Clearing obligation(under art. 4 of EMIR)
What does ‘clearing’ mean?
In the context of EMIR ‘clearing’ means the process of establishing positions, including the calculation of net obligations, and ensuring that financial instruments, cash, or both, are available to secure the exposures arising from those positions. OTC derivative contracts must be cleared by a central counterparty (CCP).
What is a CCP?
A CCP stands between the two original counterparties to a contract and guarantees the performance of obligations i.e. removing counterparty risk. In other words this is an authorised by ESMA legal person that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer.
What should to be cleared and since when?
The first technical standards on the clearing obligation under EMIR were published in the Official Journal on 1 December 2015 which gives them legal force and establishes the first application dates regarding the clearing obligation for interest rate swaps denominated in the G4 currencies.
The first EMIR swap clearing obligation requires EU firms to clear the below-mentioned OTC derivatives through CCPs. ESMA’s Public Register lists the classes of OTC derivatives covered by the clearing obligation and those CCPs authorised to clear them.
Commission Delegated Regulation (EU) 2015/2205 established four categories of counterparties:
- In Category 1 fall the counterparties which, on the date of entry into force of this Regulation (i.e. 21st Dec 2015), are clearing members for at least one of the classes of OTC derivatives mentioned above and of at least one of the CCPs authorised or recognised before that date to clear at least one of those classes. On 21st June 2016 the clearing obligation takes effect for the counterparties in this Category.
- In Category 2 fall the financial counterparties above the EUR 8bn threshold and the alternative investment funds that are non-financial counterparties whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives for January, February and March 2016 is above EUR 8 billion. On 21st December 2016 the clearing obligation takes effect for Category 2.
- In Category 3 fall the financial counterparties below the EUR 8bn threshold and the alternative investment funds that are non-financial counterparties whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives for January, February and March 2016 is below EUR 8 billion. 21st June 2017 was the initial date for the clearing obligation to take effect regarding Category 3. However on 29th April 2017 Commission Delegated Regulation (EU) 2017/751 was published in the Official Journal. The new date is 21st June 2019.
- In Category 4 fall all other counterparties that do not belong to Category 1, Category 2 or Category 3. The clearing obligation takes effect on 21st December 2018.
The EMIR clearing obligation covers the following classes of OTC interest rate.
- Basis swaps classes (float-to-float swaps)
| ID | Type | Reference Index | Settlement Currency | Maturity | Settlement Currency Type | Optionality | Notional Type |
|---|---|---|---|---|---|---|---|
| A.1.1. | Basis | Euribor | EUR | 28D-50Y | Single currency | No | Constant or variable |
| A.1.2. | Basis | LIBOR | GBP | 28D-50Y | Single currency | No | Constant or variable |
| A.1.3. | Basis | LIBOR | JPY | 28D-30Y | Single currency | No | Constant or variable |
| A.1.4. | Basis | LIBOR | USD | 28D-50Y | Single currency | No | Constant or variable |
- Fixed-to-float interest rate swap classes (plain vanilla)
| ID | Type | Reference Index | Settlement Currency | Maturity | Settlement Currency Type | Optionality | Notional Type |
|---|---|---|---|---|---|---|---|
| A.2.1. | Fixed-to-float | Euribor | EUR | 28D-50Y | Single currency | No | Constant or variable |
| A.2.2. | Fixed-to-float | LIBOR | GBP | 28D-50Y | Single currency | No | Constant or variable |
| A.2.3. | Fixed-to-float | LIBOR | JPY | 28D-30Y | Single currency | No | Constant or variable |
| A.2.4. | Fixed-to-float | LIBOR | USD | 28D-50Y | Single currency | No | Constant or variable |
- Forward rate agreement classes
| ID | Type | Reference Index | Settlement Currency | Maturity | Settlement Currency Type | Optionality | Notional Type |
|---|---|---|---|---|---|---|---|
| A.3.1. | FRA | Euribor | EUR | 3D-3Y | Single currency | No | Constant or variable |
| A.3.2. | FRA | LIBOR | GBP | 3D-3Y | Single currency | No | Constant or variable |
| A.3.3. | FRA | LIBOR | USD | 3D-3Y | Single currency | No | Constant or variable |
- Overnight index swaps classes
| ID | Type | Reference Index | Settlement Currency | Maturity | Settlement Currency Type | Optionality | Notional Type |
|---|---|---|---|---|---|---|---|
| A.4.1. | OIS | EONIA | EUR | 7D-3Y | Single currency | No | Constant or variable |
| A.4.2. | OIS | FedFunds | USD | 7D-3Y | Single currency | No | Constant or variable |
| A.4.3. | OIS | SONIA | GBP | 7D-3Y | Single currency | No | Constant or variable |
The second technical standards on the clearing obligation under EMIR were published in the Official Journal on 14 April 2016 and established the application dates regarding the clearing obligation for index credit default swaps denominated in EUR.
