On 31 October 2018, the European Securities and Markets Authority (ESMA) issued a statement relating to the challenges that certain groups, as well as certain non-financial counterparties above the clearing threshold (NFC+), would face on 21 December 2018 to start CCP clearing some of their OTC derivative contracts and trading them on trading venues.
Under Regulation (EU) No 648/2012 (EMIR), both:
- The current derogation from the clearing obligation for certain intragroup transactions concluded with a third country group entity; and,
- The phase-in for counterparties in Category 4, broadly speaking NFCs+,
expire on 21 December 2018, for the interest rate derivative classes denominated in the G4 currencies subject to the clearing obligation.
21 December 2018 deadline
With respect to (1), given the absence of equivalence decisions, ESMA undertook a review of the Commission Delegated Regulations on the clearing obligation and developed draft amendments to extend the derogation expiration to 21 December 2020. Whereas, with respect to (2), the European Commission’s proposal to amend EMIR that was published on 4 May 2017 (Refit) and which is currently being negotiated by the EU institutions envisages that NFCs+ would only be subject to the clearing obligation in the asset class or asset classes where their level of activity is above the clearing threshold.
In the eventuality that the amendments mentioned above have not entered into force by the current expiration date, these counterparties would need to have clearing arrangements in place and start clearing these transactions, before they are once again no longer required to do so after the amendments enter into force. Furthermore, given the link between the MiFIR trading obligation and the EMIR clearing obligation, this potential timing gap would also have implications with regards to the trading obligation.
From a legal perspective, neither ESMA nor competent authorities possess any formal power to dis-apply a directly applicable EU legal text or even delay the start of some of its obligations. Therefore, any change to the application of the EU rules would need to be implemented through EU legislation.
However, ESMA expects competent authorities to not prioritise their supervisory actions towards group entities that benefit from the derogation for intragroup transactions meeting certain conditions on and after 21 December 2018, and towards NFCs+ that are not above the clearing threshold (as prescribed under the current EMIR legislation) in the interest rate derivative asset class on or after 21 December 2018, and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner.