November 30, 2021

Volume XI, Number 334


November 29, 2021

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European Securities and Markets Authority (ESMA) Clearing Obligations for Foreign-exchange Non-deliverable Forwards (FX NDF) and IRS

On October 1 the European Securities and Markets Authority (ESMA) published a consultation paper on draft regulatory technical standards (RTS) for the mandatory clearing of certain foreign-exchange non-deliverable forwards (FX NDF) as required under the European Market Infrastructure Regulation (EMIR). FX NDF are defined as cash-settled foreign exchange forward contracts that cannot result in physical delivery of the designated currencies at maturity. The consultation period will close on November 6.

The FX NDF that will be subject to the mandatory clearing obligation are contracts with maturities between three days and two years settled in USD in the following 11 currencies: Brazilian Real, Chilean Peso, Chinese Yuan, Colombian Peso, Indonesian Rupiah, Indian Rupee, Korean Won, Malaysian Ringgit, Philippine Peso, Russian Ruble, and Taiwan Dollar. Currently, only LCH.Clearnet Ltd is authorized to clear the relevant FX NDF, although ESMA anticipates that such contracts will ultimately be cleared by one or several other EU central counterparties (CCPs) once they have obtained the relevant authorization.  

The Global Markets Advisory Committee (GMAC) held a public meeting on October 9 to discuss issues related to clearing FX NDF and the impact of such clearing on the underlying contracts.  

ESMA also published final RTS on mandatory clearing for certain interest rate swaps (IRS) on October 1. Details of the original draft RTS for IRS were reported in the Corporate and Financial Weekly Digest edition of August 29, 2014. The final RTS did not differ from the draft RTS in terms of the IRS that will be subject to the EMIR mandatory clearing obligation, which include the following classes of IRS that must settle in a single settlement currency in either EUR, GBP or USD: 

  • basis swaps and fixed-to-float IRS, referencing either EURIBOR or LIBOR, with a maturity of 28 days to 50 years (this category includes instruments settling in Japanese yen);

  • forward rate agreements (FRAs), referencing either EURIBOR or LIBOR, with a maturity of three days to three years; and 

  • overnight index swaps (OIS), referencing the Euro OverNight Index Average, FedFunds or the Sterling OverNight Index Average, with a maturity of seven days to three years.

The final RTS for IRS did modify the number of market participant counterparty categories subject to the mandatory EMIR IRS clearing obligation from three to four and altered the definitions slightly. These four categories and the applicable compliance dates are: 

  • Category 1 – clearing members of a recognized or authorized CCP – six months after the RTS are entered into force, estimated to be August 2015;

  • Category 2 – financial counterparties (as defined under EMIR) and alternative investment funds (AIFs) (as defined under the Alternative Investment Fund Managers Directive) that are non-financial counterparties above the clearing threshold (as defined under EMIR) – 12 months after the RTS are entered into force, estimated to be February 2016;

  • Category 3 – financial counterparties (as defined under EMIR) and other AIFs with a low level of activity in uncleared derivatives – 18 months after the RTS are entered into force, estimated to be August 2016; and

  • Category 4 – non-financial counterparties (as defined in EMIR) – three years after the RTS are entered into force, estimated to be February 2018. 

The European Commission (EC) now has up to three months to endorse the final IRS RTS. If the EC has no objection, the RTS will come into force 20 days after its publication in the Official Journal of the European Union.  

The ESMA consultation paper on draft RTS for FX NDF can be found here. The ESMA final RTS for IRS can be found here. Details of the CFTC’s GMAC meeting can be found here.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume IV, Number 283

About this Author

Carolyn H. Jackson, International Attorney, Katten Muchin law firm

Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws...

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