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EMIR OTC Derivatives - Clearing & Margining

EMIR OTC Derivatives - the obligation to Clear and Margin

6th August 2015

Clearing & Margining of OTC Derivatives

The FCA last month held a seminar on “EMIR: the obligation to clear and margin OTC derivative trades” and earlier this week they published the presentation slides for all to see.

In addition, the European Commission issued a statement today (6th August 2105) confirming it has adopted proposals that will make the clearing of interest-rate derivatives mandatory early next year (April 2016 at the earliest), in a much-anticipated move towards satisfying a 2009 G20 agreement to mitigate risk.

The confirmation from the EC, is the biggest move yet towards making central clearing an obligatory aspect of the European OTC market which is designed to reduce risk in derivatives trading by placing a clearing house between each side of a trade, thus ensuring the successful settlement of the transaction even if a counterparty defaults.

The EU Commissioner for Financial Stability, Financial Services and Capital Markets Union,(Jonathan Hill) said:

"Today we take a significant step to implement our G20 commitments, strengthen financial stability and boost market confidence. This is also part of our move towards markets that are fair, open and transparent."

The EC’s decision today is the first such to implement the clearing obligation under the European Market Infrastructure Regulation ('EMIR') and takes the form of a Delegated Regulation.

The aim is that financial markets will become more stable and less risky by making it necessary for some classes of interest rate derivative contracts, or 'interest rate swaps' (IRS), to be cleared through Central Counterparties. This will then create an environment more conducive to investment and economic growth in the EU.

This decision will affect interest rate swaps (IRS) denominated in the G4 currencies (Pounds Sterling, Euro, Japanese Yen and US Dollars) that have specific features including the index used as a reference for the derivative, its maturity and the notional type. As such, the new rules will cover the following types of contract:

The rules supplement the European Market Infrastructure Regulation (EMIR), however the Delegated Regulation is still subject to scrutiny by the EU Parliament and Council of the EU, and once finalised, the rules will be published in the Official Journal of the EU before entering into force.

These clearing obligations are to be phased in over a period of three years based upon a counterparty’s category so to allow time for smaller market participants to comply.

Today’s EC’s Delegated Regulation is based upon the proposals put forward by the European Securities and Markets Authority (ESMA) and it is further noted in today’s press release that the EC expects that ESMA will put forward further obligations for other types of OTC derivative contracts in the near future.