On 1 October 2014, the European Securities and Markets Authority (ESMA) sent the European Commission draft regulatory technical standards (draft RTS) on the clearing obligation for interest rate swaps (IRS) pursuant to Article 5 of EMIR.

The draft RTS lay down the classes of IRS that will be subject to mandatory clearing as well as the different dates from which the clearing  obligation will take effect for the four different categories identified, for which different phase-in periods are laid down. The draft RTS also set out the minimum remaining maturities determining which contracts concluded or novated before the clearing obligation takes effect will have to be cleared when the clearing obligation takes effect.

ESMA has now published a letter it has received from the Commission, in which the Commission states that it intends to endorse with amendments the draft RTS submitted.

In the letter the Commission states that the draft RTS raise some important issues that require the following amendments:

• postponing the start date of the frontloading requirement. ESMA proposes the frontloading requirement to start from the publication of the RTS in the Official Journal of the EU (OJ). However, the Commission states that the starting date of frontloading should be delayed until counterparties can become aware of whether the contracts they enter into are subject to the frontloading requirement and until they can implement the necessary arrangements for frontloading to take place. The Commission notes that in particular intragroup transactions between counterparties in Category 1 which benefit from the exemption from the clearing obligation under Article 4.2(a) EMIR are not subject to frontloading. The Commission believes that postponing the start date of frontloading for counterparties in Category 1 until two months after the entry into force of the RTS will provide those counterparties with sufficient time to know whether they benefit from the intragroup exemption before the frontloading takes effect. The Commission further states that postponing the start date of the frontloading requirement for financial counterparties in Category 2 until five months after the entry into force of the RTS will provide those counterparties with sufficient time to implement the necessary arrangements to calculate the threshold and after that, implement the necessary arrangements for frontloading. The Commission adds that the postponement of the starting date of the frontloading requirement for counterparties in Category 2 would also require an adaptation of the period to be taken into account for the calculation of the threshold. The period to take into account for the calculation of the threshold should be three months following the publication of the RTS in the OJ, excluding the month of publication;
• clarifying the calculation of the threshold for investment funds. The Commission considers that it is necessary to provide some clarification regarding the application of the quantitative threshold for determining counterparties falling in Category 2. In particular, it is proposed to include a recital clarifying that, for investment funds, the threshold should be calculated per single fund instead of at group level provided that in the event of fund insolvency or bankruptcy, the funds are distinct legal entities that are not collateralised, guaranteed or supported by other investment funds or the investment advisor itself; and
• excluding from the scope of the clearing obligation non-EU intragroup transactions. The Commission states that over-the-counter derivative transactions entered into between two counterparties established in a Member State and in a third country and belonging to the same group should not be subject to the clearing obligation for a period of three years. It adds that such transactions can, in fact, be exempted from clearing pursuant to Article 4.2(b) of EMIR when equivalence decisions pursuant to Article 13 of EMIR are adopted. However, such equivalence decisions cannot be adopted before the RTS enter into force. Therefore, the Commission states that transactions entered into between two counterparties established in a Member State and in a third country and belonging to the same group should be excluded from the clearing obligation for a sufficient period of time allowing the Commission to adopt those equivalence decisions or until those decision are adopted, whichever happens earlier.

View Letter from Commission – Annex with amended draft RTS on clearing obligation for IRS, 19 December 2014