According to Commission Delegated Regulation (EU) 2016/592 the clearing obligation takes effect on the following dates:
- In Category 1 fall the counterparties which, on the date of entry into force of this Regulation (i.e. 4th May 2016), are clearing members for at least one of the classes of OTC derivatives and of at least one of the CCPs authorised or recognised before that date to clear at least one of those classes. On 9th Feb 2017 the clearing obligation takes effect for the counterparties in this Category.
- In Category 2 fall the financial counterparties above the EUR 8bn threshold and the alternative investment funds that are non-financial counterparties whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives is above EUR 8 billion. On 9th Aug 2017 the clearing obligation takes effect for Category 2.
- In Category 3 fall the financial counterparties below the EUR 8bn threshold and the alternative investment funds that are non-financial counterparties whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives is below EUR 8 billion. 9th Feb 2018 was the initial date for the clearing obligation to take effect regarding Category 3. However on 29th April 2017 Commission Delegated Regulation (EU) 2017/751 was published in the Official Journal. The new date is 21st June 2019.
- In Category 4 fall all other counterparties that do not belong to Category 1, Category 2 or Category 3. The clearing obligation takes effect on 9th May 2019.
The EMIR clearing obligation covers the following Index CDS.
- Credit Default OTC derivatives classes subject to the clearing obligation
| id | Type | Sub-type | Geographical Zone | Reference Index | Settlement Currency | Series | Tenor |
|---|---|---|---|---|---|---|---|
| B.1.1 | Index CDS | Untranched Index | Europe | iTraxx Europe Main | EUR | 17 onwards | 5Y |
| B.1.2 | Index CDS | Untranched Index | Europe | iTraxx Europe Crossover | EUR | 17 onwards | 5Y |
The third technical standards on the clearing obligation under EMIR were published in the Official Journal on 20 July 2016 and established the application dates regarding the clearing obligation for interest rate swaps denominated in NOK, PLN, SEK.
According to Commission Delegated Regulation (EU) 2016/1178 the clearing obligation takes effect on the following dates:
- In Category 1 fall the counterparties which, on the date of entry into force of this Regulation (i.e. 9th Aug 2016), are clearing members for at least one of the classes of OTC derivatives and of at least one of the CCPs authorised or recognised before that date to clear at least one of those classes. On 9th Feb 2017 the clearing obligation takes effect for the counterparties in this Category.
- In Category 2 fall the financial counterparties above the EUR 8bn threshold and the alternative investment funds that are non-financial counterparties whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives is above EUR 8 billion. On 9th Aug 2017 the clearing obligation takes effect for Category 2.
- In Category 3 fall the financial counterparties below the EUR 8bn threshold and the alternative investment funds that are non-financial counterparties whose aggregate month-end average of outstanding gross notional amount of non-centrally cleared derivatives is below EUR 8 billion. 9th Feb 2018 was the initial date for the clearing obligation to take effect regarding Category 3. However on 29th April 2017 Commission Delegated Regulation (EU) 2017/751 was published in the Official Journal. The new date is 21st June 2019.
- In Category 4 fall all other counterparties that do not belong to Category 1, Category 2 or Category 3. The clearing obligation takes effect on 9th Aug 2019.
