Esma Releases Final Draft Standards for IRS Clearing

The European Market Infrastructure Regulation (EMIR) requires certain over-the-counter (OTC) derivatives to be centrally cleared at an authorized central counterparty (CCP). CCPs sit in the middle of derivative transactions, acting as a seller to every buyer and a buyer to every seller, and are designed to mitigate the systemic risk that can arise from trade failure between defaulting counterparties.

The pan-European regulator has announced that four basic classes of IRS will be subject to the central clearing mandate, which will be phased in gradually. These include basis swaps, fixed-to-float swaps, forward-rate agreements and overnight index swaps, denominated in euros, yen, sterling and US dollars.

In terms of timeframes, Esma has staggered the obligation depending on the profile of the counterparty, again split into four components. Clearing members will have to comply six months after the RTS enters into force, financial counterparties and alternative investment funds will have twelve months, those same bodies who typically don't use the swaps frequently will have eighteen, and finally, non-financial counterparties will be given three years.

"The finalization today of the first clearing mandates represents a significant milestone for the EU in fulfilling its [Group-of-20] commitments and promoting international convergence on derivatives market reform," says Steven Maijoor, chair of Esma. "This move to mandatory clearing will lead to significant improvements in the risk management of EU derivatives markets."

Esma has now submitted the RTS to the European Commission, which has three months to review and endorse them.