Why populating the clearing obligation field won’t be so easy

As we approach the deadline for mandatory clearing ESMA has published a further update to its EMIR Q&As providing guidance on the application of the clearing obligation for swaps resulting from exercise of swaptions.  With mandatory clearing only months away for OTC interest rate derivatives denominated in the G4 currencies (EUR, GBP, JPY and USD) we take a quick look at how mandatory clearing will impact EMIR reporting.

From 21 June 2016 mandatory clearing will firstly affect firms who are individual or general clearing members of an authorised or recognised central counterparty (CCP).  Six months later, category 2 firms will be caught and category 3 firms a further six months after that. This means that firms will need to assess what category they will fall within, but also what category their counterparties will fall within as that will determine if and when mandatory clearing applies.  See our table at the end of this blog.

Firms that aren’t in category 1 will need to do some data crunching to calculate whether their group is above or below the €8bn clearing threshold and they should be notifying their counterparties either way, something Kaizen can assist with.  Each of the three categories will need to be wary of the frontloading obligation which captures trades entered into or novated on or after the frontloading date dependent on the instrument and the remaining maturity on the trade.  So they will need to consider pricing based on the potential for eventual clearing of these trades if they remain open once the clearing obligation kicks in.

Regarding the ESMA Q&A, it makes clear that for in scope derivative instruments and counterparties:

  1. All novations of any type which result in a new counterparty will be subject to the clearing obligation.
  2. For swaptions entered into prior to the frontloading window the resultant swaps will not be subject to the clearing obligation irrespective of when the swaption is exercised.
  3. For swaptions entered into after the start of the frontloading period:
  4. Mandatory clearing applies where the swaption is exercised during the frontloading period and the resultant swap is above the minimum remaining maturity per the RTS.
  5. And for any swaptions exercised after the clearing obligation takes effect the resultant swap will be subject to the clearing obligation.

Reporting implications

To report correctly, firms will need to complete the “clearing obligation” flag with the appropriate value.  This will require firms to assess whether each trade is subject to the mandatory clearing obligation irrespective of whether the trade is already cleared or not.  That will mean assessing all trades entered into after the frontloading period begins.  Currently, this field should be populated with an “N” but for Category 1 firms this may change post 21 June 2016.  Trades which will be subject to mandatory clearing entered into prior to this date should be flagged as “N” in the clearing obligation field until the clearing obligation takes effect.  The timing of this will be based on the firm’s category and that of its counterparty.




NFC+:   Non-financial Counterparty above the clearing threshold, as referred to in Article 10 of EMIR
AIF:    Alternative Investment Funds