On August 18, the consultation period closed for responding to the draft regulatory technical standards (RTS) published by the European Securities and Markets Authority (ESMA) for the mandatory clearing of certain interest rate swaps (IRS) as required under the European Market Infrastructure Regulation (EMIR). The consultation period for credit default swaps (CDS) will close on September 18.The classes of IRS that will be subject to the EMIR mandatory clearing requirement must settle in a single settlement currency in either EUR, GBP or USD and include:
- basis swaps and fixed-to-float IRS, referencing either EURIBOR or LIBOR, with a maturity of 28 days to 50 years (this category includes instruments settling in JPY);
- forward rate agreements (FRAs), referencing either EURIBOR or LIBOR, with a maturity of three days to three years: and
- overnight index swaps (OIS), referencing EONIA, FedFunds or SONIA, with a maturity of seven days to three years.
The Commodity Futures Trading Commission (CFTC) issued CFTC Regulation 50.4, effective on February 11, 2013, implementing the first mandatory clearing determinations under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The classes of IRS to be cleared under that rule are largely similar to the list above; however, CFTC Regulation 50.4 does not require any IRS that has a notional amount that can change over the life of the swap to be cleared. Additionally, the IRS under CFTC Regulation 50.4 includes FRAs settling in JPY, with both FRAs and OIS having a maximum maturity of two years.
The classes of CDS that will be subject to the EMIR mandatory clearing requirement must settle in EUR only and include index CDS (untranched), referencing iTraxx Europe and iTraxx Europe Crossover indices, with a series of 11 onwards and a maturity period of five years.
The list of CDS required to be cleared under CFTC Regulation 50.4 is broader than the list above and covers iTraxx Europe HiVol, European untranched indices with a broader range of applicable series, and USD-denominated North American untranched indices being traded in North America.
ESMA, once it considers the responses to its consultations for the draft RTS on IRS and CDS, will issue final RTSs, which are then required to be endorsed by the European Commission before each RTS becomes effective, which is expected to be around November 2014 to January 2015 for IRS and around December 2014 to February 2015 for CDS.
ESMA currently intends to adopt a phased-in implementation schedule from the date at which the RTS for IRS and CDS come into force to encourage an orderly process of application as follows:
- Category 1 – Clearing members of at least one EMIR-authorized CCP that clears the specified IRS or CDS products subject to the clearing obligation, six months;
- Category 2 – Non-clearing members that are financial counterparties (as defined under EMIR) or alternative investment funds (AIFs) (as defined under the Alternative Investment Fund Managers Directive) which qualify as non-financial counterparties above the EMIR clearing threshold, 18 months; and
- Category 3 – Non-clearing members that are non-financial counterparties above the clearing threshold as defined under EMIR (excluding AIFs), three years.
Category 1 entities, therefore, are currently expected to commence clearing of IRS around May to July 2015; Category 2, around May to July 2016; and Category 3, around November 2017 to January 2018. Similarly, Category 1 entities are expected to begin to clear CDS around June to August 2015; Category 2, around June to August 2016; and Category 3, around December 2017 to February 2018.
The responses to the ESMA consultation on the clearing obligation for IRS can be found here. The ESMA draft RTS for IRS and for CDS can be found here. CFTC Regulation 50.4 can be found here.