ECB, European Central Bank Frankfurt, Germany

The European Union regulation on derivatives, central counterparties and trade repositories (EMIR) introduces new requirements to improve transparency and reduce the risks associated with the derivatives market. EMIR also establishes common organisational, conduct of business and prudential standards for Central Counterparties (CCPs) and trade repositories.

In the EU official journal, it was stated on 1 December 2015 that under EMIR, central clearing of interest rate swaps will become obligatory for firms in Category 1 on 21 June 2016. The firms deemed as falling in Category 2 will follow on 21 December 2016, while those falling in Category 3 have to follow the rules from 21 June 2017. Finally, Category 4 firms, which are non-financial counterparties whose over-the-counter derivatives (OTC) portfolios exceed an asset-specific threshold, will have to clear their trades from 21 December 2018.

Interest rate swaps make up around 80% of all global derivatives. The clearing obligation requires the firms to clear certain OTC derivatives through CCPs under EMIR with the aim of reducing systemic risk in the financial system. The incoming clearing obligation will cover the following classes of OTC interest rate derivatives denominated in the currencies EUR, GBP, JPY and USD:

  • fixed-to-float interest rate swaps (also known as plain vanilla);
  • float-to-float swaps (also known as basis swaps);
  • forward rate agreements: and
  • overnight index swaps.

For more detailed information about EMIR, see our earlier post by clicking here and the Public Register for the Clearing Obligation under EMIR published by the European Securities and Markets Authority.