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«01 October 2015 | ESMA/2015/1481 Table of Contents 1 Executive Summary 2 Introduction 3 The clearing obligation procedure 4 Structure of the credit ...»

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Final Report

Draft technical standards on the Clearing Obligation – Credit Derivatives

01 October 2015 | ESMA/2015/1481

Table of Contents

1 Executive Summary

2 Introduction

3 The clearing obligation procedure

4 Structure of the credit derivative classes

5 Classes of OTC derivatives to be subject to the clearing obligation

6 Dates of application and categories of counterparties

6.1 CCPs and clearing members

6.2 Categories of counterparties

6.3 Dates on which the clearing obligation takes effect

7 Remaining maturity of the contracts subject to frontloading

8 Other aspects related to the draft RTS not covered in the other sections

9 Annexes

9.1 Annex I - Legislative mandate to develop technical standards

9.2 Annex II - Cost-benefit analysis

9.2.1 Introduction

9.2.2 Quantitative impact assessment

9.2.3 Qualitative impact assessment

9.3 Annex III - Draft Regulatory Technical Standards

1 Executive Summary Reasons for publication Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC Derivatives, CCPs and Trade Repositories (EMIR) requires ESMA to develop draft regulatory technical standards (RTS) in relation to the clearing obligation.

In this context ESMA consulted stakeholders with a discussion paper1 and four consultation papers.

The first consultation paper on the clearing obligation for OTC derivatives covered interest rate derivative denominated in EUR, GBP, JPY and USD, the second one covered credit default swap (CDS), the third one covered foreign exchange non-deliverable forward (NDF) and the fourth one covered interest rate derivative classes denominated in CZK, DKK, HUF, NOK, PLN and SEK.

The first RTS on the clearing obligation for certain classes of OTC interest rate derivatives denominated in EUR, GBP, JPY and USD were adopted by the European Commission on 06 August 2015.

This final report on the clearing obligation is covering certain classes of credit derivatives. It includes the final version of the draft RTS that are submitted to the European Commission for endorsement.

Contents

This final report incorporates the feedback received to the consultation on the CDS classes and explains the reasons for reflecting or not the stakeholders proposals to the draft RTS. It follows the same structure as the consultation paper.

Section 3 provides explanations on the procedural aspects of the clearing obligation. Section 4 provides clarifications on the structure of the classes of OTC credit derivatives that are proposed for the clearing obligation. Section 5 covers the determination of the classes of OTC credit derivatives that should be subject to mandatory clearing. Section 6 presents the approach for the definition of the categories of counterparties, and the proposals related to the dates from which the clearing obligation should apply per category of counterparty. Section 7 provides explanations on the approach considered for frontloading and the definition of the minimum remaining maturities of the contracts subject to it.

Next Steps This final report is submitted to the European Commission for endorsement of the draft RTS presented in Annex III. From the date of submission the European Commission should take the decision whether to endorse the RTS within three months.

2013/ESMA/925 Discussion Paper on the Clearing Obligation published on 12 July 2013 2014/ESMA/799 Consultation Paper, Clearing Obligation under EMIR no.1 published on 11 July 2014 2014/ESMA/800 Consultation Paper, Clearing Obligation under EMIR no.2 published on 11 July 2014 2014/ESMA/1185 Consultation Paper, Clearing Obligation under EMIR no 3 published on 1 October 2014 2015/ESMA/807 Consultation Paper, Clearing Obligation under EMIR no.4 published on 11 May 2015

The publication of the adoption of the first RTS on the Clearing Obligation is available at:

http://ec.europa.eu/finance/index_en.htm Acronyms used

–  –  –

2 Introduction

1. With the overarching objective of reducing systemic risk, the European Market Infrastructure Regulation (“EMIR”) introduces the obligation to clear certain classes of OTC derivatives in Central Counterparties (CCPs) that have been authorised (for European CCPs) or recognised (for thirdcountry CCPs) under the EMIR framework. Ensuring that the clearing obligation reduces systemic risk requires a process of identification of classes of derivatives that should be subject to mandatory clearing.

2. The clearing obligation procedure shall begin when a CCP clearing OTC derivatives is authorised under EMIR, or when ESMA has accomplished a procedure for recognition of a third-country CCP set out in EMIR Article 25. It has therefore started in Q1 2014 following the first CCPs authorisations. The list of CCPs that have been authorised to clear OTC derivatives, and the classes for which they are authorised, are available in the public register 7.

3. In accordance with Article 5 of EMIR, ESMA shall develop and submit to the European

Commission for endorsement draft technical standards specifying:

(a) the class of OTC derivatives that should be subject to the clearing obligation referred to in Article 4;





(b) the date or dates from which the clearing obligation takes effect, including any phase in and the categories of counterparties to which the obligation applies; and (c) the minimum remaining maturity of the OTC derivative contracts referred to in Article 4(1)(b)(ii).

4. The present final report follows the publication on 11 July 2014 of a consultation paper on the clearing obligation proposing some OTC credit derivative classes to be subject to the clearing obligation. The consultation closed on 18 September 2014 and ESMA received 35 responses.

5. This final report on Credit Default Swap (CDS) is the second final report on the clearing obligation that ESMA submits to the European Commission. In view of the strong interactions between the various papers and regulatory technical standards (RTS) on the clearing obligation in different

asset classes, this paper should be read in conjunction with:

 the first final report on the clearing obligation published on 01 October 2014 and covering OTC interest rate derivative classes denominated in EUR, GBP, JPY, USD (the “G4 currencies”).

 the letter from the Commission to ESMA of 18 December 2014 indicating its intention to endorse with amendments the draft RTS;

 the related ESMA opinion of 29 January 2015 ;

The Public Register for the Clearing Obligation under EMIR is available under the post-trading section of :

http://www.esma.europa.eu/page/Registries-and-Databases 2014/ESMA/1184 Final Report, Clearing Obligation under EMIR no. 1 published on 1 October 2015 2015/ESMA/223 Opinion on the draft regulatory technical standards published on 29 January 2015  the publication on 6 August 2015 of the adopted first draft RTS on the clearing obligation covering the interest rate OTC derivative classes denominated in the G4 currencies.

