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With the objective of reducing systemic risk, EMIR introduces the obligation to clear certain classes of OTC derivatives in central clearing houses (CCPs) that have been authorised (European CCPs) or recognised (third-country CCPs) under its framework. ESMA defined the IRS classes to be subject to central clearing following an analysis of all IRS classes which are currently offered for clearing by European CCPs. ESMA’s draft RTS propose to subject the following four classes: Basis swaps, fixed-to-float interest rate swaps, forward rate agreements and overnight index swaps on a range of currencies and maturities. The clearing obligation will take effect following a phased implementation depending on the types of counterparties.
With regards to the determination of the OTC interest rate classes to be subject to the clearing obligation, EACH believes that ESMA should consider expanding the classes beyond the G4 currencies i.e. EUR, USD, GBP and JPY. A mandate for Interest Rate Derivatives has been widely anticipated by clearing and trading participants in Europe since the original G20 summit requesting OTC derivatives to be cleared.
It was a surprise to the market that ESMA did not implement the clearing obligation for all IRS currencies. Whilst ESMA estimates that around 90% of the outstanding notional is covered by including the top 4 currencies, there is still systemic risk remaining at the regional level. Limiting the scope of the Class+ to G4 currencies based on globally outstanding volumes and turnover is simplistic and EACH's view does not fully address the G20 commitments to increase central clearing. In its opinion, ESMA should consider criteria 2(d) –volume and value of transactions -within the scale the region/country that is linked to specific class. In addition, only imposing a clearing mandate on 4 currencies could increase the risks in other currencies in the EU as the market adjusts its trading patterns to meet or avoid the clearing obligation.
One of EBF’s key concerns is the manner in which the clearing obligation for different asset classes and product categories is to be introduced where this cannot be done at the same time by one single regulatory technical standard is currently not entirely clear. However, on the basis of the two current consultation papers and the proposed RTS contained therein, it appears that –unless the relevant proposals are adopted at the same time and thus combined – the first RTS to be adopted covering a certain asset class
(presumably IRS) would later be replaced by a new RTS incorporating both the asset class previously covered by the already existing now to be replaced RTS and the new asset class to be covered (effectively, by replacing the first RTS by a new RTS with identical provisions but an extended Annex). To avoid any uncertainty over the scope of an RTS setting out a clearing obligation and, in particular, regarding the dates relevant for the phase-in period and frontloading requirement, it could be considered to set out the method how future extensions of the clearing obligation are intended to be addressed or how the various RTS to be proposed and adopted are intended to interrelate.
EFAMA are concerned that the practical impact of the application of front loading to contracts with a minimum remaining maturity of 6 months, on the date of application of the clearing obligation will mean that the phase-in will be of little practical use to a large number of category 2 counterparties.
EFAMA supports the principle of a public register available on ESMA’s website. Such register will indeed enable all market participants (including investment fund management companies) to access in a timely manner all relevant data belonging to a class of OTC derivative contracts which is subject to clearing obligation. This will also help reducing research costs incurred by market participants who will no longer have to conduct their own research for each authorised or registered CCP. EFAMA have some concerns on the practical implications of the public register process, in particular in cases where derivative classes should be removed from the register. In EFAMA’s view, ESMA should be able to remove quickly a clearing obligation in case of unexpected market circumstances, in particular in instances where the CCPs may impose extremely high margin requirements.
AIMA warns that frontloading could lead to significant market disruption and should be avoided as far as possible. At a minimum, the threshold for minimum remaining maturity should be increased to 24 months to reduce this potential for disruption. This would not impact the longer-term goal of systemic risk reduction through central clearing. Furthermore, a lack of a comprehensive agreement between the EU and US regarding equivalence and substituted compliance for entities subject both to EMIR and CFTC rules is the greatest potential impediment to the smooth implementation of the clearing obligation under EMIR.
FESE present two fundamental points to make in our response to this consultation:
Firstly, FESE rejects the conclusions reached in Section 6 as regards the exclusion of OTC equity derivatives from the clearing obligation. In this respect, we would like to see a more regional/national approach taken to the assessment of the relative relevance of derivative contracts;
Secondly, FESE would like to highlight that ESMA’s proposed framework is silent on the risk of seeing exchange traded derivatives which have been historically cleared and traded on transparent venues shifting from those regulated venues to OTC environments.
FESE considers that both ESMA’s decision regarding equity derivatives under Section 6 and the risk of a shift from a regulated market to an OTC trading environment are completely at odds with the objectives set out by the G20 and implemented by EMIR and the MiFID Review.
The ABBL stresses the idea that if a product shall be mandatorily cleared at some stage it must be doable on at least 2 CCPs, which has several consequences. First as pointed in the consultation paper, clearable instruments of similar nature across CCPs shall not be subject to specific authorisation procedure. Then once a product is removed from the clearable products it shall be so immediately, in addition if a product is cleared in the future by only one CCP the mandatory clearing shall cease, which does not mean it is forbidden to clear it. Then ensuring that several CCPs offer a similar service ensures that portability obligation of EMIR is applicable.
Insurance Europe remains concerned about delays in the implementation of the pension scheme arrangements exemption and urges ESMA to accept notifications from NCAs as soon as possible. In cases where pension scheme arrangements are covered by Solvency I/II, the exemption for the relevant type of entity or arrangement must be granted by the NCA, which has to receive ESMA’s opinion as well. We had understood that ESMA had proposed to receive notifications from NCAs regarding the exemption of pension scheme arrangements from central clearing once the first CCP was authorised. Despite this occurring in March 2014, there has been no further progress and ESMA has yet to commence receiving notifications from NCAs. This continuing delay causes uncertainty for non-IORP schemes providing retirement products, as they still do not know, in advance of front-loading commencing (late 2014-early 2015) whether they will qualify for the exemption or not. In addition, the bulk of the three-year exemption (started in August 2012) has already elapsed and its scope has not yet been clarified.Insurance Europe therefore urge ESMA to accept notifications of types of entities or arrangements that have been granted exemptions from NCAs as soon as possible.
Full Insurance Europe response
EMIR and the clearing obligation
Consultation paper Clearing Obligation no1 IRS