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ESMA proposed a phased-in approach for OTC clearing that is similar to the one taken by US regulators. It is hoped this will help alleviate the pressure on those buy-side companies having difficulties finding a broker to clear trades. ESMA's proposals form part of the European Market Infrastructure Regulation, or EMIR, and the market now has until late summer to respond to two separate consultations — covering interest rate swaps and credit default swaps — before rules are finalised later in 2014. Each consultation proposes the introduction of clearing in three phases, depending on the type of counterparty.
The first group of participants comprise companies that already clear interest rate swaps or CDS trades at an approved clearing house, including those run by Nasdaq OMX, Eurex and LCH.Clearnet. This group — primarily banks and brokers — will have to clear trades six months after ESMA publishes its final rules later this year. The second group includes all other financial institutions, such as buy-side companies and alternative investment funds. This group will need to start clearing 18 months after the rules are published. This lengthier period would extend well into 2016 and may help smaller buy-side firms that are struggling to find brokers to clear swaps on their behalf.
Some fear that despite the longer timeframe, some buy-side firms may still leave preparations until the last minute. Damon Batten, principal at consultancy Catalyst, said: “Although the buy-side has more time than they anticipated there is still a risk of a rush to the door because complacency is likely to be a factor. “There is also a greater likelihood that firms will be able to get the clearing brokers of their choice if they act now, particularly as some brokers are reassessing whether they want to be in the OTC derivatives clearing business.”
The final group of participants affected by EMIR comprises non-financial firms such as large corporates — ESMA has proposed giving these companies three years from when the rules are finalised to start clearing their interest rate and CDS trades. The consultation period for interest rate swaps runs until August 18 and the consultation for credit default swaps runs until September 18. ESMA is then expected to publish final technical standards for interest rate swaps in September and CDS in November. The European Commission will then have three months to endorse the standards before they are enforced.
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