ESMA's Draft Regulatory Technical Standards for Interest Rate Swaps Are Changing

In a recent letter, the European Commission outlined its intention to endorse ESMA’s draft regulatory technical standards (RTS), which set out which interest rate swaps will be subject to mandatory clearing under EMIR. However, before formally doing so, the European Commission has asked ESMA to make some amendments in specific areas. These include:

• Postponing the calculation period for counterparties to determine whether they are in category 2 or 3  
• Clarifying that the calculation for investment funds should be made at fund, rather than group, level
• Delaying the start of the frontloading window to allow counterparties more time to prepare

Although there no proposed changes to the scope of instruments that will be subject to mandatory clearing, it is now anticipated that the final rules will apply (“enter into force” *) later than originally estimated impacting the clearing start date for each type of counterparty.

Assuming the RTS enter into force in early April 2015, the following timeline will apply:

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* Note: The RTS will “enter into force” 20 days after they are published in the Official Journal

FURTHER DETAIL ON CHANGES TO THE DRAFT REGULATORY TECHNICAL STANDARDS FOR INTEREST RATE SWAPS

Category 2 or 3 determination

Counterparties whose aggregate month-end average notional amount of non-cleared derivatives in the three months following the publication of the RTS in the Official Journal is above 8bn EUR will be classified as Category 2. The calculation period excludes the month of publication. Counterparties who fall below this threshold will be in Category 3.

By way of example, if the final RTS are published in the Official Journal in March 2015, the three month-end calculations would now include April, May and June 2015 exposure.

Calculation threshold for investment funds

The letter clarified that the calculation for investment funds should be carried out for each single fund, rather than at group level, as long as, in the event of fund insolvency or bankruptcy, the funds are distinct legal entities.

Delay to the start of frontloading

Frontloading is the requirement to centrally clear certain derivatives contracts entered into before the clearing obligation for the counterparty takes effect. The start date of frontloading for interest rate swaps has been delayed to give counterparties more time to prepare for its implementation.

For Category 1 counterparties, the frontloading window will open two months after the RTS enter into force. For Category 2 counterparties, this will now be five months after the RTS apply.

It is the intention that Category 3 and 4 counterparties are not subject to the frontloading requirement.