Esma to align indirect clearing rules

3 min read
Helen Bartholomew

The European Securities and Markets Authority has opened a new consultation on rules for indirect clearing of over-the-counter and exchange traded derivatives. The regulator is hoping to reverse an inconsistent approach to the currrent requirements, which fall under two separate pieces of legislation.

Esma chairman Steven Maijoor has written to Europe’s financial stability commissioner, Jonathan Hill, explaining the regulator’s decision to exclude new rules for indirect clearing for exchange-traded derivatives from final regulatory technical standards for Mifid II that were published last week.

“Stakeholders have unanimously raised a series of important concerns. In order to address these concerns, it is necessary to develop alternative requirements for both OTC derivatives and exchange-traded derivatives than those requirements set in the Emir RTS,” wrote Maijoor in his letter.

Indirect clearing, which enables derivatives users to access clearing houses by facing a client of a clearing broker rather than the broker itself, has already been addressed for cleared OTC swaps under the European Market Infrastructures Regulation. But as an entirely new concept in the OTC market, its practical applicability has been limited.

In the exchange-traded market, indirect clearing is widespread with as much as half of futures and options activity cleared either through other firms or via subsidiaries.

Mifid aims to boost client protection by standardising the treatment of positions and collateral in the event of a bankruptcy through the indirect clearing chain.

But market participants, led by the European arm of the Futures Industry Association have railed against the approach as many of the requirements are legally challenging without a standardised bankruptcy regime.

“As Emir is more prescriptive on indirect clearing than Mifir, especially regarding default porting of positions of indirect clients, it is hard to see how the problems of indirect clearing under Emir can be fixed by an amending RTS. It may well be necessary to amend Emir itself, as part of the current Emir Review,” said Pauline Ashall, derivatives partner at Linklaters.

In his letter, Esma’s Maijoor notes that the regulator has developed a new set of requirements for indirect clearing that takes market feedback into account and recognises the need for a change to current Emir rules.

“In the interest of preserving the smooth and orderly functioning of the markets, Esma is of the opinion that amendments to the EMIR RTS need to be considered. Esma thus intends to conduct a consultation on the possible amendments to the EMIR RTS that would be consistent with the requirements as envisaged for the draft Mifir RTS,” Maijoor says in his letter.

Esma intends to submit draft Mifir RTS and proposed amendments to the OTC rules under Emir together following the consultation.

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