The Commission Delegated Regulation (2015/2205) on the mandatory clearing of certain OTC derivative contracts through central counterparties (see Regulatory Roundup 67) under Article 4 of EMIR has now been published in the Official Journal of 1 December. As is usual, the Regulation comes into force on the twentieth day after such publication i.e. 21 December 2015.
The following classes of contracts denominated in EUR, GBP, JPY and USD fall within the scope of the Delegated Regulation (subject to the exclusions in Article 1(2)):
- Basis swaps
- Fixed-to-float interest rate swaps
- Forward Rate Agreements
- Overnight Index swaps.
Please see the tables in the Annex to 2015/2205 for further details.
The clearing obligation will take effect at various times depending on how a counterparty (as defined in Article 2(8) & (9) of EMIR) is categorised as follows:
- Category 1 will include counterparties that are clearing members for at least one of the OTC contracts set out in the Annex (on 21 June 2016), of at least one of the Central Counterparties (“CCPs”) authorised or recognised to clear one of those classes.
- Category 2 will capture counterparties not falling within the above that are financial counterparties (or AIFs that are non-financial counterparties) which belong to a group whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives from January, February and March 2016 is above €8bn.
- Category 3 will be financial counterparties (or AIFs that are non-financial counterparties) not belonging either of the above categories.
- Category 4 will consist of non-financial counterparties that do not belong to any of the above three categories.
Where the counterparties are AIFs or UCITS then the €8bn referred to in Category 2 applies individually at fund level.
Once a counterparty has been categorised in accordance with the above then the clearing obligation takes effect on:
- Category 1: 21 June 2016
- Category 2: 21 December 2016
- Category 3: 21 June 2017
- Category 4: 21 December 2018
Where a contract is concluded between counterparties included in different categories then the clearing obligation will take place from the later date.
Although there is now certainty as to when the clearing obligation takes place, a reminder that the frontloading obligation set out in EMIR Article 4(1)(b)(ii) will impact many firms.
In essence the frontloading obligation requires clearing of certain contracts of a minimum remaining maturity to be cleared before the clearing obligation takes effect.
Fortunately the frontloading obligations have been rethought (see article ‘EMIR and Frontloading’ in Regulatory Roundup 67) and will only apply to:
- Category 1 counterparties for those contracts entered into or novated two months after the Delegated Regulation comes into force i.e. 21 February 2016.
- Category 2 counterparties for those contracts entered into or novated five months after the Delegated Regulation comes into force i.e. 21 May 2016.
This means that Category 1 firms will have a four-month frontloading period whilst Category 2 firms will have a seven-month frontloading period.
Please see Article 4 of 2015/2205 for the relevant minimum maturity dates and for the process when counterparties fall into different categories.
There is no frontloading requirement for Category 3 or Category 4 counterparties nor for any non-financial counterparties.
ESMA has recently updated its Q&As on EMIR (2015/1485) which may be useful.