Europe’s key derivatives regulator has reduced the burden that swaps counterparties face as part of a requirement to retrospectively load derivatives into central clearing. However, in its attempt to ease congestion, ESMA may have unleashed a new stumbling block for the industry.
In its final draft regulatory technical standards on the clearing obligation for over-the-counter interest rate derivatives, ESMA mandated four classes of swaps for clearing – similar to US requirements under the Dodd-Frank Act. The contentious frontloading issue – which is unique to Europe – requires contracts negotiated after publication of the technical standards to be cleared by the appropriate compliance deadline. It has been a source of immense industry pushback given uncertainty about pricing bilateral contracts that may move to CCPs, and the complexities of agreeing advance terms for future clearing.
Judging by ESMA’s submission to the European Commission, the industry has had some success in those lobbying efforts, with non-financial firms avoiding frontloading altogether. “For more active derivatives users, frontloading is still very much part of the picture, but for the less active it has effectively been switched off,” said Helen Lofthouse, global head of OTC clearing at UBS. By maintaining frontloading, the Commission has been able to demonstrate a tougher stance on the clearing obligation, which will not take hold until July 2015 at the earliest, with a phase-in pushing full compliance out to 2018 – something that many clearing businesses welcome.
For category one clients – clearing member firms that already clear the bulk of IRS contracts – swaps clearing becomes mandatory six months after standards are published in the official register. The biggest change from ESMA’s initial proposals is to bring category two clients online in 12 rather than 18 months, eliminating a sizeable chunk of frontloading for financial counterparties that are not clearing members.
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