The following interest rate OTC derivatives classes are subject to the clearing obligation:
- Fixed-to-float interest rate swaps classes
| id | Type | Reference Index | Settlement Currency | Maturity | Settlement Currency Type | Optionality | Notional Type |
|---|---|---|---|---|---|---|---|
| C.1.1 | Fixed-to-float | NIBOR | NOK | 28D-10Y | Single currency | No | Constant or variable |
| C.1.2 | Fixed-to-float | WIBOR | PLN | 28D-10Y | Single currency | No | Constant or variable |
| C.1.3 | Fixed-to-float | STIBOR | SEK | 28D-15Y | Single currency | No | Constant or variable |
- Forward rate agreement classes
| id | Type | Reference Index | Settlement Currency | Maturity | Settlement Currency Type | Optionality | Notional Type |
|---|---|---|---|---|---|---|---|
| C.2.1 | FRA | NIBOR | NOK | 3D-2Y | Single currency | No | Constant or variable |
| C.2.2 | FRA | WIBOR | PLN | 3D-2Y | Single currency | No | Constant or variable |
| C.2.3 | FRA | STIBOR | SEK | 3D-3Y | Single currency | No | Constant or variable |
Current status of the progress of the clearing obligation
| Asset Class | Classes | Consultation Paper | Final Report | Other documents | Status of RTS | Last Update |
|---|---|---|---|---|---|---|
| Interest Rate | Basis, Fixed-to-float, FRA and IOS in EUR, GBP, JPY and USD | 11-Jul-14 | 01-Oct-14 | 06-Mar-15 | RTS 2015/2205 RTS 2017/751 amends RTS 2015/2205 | 20-Feb-18 |
| Consultation Paper (n°1) | Final Report (n°1) | Opinion on the RTS on IRS | ||||
| Interest Rate | FRA and fixed-to-float swaps in NOK, PLN and SEK | 11-May-15 | 10-Nov-15 | RTS 2016/1178 RTS 2017/751 amends RTS 2016/1178 | 20-Feb-18 | |
| Consultation Paper (n °4) | Final Report (n°3) | |||||
| Equity | Lookalike/ Flexible equity derivatives and CFD | 11-Jul-14 | 01-Oct-14 | No RTS proposed at this stage | 01-Oct-14 | |
| Consultation Paper (n°1) | Final Report (n°1) | |||||
| Credit | Index Credit Default Swaps | 11-Jul-14 | 01-Oct-15 | 20-Nov-14 | RTS 2016/592 RTS 2017/751 amends RTS 2016/592 | 20-Feb-18 |
| Consultation Paper (n°2) | Final Report (n°2) | Letter to the Commission on RTS on CO | ||||
| Foreign Exchange | Non-deliverable Forward (NDF) | 1 Oct 2014 | 04-Feb-15 | No RTS proposed at this stage | 04-Feb-15 | |
| Consultation Paper (n°3) | Feedback statement on NDF |
ESMA maintains a Public Register for the Clearing Obligation that includes the classes of OTC derivatives that CCPs are authorised to clear. ESMA constantly updates the register with the new classes of OTC derivatives subject to the clearing obligation once the process is finalised, i.e. after the publication of the relevant technical standards in the Official Journal of the European Union.
What are the thresholds to non-financial counterparties (NFCs)?
The following thresholds are applicable only to non-financial counterparties (NFCs):
- EUR 1 billion* Credit derivative contracts
- EUR 1 billion* Equity derivative contracts
- EUR 3 billion* Interest rate derivative contracts
- EUR 3 billion* Foreign exchange derivative contracts
- EUR 3 billion* Commodity derivative contracts and others
* in gross notional value
NFCs need to inform ESMA both when exceeding the clearing threshold (NFC+) and when no longer exceeding it (NFC-). The same notifications need to be made to a NFC’s national regulator, using the template which, for ESMA, should be sent to EMIR-notifications@esma.europa.eu
Who is obliged to clear the OTC derivative contracts?