6. The present final report is thus building on (a) the documents and consultations related to the first draft RTS on OTC interest rate derivative classes denominated in the G4 currencies as well as on (b) the consultation on OTC credit derivative classes, including the review of the 35 responses.

7. The first final report covering the interest rate OTC derivative classes denominated in the G4 currencies already integrated and addressed the feedback from the 51 responses to the first and related consultation. This second final report does not repeat the analysis of the first one where the feedback is consistent. Instead, this final report addresses new feedback as well as feedback that is specific to the OTC credit derivative classes.

8. In summary, the proposals presented in the consultation paper on CDS were broadly supported by stakeholders. This final report develops further in the next sections the changes made to take into account the range of feedback and provides a number of clarifications as requested by stakeholders. The resulting draft RTS are included in Annex III.

3 The clearing obligation procedure The submission of new classes (Question 1 of the consultation paper)

9. The first final report on the clearing obligation already detailed the large consensus for ESMA to proceed with the grouping approach to the extent possible, i.e. to produce a single consultation paper per asset class, where an asset-class is understood to be one of the five following: interestrate, credit, equity, commodity and foreign-exchange. This approach was also supported in the responses for this set of classes covering the OTC credit derivatives asset class11.

10. In line with the analysis and the consultation, ESMA has determined that some OTC credit derivatives classes should be subject to the clearing obligation. These new classes constitute the second set of classes to be subject to the clearing obligation that ESMA submits to the European Commission following the first set covering OTC interest rate derivatives denominated in EUR, GBP, JPY and USD (the G4 currencies). The present final report is thus addressing how additional classes get added to the clearing obligation, in terms of structure of the sequential RTS.

11. First of all, the process to determine additional classes, or to remove some, has been explained in the first final report as well as in the consultation paper no.4 on FX non-deliverable forwards (NDF).

Indeed, ESMA can use the bottom-up approach, the top-down approach as well as the review of the current scope and, following further analysis and consultations where appropriate, determine a different scope for the clearing obligation. In particular, classes previously not determined to be subject to the clearing obligation can be added later under appropriate justifications. The overarching principle being the reduction of systemic risk, the set of classes subject to the clearing obligation can evolve and ESMA will continue to analyse classes and consult accordingly. In line

The publication of the adoption of the first RTS on the clearing obligation is available at:

http://ec.europa.eu/finance/index_en.htm This approach was also supported in the responses related to the set of NDF classes as reported in the feedback statement (2015/ESMA/234) published on 4 February 2015.

with this principle, in the present case, the new set of classes to be subject to the clearing obligation has been determined following the bottom-up approach.

12. Several respondents to the four consultations on the clearing obligation have requested some clarification on the way in which the different sets of classes subject to the clearing obligation would be reflected in the technical standards: would all the classes belong to the same technical standards, or each set of classes form new technical standards?

13. A few respondents compared the two following approaches: either new and standalone RTS enter into force following each clearing obligation determination (hence several RTS on the clearing obligation would coexist), or an amended version of the RTS is issued after each clearing obligation determination (hence there would be only one RTS on the clearing obligation, but it could be amended several times). There was no particular consensus for either approach in the responses.

14. Many linked the choice of the approach with regards to the RTS to its impact on the definition of categories, the phase-in, etc. However, to ensure the specificities of new classes and the feedback from subsequent consultations are properly taken into consideration, the RTS approach for each new set of classes or change in scope will be derived from the desired policy choices, not the other way around.

15. From the points of view of timing and clarity to stakeholders, ESMA considers that the standalone approach is the most appropriate for this second draft RTS. For this reason new draft RTS covering only the CDS classes are presented in Annex III. Indeed, the draft RTS on OTC interest rate derivative classes has now been endorsed by the European Commission but is still under review with the European Parliament and the Council. It could create confusion for stakeholders if amendments to RTS that have not yet entered into force were proposed in parallel. Decoupling the two RTS seems the most appropriate approach with regard to their approval cycle.

16. Finally, one of the main advantages of the other approach, i.e. to include all the classes subject to the clearing obligation in the same RTS, was to have all the classes subject to the clearing obligation in a single regulation, (a) for ease of reference and (b) for consistency in the requirements beyond the scope of classes, i.e. with regard to the definition of the categories, the applicable timing, etc. With regard to (a), in practice, the amendments to the RTS would still be presented independently, and not necessarily consolidated in a single document. Instead, the benefits of having all the classes in one central place are achieved by the use and the maintenance of the Public Register for the clearing obligation introduced under the EMIR framework. In relation to (b), consistency can still be achieved across multiple RTS, as is the case between the draft RTS on CDS classes presented in Annex III and the RTS on interest rate swaps (IRS) classes adopted by the European Commission.

17. In summary, the use of separate RTS for the CDS and the IRS classes enables a clearer and more efficient approval process for the respective RTS, while not having to compromise on the policy choices.

4 Structure of the credit derivative classes Question 2 of the consultation paper

18. A large majority of respondents to the consultation paper had no particular comments or communicated broad support with regards to the proposed structure of the credit derivative classes to be subject to the clearing obligation, i.e. untranched index CDS classes. In particular, several

respondents commented on their support referring to two specific aspects:



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