07 November 2014

ESMA published responses to consultation on clearing obligation

ESMA published the responses received to the questions listed in this Consultation Paper on the Clearing Obligation under EMIR (no. 3). ESMA has considered all comments received by 6 November 2014.

International Swaps and Derivatives Association (ISDA) & FIA Europe

In view of the ISDA & FIA Europe, to avoid undermining the level of standardisation achieved to date for FX NDFs, any clearing obligation for these contracts must be limited to standardised contracts which incorporate industry standardised currency templates, in the form published by the Emerging Markets Trade Association ("EMTA") (without modification). Any clearing obligation for FX NDFs should be limited to contracts with a tenor of one year or less. As open interest in FX NDF contracts is concentrated in shorter-dated tenors, there is insufficient liquidity beyond the one year tenor to support clearing.

To prevent decisions of CCPs to cease clearing a particular contract from dictating whether that contract is tradable, the ISDA & FIA Europe suggest the application of the clearing obligation to a particular contract should be conditional not only on the contract being of a type that would have been accepted for clearing by a CCP at the time of its authorisation, but also on the contract being of a type which will be accepted for clearing by an authorised or recognised CCP as at the later of (i) the date of trading and (ii) the date on which the contract is required to be cleared under EMIR.

Full ISDA & FIA Europe response

Alternative Investment Management Association (AIMA)

AIMA considers that further work would be beneficial to collect and evaluate further empirical data and evidence in order to reach robust conclusions as to whether an FX NDF clearing determination would address appropriately the objective of the reduction of systemic risk associated to NDF contracts. It is also the case that coordination with US authorities is especially important when considering the reduction of systemic risk. Should a clearing determination be made in the EU but not in the US, a bifurcation of liquidity could well occur between the respective jurisdictions across cleared and uncleared contracts, to the detriment of spreads and efficient pricing. AIMA stresses the importance of resolving issues of regulatory conflict and overlap between the US and EU regimes.

AIMA suggests, therefore, that the mandatory central clearing of FX NDFs should be delayed whilst further data is collected and analysed - taking account of the activities of new CCPs as they become authorised – and a discussion is had between the EU and CFTC on the possible coordination of the respective EU and US clearing mandates for FX NDFs.

Full AIMA response

Deutsche Bank (DB)

DB has some doubts about maturities extending beyond one year, especially as trade volume data appears to show reduced liquidity after six months. The past experiences which are used to support the case for mandating longer maturities may not be accurate guides to future liquidity developments in today’s market place.

DB appreciates that ESMA adjusted their counterparty classification proposal in response to market participant’s concerns around frontloading requirements. However, DB has concerns that the updated proposal reintroduces the legal uncertainty it was meant to address. DB makes some practical suggestions on how to address these concerns and achieve a consistent approach to counterparty classification for all EU clearing mandates.

Full DB response

Federation of European Securities Exchanges (FESE)

FESE urges ESMA to consider the overall impact that its work on the EMIR Clearing Obligation will ultimately have on the final implementation of the MiFIR Trading Obligation. Critically, because of the way the trading obligation is designed, any instrument which does not fall under the scope of the EMIR clearing obligation will not be eligible for the trading obligation. Therefore, FESE supports that the clearing obligation fully applies to non-deliverable forwards as outlined in the consultation paper.

FESE supports the inclusion of the proposed NDF derivatives in the clearing obligation on the lines set out in the consultation paper. FESE also supports the consistency of approach with the clearing obligation proposed for other asset classes, namely IRS and CDS.

Full FESE response

European Association of CCP Clearing Houses (EACH)

EACH believes the proposed structure for the FX NDF classes enables counterparties to easily identify which contracts are subject to the clearing obligation. EACH supports the compatibility of ESMA’s proposal with the taxonomy defined by the GFMA Global FX Division.

EACH points out that the term “cash settled forwards” is widely used for those cash settled products in currencies that are not subject to restrictions from a local central bank and can be physically settled, but for which the user elects to have financial settlement; this is the case for example for GBP/USD, EUR/USD and USD/JPY.

The term NDF, whilst having the underlying feature of cash settlement, is used to refer to the product used for currencies, on which there are restrictions imposed by a local central bank. In addition, EACH suggests that in the final report the definition of non-deliverable forward in paragraph 14 refers to “the official fixing rate, as listed in the EMTA template for that currency” instead of “the spot market exchange rate”.

Full EACH response

All responses

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