On September 22, the European Commission adopted two delegated regulations to implement new EU-wide rules on “indirect clearing arrangements” for the exchange-traded derivatives market (ETD Delegated Regulation) and for the over-the-counter (OTC) derivatives market (OTC Delegated Regulation). The term “indirect clearing arrangement” refers to a set of relationships—also called a “chain”—where at least two intermediaries are interposed between an end-client and the relevant central counterparty (CCP). The most basic indirect clearing chain, therefore, involves the following four entities: the CCP; a clearing member of the CCP (Clearing Member); the client of the Clearing Member that is itself an intermediary (Direct Client); and the client of such Direct Client (Indirect Client). Longer chains are permitted in certain limited circumstances. The OTC Delegated Regulation amends earlier indirect clearing rules for the OTC derivatives market in order to ensure that the provisions of the ETD Delegated Regulation and the OTC Delegated Regulation are identical.

The two Delegated Regulations are largely designed to provide greater protection of Indirect Client positions and assets in the event that the Direct Client defaults. The principal innovation in the Delegated Regulations is the introduction of two new types of segregated accounts for Indirect Clients in a standard indirect clearing chain. A CCP must permit a Clearing Member to open and maintain at least the following two types of segregated accounts for its Direct Client(s) that have Indirect Client(s): (1) one omnibus segregated account for all Indirect Clients of all such Direct Clients; and (2) one gross (position and margin) segregated account per Direct Client for all Indirect Clients of that Direct Client that choose gross segregation. A Clearing Member must also open and maintain corresponding types of accounts in its own books and records. The Delegated Regulations also provide for extensive default management provisions, including rules relating to porting and liquidation, as well as provisions relating to disclosure, documentation and risk management.

The Delegated Regulations take effect on January 3, 2018.