ESMA Proposes Clearing Expansion
The European Securities and Markets Authority has proposed that mandatory clearing of interest rate swaps should be extended to three new currencies.
The European Commission approved the mandatory clearing of interest rate swaps in G4 (US dollars, euros, sterling and Japanese yen) currencies in August this year, and this is expected to launch in the second quarter of next year. In the summer Esma also launched a consultation on clearing under Emir for certain European currencies outside the G4.
Last week the European regulator proposed that fixed-to-float interest rate swaps and forward rate agreements denominated in Norwegian krone, Polish zloty and Swedish krona should be centrally cleared. Esma said significant trading volumes exist in these contracts which are of important systemic relevance for both the specific local markets and the European Union as a whole. “The addition of those classes to the clearing obligation can therefore be seen as an important step in reducing systemic risk,” added Esma.
The European Commission has three months to endorse the proposal, followed by a non-objection period by the European Parliament and the Council.
During the Esma consultation Citadel had supported the extension of mandatory clearing of interest rate derivatives in Europe to a wider range of currencies and the US hedge fund said it voluntarily clears interest rate OTC derivatives in non-G4 currencies.
Market participants had asked Esma to co-ordinate with the CFTC to ensure there is a harmonised approach for these products as the US regulator has not proposed mandatory clearing of swaps in Scandinavian currencies.
Olivier de Schaetzen, head of product solutions collateral management, at Euroclear said in a blog last month that banks with high volumes of over-the-counter derivatives transactions, representing 75% of the total swaps market, already centrally clear a high proportion of these instruments for operational and counterparty risk reasons. “But, despite the fact that interbank OTC derivatives transactions will need to be collateralized by September 2016, with client business following later in 2017, the arguments for change for buyside firms don’t stack up so well,” he added.
At the Euroclear conference in May this year 48% of a mixed buyside and sellside audience said they were already clearing derivatives, 23% said they expected to have the capacity to be ready, while 29% had no firm plans. In addition, 42% said there was ‘no change’ in the migration to central clearing in the past 12-18 months.
“Ultimately it comes down to cost: the buyside will move early, if the sellside and market infrastructure providers make it cost-effective for them to do so,” added de Schaetzen.
Featured image by NorGal/Dollar Photo Club
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