

Esma Prepares for Central Clearing

The European Securities and Markets Authority (Esma) is preparing regulatory technical standards which will implement provisions of the European Markets Infrastructure Regulation (Emir) regarding the obligation to centrally clear OTC derivatives.

It’s issued a consultation aimed at assisting Esma in developing its approach to determining which classes of OTC derivatives need to be centrally cleared and the phase-in periods for the counterparties concerned.

Emir introduced provisions to improve transparency, establish common rules for central counterparties (CCPs) and for trade repositories (TRs) and to reduce the risks associated with the OTC derivatives market. It provides for the obligation to centrally clear OTC derivative contracts or to apply risk mitigation techniques such as the exchange of collateral.

“Our consultation is a first important step in shaping the details of how central clearing of OTC derivatives will work in the European Union,” said Esma chair Steven Maijoor. “Having these trades centrally cleared and ultimately making post-trade data available to investors will increase the robustness, transparency and stability of the financial system.”

Separately, LCH.Clearnet SA has received permission to begin clearing credit default swaps (CDS) for U.S. clearing members through CDSClear, LCH.Clearnet SA’s credit default swap clearing business.

The regulatory move allows U.S. members to clear proprietary CDS index trades through LCH.Clearnet SA, the multinational central counterparty’s Paris-based CCP, which provides them with greater choice of institutions through which to clear credit default swap indices and provides additional liquidity to the CDSClear service and the market.

The development adds a third OTC derivative asset class to LCH.Clearnet Group’s OTC derivative clearing service for U.S. members, which includes interest rate and foreign exchange derivatives.

“This important milestone for our credit default swap clearing business complements LCH.Clearnet Group’s market leading position in interest rate swaps and foreign exchange OTC clearing, and enables us to offer clearing services across the broadest range of OTC derivative asset classes and geographies in the market,” said Ian Axe, LCH.Clearnet group chief executive. “We look forward to continuing to work with the CFTC and other regulators as we grow our US business.”

The Esma consultation on the clearing obligation outlines Esma’s approach in determining the characteristics of OTC derivative classes that should be subject to the clearing obligation.

The paper also provides a high level analysis of the current readiness of derivative asset classes regarding the clearing obligation on the basis of some of the criteria that Esma will take into account when defining the classes for central clearing.

These include the standardization, volume and liquidity of relevant classes of OTC derivatives; the availability of data related to OTC derivative markets; and the experience in clearing and the international regulatory framework.

Emir covers most derivative types and applies to financial and non-financial counterparties. The clearing obligation only applies to financial counterparties and non-financial counterparties above the clearing threshold.

Currently, 13 CCPs provide OTC clearing for five asset classes – interest rate derivatives, credit derivatives, equity derivatives, forex and commodity derivatives – within the European Union.

Esma’s procedure to define the classes that should be centrally cleared will only begin when a CCP is authorized under Emir, or when Esma has recognized CCP based outside the EU.

Currently, no CCPs have yet been authorized under Emir as the applications are still being assessed.

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