The clearing obligation applies for the OTC derivative contracts that are traded between the following entities as indicated with a “+” sign in the table below:
| FC (based in EU) | NFC+ (based in EU) | NFC- (based in EU) | Non-EU FC | Non-EU NFC+ | Non-EU NFC- |
|
|---|---|---|---|---|---|---|
| FC (based in EU) | + | + | - | + | + | - |
| NFC+ (based in EU) | + | + | - | + | + | - |
| NFC- (based in EU) | - | - | - | - | - | - |
| Non-EU FC | + | + | - | + | + | - |
| Non-EU NFC+ | + | + | - | + | + | - |
| Non-EU NFC- | - | - | - | - | - | - |
NFC+ means a non-financial counterparty that is above the clearing threshold while NFC- is a non-financial counterparty that is below the clearing threshold.
The pension funds are exempted from the central clearing until 15 August 2018.
How can NFCs apply the clearing threshold?
Not all OTC derivative contracts count towards the clearing threshold. Those OTC derivative contracts entered into in order to reduce risks relating to the commercial or treasury financing activity of the NFC, or of NFCs of the group it belongs to, are excluded from the calculation of the clearing threshold. Criteria to determine those contracts are specified in regulatory technical standards. All other OTC derivative contracts entered into by the NFC or other NFC entities of the group shall be taken into account for the calculation of the clearing threshold. When the amount for one class of OTC derivative contracts is surpassed, you exceed the clearing threshold.
- Derivative contracts executed on non-EU exchanges that are equivalent to a regulated market in accordance with Article 19(6) of MiFID do not count for the purpose of the determination of the clearing threshold. Derivatives traded in other non-EU exchanges will count for the determination of the clearing threshold. Article 19(6) states that the European Commission shall publish a list of those exchanges that are to be considered as equivalent. To date, there is no publicly available list of non-EU exchange equivalent to a regulated market, as envisaged under Article 19(6) of MiFID. In the absence of this list, all derivative contracts executed on non–EU exchanges should be counted for the purpose of the determination of the clearing threshold.
- Derivatives transactions, such as block trades, which are executed outside the trading platform of the regulated market, but are subject to the rules of the regulated market and are executed in compliance with those rules, including the immediate processing by the regulated market after execution and the clearing by a CCP, should not be regarded as OTC derivatives transactions. Therefore, these transactions should not be considered for the purpose of the clearing obligation and the calculation of the clearing threshold by NFC that only relates to OTC derivatives.
Derivatives transactions that do not meet the conditions listed in the first paragraph of this sub-answer (d) should be considered OTC. For example, derivatives contracts that are not executed on a regulated market and are not governed by the rules of an exchange at the point of execution should be considered OTC even if after execution they are exchanged for contracts traded in a regulated market. However, the replacement contract itself may be considered ex-change traded if it meets
How to meet the clearing obligations?
Counterparties may meet the clearing obligation as:
- a direct clearing member;
- client of a clearing member; or
- indirectly through a clearing member.
The CCPs and clearing members must offer:
- individual client segregation; and
- omnibus client segregation.
The CCPs may offer other levels of segregation but the minimum level is omnibus segregation.
EMIR REFIT and clearing obligation
EMIR Refit (Regulation EU 2019/834 amending EMIR) provides for a new regime to determine when financial counterparties (FCs) and non-financial counterparties (NFCs) are subject to the clearing obligation.
Under EMIR Refit FCs and NFCs decide whether to calculate or not their positions on OTC derivative contracts against the clearing thresholds.
- Where a FC or a NFC does not to calculate its positions against the clearing thresholds, it will become subject to the clearing obligation for all OTC derivative contracts pertaining to any class of OTC derivatives for which the clearing obligation is applicable.
- Where a FC calculates its positions and the result of that calculation exceeds the clearing threshold, the FC will become subject to the clearing obligation for all OTC derivative contracts pertaining to any class of OTC derivatives for which the clearing obligation is applicable (regardless of not exceeding the clearing threshold of each asset class, see table below on value of clearing thresholds).
- Where a NFC calculates its positions and the result of that calculation exceeds the clearing thresholds, the NFC will become subject to the clearing obligation only for the OTC derivative contracts in asset classes for which the result of the calculation exceeds the clearing thresholds.
Please refer to the public statement issued by ESMA on the implementation of the new EMIR Refit regime for the clearing obligation for FCs and NFCs.