The European Securities and Markets Authority (ESMA) has published a Discussion Paper on the calculation of counterparty risk by Undertakings for Collective Investment in Transferable Securities (UCITS) which enter into over the counter (OTC) derivative transactions that need to be centrally cleared under the European Markets Infrastructure Regulation (EMIR).
The Discussion Paper is seeking stakeholders’ views on how the limits on counterparty risk in OTC derivative transactions that are centrally cleared should be calculated by UCITS, and whether the same rules should be applied by UCITS for both centrally cleared OTC transactions and exchange traded derivatives.
The Discussion Paper is focused on the impact of a default of a clearing member or of other clients of that clearing member on UCITS that enter into centrally cleared OTC derivative transactions. This takes into account the fact that European clearing houses (CCPs) and non-EU CCPs recognised by ESMA are already subject to stringent collateral requirements, and should generally be considered as entailing low counterparty risk.
The deadline for comments is 22 October 2014. ESMA will use the feedback received from the public consultation to determine its final views on the appropriate way forward, including a possible recommendation to the European Commission on a modification of the UCITS Directive.