The European Commission has adopted new rules that make it mandatory for certain over-the-counter interest rate derivative contracts to be cleared through central counterparties.
The new rules can be found in a Delegated Regulation – the first such to implement the clearing obligation under the European Markets Infrastructure Regulation (EMIR). It covers interest rate swaps denominated in euro, pounds sterling, Japanese yen or US dollars that have specific features, including the index used as a reference for the derivative, its maturity and the notional type (i.e. the nominal or face amount that is used to calculate payments made on the derivative).
The contracts are:
- fixed-to-float interest rate swaps, known as ‘plain vanilla’ interest rate derivatives;
- float-to-float swaps, known as ‘basis swaps’;
- forward rate agreements; and
- overnight index swaps.
The clearing obligations will enter into force subject to scrutiny by the European Parliament and the Council of the EU and will be phased in over three years to allow additional time for smaller market participants to begin complying.