The European Securities and Markets Authority (ESMA) has published a letter from Michel Barnier, (European Commissioner for Internal Market and Services) to its chairman, Steven Maijoor. The letter responds to ESMA’s earlier letter concerning the European Markets Infrastructure Regulation (EMIR) and the clearing of over-the-counter (OTC) derivative contracts entered into after a central counterparty has been authorised under EMIR and before the date of application of the clearing obligation (the frontloading requirement).
In the response, Mr Barnier notes that the application of the frontloading requirement does not ensure in all cases the achievement of the goals pursued by it. In particular, the application of the frontloading requirement to certain OTC derivatives may have substantial negative effects in the functioning of the market, financial stability and systemic risk.
Mr Barnier states that this is why EMIR provides for the possibility to adjust the application of the frontloading requirement, through the determination of minimum remaining maturities adapted to the specificities of the different classes of OTC derivatives, which must ensure a uniform and coherent application of EMIR and a level playing field for market participants without undermining the overarching objective of the clearing obligation to reduce systemic risk. On this basis, the Commission is of the view that the frontloading of OTC derivatives should be avoided in cases where it would not ensure the achievement of those objectives.
Mr Barnier also adds that the determination of remaining maturities should not result in the application of the frontloading requirement to OTC derivatives concluded before counterparties could reasonably foresee that those contracts would need to be cleared as a consequence of the frontloading requirement.
View Letter from Michel Barnier to Mr Maijoor, 8 July 2014