On May 22, the European Securities and Markets Authority (ESMA) published an opinion to the EU institutions (including the Commission, Parliament and Council) calling for a modification of the Directive for Undertakings for the Collective Investment of Transferable Securities (UCITS Directive) to take into account the clearing obligations for both exchange-traded and over-the-counter (OTC) financial derivatives arising under the European Market Infrastructure Regulation (EMIR).

ESMA has determined that the UCITS Directive should no longer distinguish between OTC and exchange-traded financial derivatives, but rather make a distinction between cleared (both OTC and exchange-traded) and non-cleared financial derivatives. Therefore, ESMA recommends that the counterparty risk limits imposed by the UCITS Directive for OTC derivatives should be amended to apply to exchange-traded derivatives as well.

ESMA maintains that for non-cleared derivatives, the current counterparty risk limits (5 percent/10 percent) should continue to apply. For cleared derivatives, however, separate counterparty exposure limits should be put in place for exposure to central counterparties (CCPs) and to their clearing members.

The opinion further states that the counterparty risk limits should be calibrated to the different types of segregation arrangements, i.e., gross or net omnibus versus individual segregation. ESMA also recommends that counterparty risk limits applied to CCPs should be lower for non-EU CCPs that have not been recognized by ESMA than for EU CCPs or those non-EU CCPs that have been recognized by ESMA.

ESMA provides general indication regarding what it believes the appropriate counterparty risk limits should be. Therefore, more analysis will need to be done before a final decision on ESMA’s recommendation can be made, which probably will not be until the end of the year, or potentially later.

A copy of the opinion can be found here.