knowledge 11 March 2016 |

EMIR Clearing for Credit Default Swaps

Background

EMIR requires certain over-the-counter (“OTC”) derivatives to be centrally cleared and mandates the European Securities and Markets Authority (“ESMA”) to propose the classes of OTC derivatives to which the central clearing obligation is to apply, as well as the dates from which that obligation will take effect for each of the different types of counterparties identified.

ESMA submitted draft regulatory technical standards (“RTS”) on the clearing obligation for CDS to the European Commission on 1 October 2015. This followed the earlier submission of draft RTS on the application of the clearing obligation to certain OTC interest rate swaps denominated in one of the G4 currencies (“G4 IRS”) on 1 October 2014. ESMA has since submitted further draft RTS applying the clearing obligation to OTC interest rate derivatives in EEA currencies.

The EMIR clearing obligation will start from 21 June 2016 for the G4 IRS, under the Commission’s Delegated Regulation 2015/2205 (see our related briefing here).

The Delegated Regulation

The Delegated Regulation applies the clearing obligation to Untranched iTraxx Index CDS (Main, EUR, 5Y) and Untranched iTraxx Index CDS (Crossover, EUR, 5Y). Its provisions mirror the overall approach of Delegated Regulation 2015/2205, in particular as regards the categorisation of counterparties, the treatment of intragroup transactions, and the scope of the front-loading requirement. It also reflects the requirements set out in the RTS (see our related briefing here). 

The Delegated Regulation sets out four different categories of counterparties to which the clearing obligation applies and specifies the phase-in periods for each. The different categories and phase-in periods are as follows:

• Category 1: clearing members of a recognised or authorised central counterparty (“CCP”) for at least one of the classes of iTraxx Index CDS covered by the Delegated Regulation – 9 months after the Delegated Regulation enters into force;
• Category 2: financial counterparties as defined in EMIR (“FCs”), and alternative investment funds as defined in the Alternative Investment Fund Managers Directive² (“AIFs”) that are non-financial counterparties as defined in EMIR (“NFCs”), which belong to a group whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives is above EUR 8 billion³ for January, February and March 2016 – 15 months after the Delegated Regulation enters into force;
• Category 3: FCs and AIFs that are NFCs not falling within categories 1 or 2 – 21 months after the Delegated Regulation enters into force; and
• Category 4: NFCs not falling within another category – three years after the Delegated Regulation enters into force.

Where the counterparties to a contract belong to different categories, the later of the dates applicable to those categories applies.

Intra-group Transactions

Specific phase-in periods apply to category 1, 2 or 3 intra-group transactions concluded between a counterparty established in a Member State and another counterparty established in a third country, which fulfil certain conditions. In the case of such transactions, the phase-in period depends on whether or not an equivalence decision pursuant to EMIR has been adopted for the relevant third country in which the group counterparty is established. If such a decision has been adopted, then clearing is required from the later of 60 days after the adoption of the equivalence decision and the date from which the clearing obligation takes effect. If no such decision has been adopted, then clearing is required three years after the Delegated Regulation enters into force.

Front-loading

Under EMIR, the clearing obligation applies to contracts concluded on or after the date on which a CCP was first authorised under EMIR, which occurred on 18 March 2014, but before the date the clearing obligation takes effect, provided this is justified by the remaining maturity of such contracts at that date.

The Delegated Regulation specifies minimum maturities ranging from six months to 5 years and three months and front-loading will be required with an effective date of five months after the Delegated Regulation enters into force.

Next Steps

The Council of the EU and the European Parliament must now consider the Delegated Regulation, which, if neither objects to it, will then be published in the OJ and will enter into force 20 days thereafter. The text of the Delegated Regulation is available here.