ESMA kicks off latest OTC derivatives clearing consultation with discussion paper
ESMA is asking for views on the final standards for EMIR
European securities regulator ESMA has started the latest round of consultation on OTC derivatives clearing with the release of a discussion paper on regulatory technical standards for the European Market Infrastructure Regulation, the new pan-European rulebook.
Although the technical standards for central counterparties under EMIR came into force at the end of March, the new discussion paper is designed to help ESMA decide which classes of OTC derivatives need to be centrally cleared, and how long market participants will be given to prepare.
EMIR attempts to improve transparency in global derivatives markets by mandating the central clearing and reporting of the bulk of OTC derivatives, establishing common rules for CCPs and trade repositories. The overall aim is to risk systemic risk in OTC derivatives markets, which have been blamed for their contribution to the global financial crisis.
“Our consultation is a first important step in shaping the details of how central clearing of OTC derivatives will work in the European Union,” said Steven Maijoor, ESMA chair. “Having these trades centrally cleared and ultimately making post-trade data available to investors will increase the robustness, transparency and stability of the financial system.”
The ESMA consultation document also contains an analysis of the current readiness of derivative asset classes for central clearing, including their standardisation, volume, liquidity, the availability of data, and the experience in clearing of those asset classes.
The clearing obligation in EMIR only applies above a clearing threshold. At present, 13 CCPs provide OTC clearing for five asset classes – interest rate derivatives, credit rate derivatives, forex and commodity derivatives.
However, many financial industry observers including representatives of CME Europe have commented that the new rules are likely to prompt “futurisation” of derivatives markets, as market participants turn to vanilla futures to avoid the severe collateral/margin requirements associated with OTC trades under EMIR. Meanwhile, others such as Anthony Belchambers, chief executive at the Futures and Options Association, have expressed concern about the cost of the new rules and their impact on consumer choice.
The discussion paper is open for feedback until 12 September. ESMA will then draft its technical standards on the clearing obligation, which will be presented in future public consultations.
