Published: 4th March 2016

Of Relevance to:

Those entities subject to EMIR


EMIR Mandatory Clearing: Credit Default Swaps

As we know, Article 4 of EMIR imposes a clearing obligation on all OTC contracts which fulfil the conditions therein. However it is incumbent upon ESMA to determine which classes of OTC derivatives should be subject to the clearing obligation.

Last December a Delegated Regulation came into force setting out the first four classes of contracts which would be subject to mandatory clearing – see Regulatory Roundup 71 for further details.

A European Commission press release advises that a second tranche of OTC derivatives have been nominated for mandatory clearing following the release of a further Delegated Regulation, the Annex to which lists the specific classes (European untranched Index Credit Default Swaps).

The Delegated Regulation still has to be reviewed by the European Parliament and the European Council after which the Regulation will enter into force 20 days after its publication in the Official Journal. As such, there are no precise dates at the moment for when clearing will become obligatory but hopefully the following will assist firms in their planning.

Once the Regulation is in force the clearing obligation will take effect at various times depending upon how a counterparty – as defined in EMIR Article 2(8) and (9) – is categorised as follows:

  • Category 1 comprises clearing members for at least one of the classes of OTC subject to clearing.
  • Category 2 comprises financial counterparties (and AIFs which are not financial counterparties) which are not members and which belong to a group whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives for January, February and March 2016 is above €8bn.
  • Category 3 comprises financial counterparties (and AIFs which are not financial counterparties) which do not belong within either Category 1 or Category 2.
  • Category 4 comprises non-financial counterparties not included in the other categories.

Once a counterparty has been categorised in accordance with the above then the clearing obligation takes effect on:

  • Category 1: 9 months after the Regulation enters into force.
  • Category 2: 15 months after the Regulation enters into force.
  • Category 3: 21 months after the Regulation enters into force.
  • Category 4: 3 years after the Regulation enters into force

Where a contract is concluded between two counterparties included in different categories then the clearing obligation will take effect from the later date.

Please see Article 3(2) of the Delegated Regulation for when one counterparty is established in a third country.

A frontloading requirement i.e. where contracts will be subject to clearing before the date the clearing obligation takes effect (as per EMIR Article 4(1)(b)(ii)) will only apply to Category 1 and Category 2 counterparties (and will apply to contracts entered into or novated before the date that is five months after the Delegated Regulation comes into force) – see Article 4 of the Delegated Regulation for the relevant maturities.

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