The European Securities and Markets Authority (ESMA) has published a letter to the European Commission setting out concerns that are linked to the clearing obligation and the frontloading requirement set out in the European Markets Infrastructure Regulation (EMIR).
The frontloading requirement is an obligation to clear over-the-counter (OTC) derivative contracts entered into after a central counterparty (CCP) has been authorised under EMIR and before the date of application of the clearing obligation. The frontloading requirement implies that contracts concluded on a bilateral basis following the authorisation of a CCP might become subject to the clearing obligation before their expiration date.
In the letter, ESMA states that it has identified that the frontloading requirement may introduce significant uncertainties in the market with the consequences mainly borne by derivatives end-users. It also states that the consequences are legal, operational and financial. The overall effect could be a reduction in the incentive to hedge risks during a certain period (to avoid the consequences of the frontloading effect) which may in turn increase the un-hedged risks and could impact negatively on financial stability.
ESMA sets out in the letter a possible way to mitigate the negative impact of the frontloading requirement which it will consider further. It also states that possible solutions will be outlined in a public Consultation Paper which will be published prior to the finalisation of the draft regulatory technical standard on the clearing obligation.
ESMA also asks for the Commission’s views on the possible approach to frontloading.