The European Securities and Markets Authority (ESMA) has today published additional draft regulatory technical standards (RTS) regarding the central clearing of Interest Rate Swaps (IRS) which ESMA is required to develop under the European Market Infrastructure Regulation (EMIR). ESMA’s RTS propose the mandatory central clearing of fixed-to-float IRS and forward rate agreements denominated in Norwegian Krone (NOK), Polish Zloty (PLN) and Swedish Krona (SEK).
IRS make up the bulk of the EU’s OTC derivative market in terms of volumes which is why ESMA had already deemed IRS denominated in EUR, GBP, JPY and USD eligible for mandatory clearing earlier this year. These RTS were already endorsed by the European Commission in August 2015, meaning that central clearing for IRS in those currencies is expected to start in Q2 2016. In addition, ESMA decided to propose central clearing to IRS denominated in NOK, PLN and SEK as significant trading volumes exist and these contracts are of important systemic relevance for both the specific local markets and the EU as a whole. The addition of those classes to the clearing obligation can therefore be seen as an important step in reducing systemic risk.
ESMA has already proposed central clearing for different types of derivatives, including for Index Credit Default Swaps in October 2015. ESMA’s assessment whether a class of OTC derivatives should be subject to central clearing is based on a number of criteria, including liquidity, price availability and standardisation.
EMIR aims at reducing systemic risk by introducing the obligation to clear certain classes of OTC derivatives through central counterparties (CCP) that have been authorised (EU-based CCPs) or recognised (third-country CCPs). Central clearing of OTC derivatives is part of the G20 commitments aimed at reducing risk in the financial system and requires a process for the identification of classes of OTC derivatives that should be subject to mandatory clearing.
Next Steps
ESMA has sent the draft RTS for endorsement to the European Commission, which has three months to do so, followed by a non-objection period by the European Parliament and the Council.