On 24 November 2020, the European Securities and Markets Authority (ESMA) published a final report presenting a new set of draft regulatory technical standards (RTS) on the clearing obligation that the European Supervisory Authority has developed under Article 5(2) of the European Market Infrastructure Regulation (EMIR).

The draft RTS cover:

  • The treatment of certain intragroup transactions concluded with a third-country group entity, as well as the treatment of over-the-counter (OTC) derivative transactions concluded with a third country group entity.
  • The treatment of OTC derivative contracts novated from a counterparty established in the UK to a counterparty established in a Member State as a consequence of the withdrawal of the UK from the EU.

There are currently three Commission Delegated Regulations on the clearing obligation:

  • Commission Delegated Regulation (EU) 2015/2205 of 6 August 2015 supplementing EMIR with regard to RTS on the clearing obligation.
  • Commission Delegated Regulation (EU) 2016/592 of 1 March 2016 supplementing EMIR with regard to RTS on the clearing obligation.
  • Commission Delegated Regulation (EU) 2016/1178 of 10 June 2016 supplementing EMIR with regard to RTS on the clearing obligation.

These Delegated Regulations mandate a range of interest rate and credit derivative classes to be cleared. With regards to the first aspect covered in the draft RTS, the treatment of certain intragroup transactions concluded with a third-country group entity, these Commission Delegated Regulations contain a deferred date of application of the clearing obligation for intragroup transactions satisfying certain conditions and where one of the counterparties is established in a third country, in the absence of a relevant equivalence decision. However, the deferred date is soon approaching and there have not been any equivalence decisions to date with regard to the clearing obligation. The draft RTS include amendments to extend the deferred date of application.

With regards to the second aspect covered in the draft RTS, the treatment of OTC derivative contracts novated from a counterparty established in the UK to a counterparty established in the EU, the provisions have been developed following a similar reasoning as with:

  • Commission Delegated Regulation (EU) 2019/396, based on the draft RTS developed by ESMA and submitted to the European Commission on 8 November 2018, which were adopted by the European Commission on 19 December 2018 and which were published in the Official Journal (OJ) on 13 March 2019 (the first Delegated Regulation).
  • Commission Delegated Regulation (EU) 2019/565, dated 28 March 2019 and published in the Official Journal on 10 April 2019 3 (the second Delegated Regulation).

The application of the first Delegated Regulation and second Delegated Regulation was conditional. However, as a result of: (i) for the first Delegated Regulation, the decision of the European Council of 21 March 2019 to extend the two-year period referred to in Article 50(3) of the Treaty on European Union following a request from the UK; and (ii) for the second Delegated Regulation, the withdrawal agreement signed on 24 January 2020 with regards to the conditions for the UK’s departure from the EU (which entered into force on 1 February 2020 and which introduced a transition period running until 31 December 2020), none of them has applied.

Given that the current probability of the UK and EU not entering a free trade agreement after the end of the transition period may be high ESMA feels that the underlying reasons for the first Delegated Regulation and second Delegated Regulation remain valid. ESMA is therefore proposing a new draft RTS mirroring the content of both Delegated Regulations to take account of this new situation.

ESMA’s proposal also includes an amendment of the three Commission Delegated Regulations, in order to facilitate certain Brexit-related novations of OTC derivative contracts to EU counterparties during a specific time-window.

ESMA is also taking the opportunity of using the draft RTS to update the Delegated Regulations on the clearing obligation in line with the changes introduced by Regulation (EU) 2019/834 of 20 May 2019 (Refit) to EMIR. Specifically here, Refit has amended EMIR such that the frontloading requirement has been removed. The draft RTS include amendments to remove the minimum remaining maturities’ requirements from the three Commission Delegated Regulations bringing them in line with the updated mandate under Article 5(2) of EMIR.

The final report has been sent to the European Commission in order to submit the draft RTS for endorsement, in the form of a Commission Delegated Regulation. Following the endorsement, they are then subject to non-objection by the European Parliament and the Council.

ESMA states that it cannot dis-apply EU law. However, in view of the steps mentioned above that the draft RTS need to go through before being finalised and enter into force, and in light of the relevant deadline for intragroup OTC derivatives as well as the end of the transition period with the UK and the treatment of OTC derivative contracts novated from the UK to the EU, ESMA expects Member State competent authorities to apply the EU framework with regards to the clearing obligation and the treatment of intragroup OTC derivative contracts and OTC derivative contracts novated from the UK to the EU in a risk-based and proportionate manner until the amended RTS enter into force.