Derivatives pros welcome EU’s 'reasonable' post-Brexit clearing rules
The derivatives industry is breathing a collective sigh of relief following the final publication of landmark European Union derivatives regulations, after years of anxiety over the contentious and complex rules that aim to bring more euro derivatives clearing activity within its borders.
“[The European Securities and Markets Authority] has clearly taken extensive and fairly robust industry feedback onboard to revise its approach, which has been very well received by us and others affected by the rules,” said Bill Stenning, head of public affairs at Societe Generale. “It’s good to see we’ve ended up in a reasonable place.”
The location of euro derivatives clearing has been a major sticking point in cross-border financial services regulation following Brexit. While more credit default swap clearing activity has moved to Paris after ICE shut its London-based CDS clearinghouse in 2023, the European Union has struggled to engineer a mass migration of euro-denominated interest rate swaps clearing from LCH in London. Some 95% of euro-denominated interest rate swaps were cleared through LCH in 2024, according to analytics firm ClarusFT. LCH is part of LSEG, which also owns IFR.
The EU ultimately decided to grab a larger share of euro swaps clearing by force. To do this, it penned new regulations demanding EU firms with more than €3bn of gross notional value in these derivatives to hold an "active account" at an EU clearinghouse and clear a minimum number of trades there every year. ESMA published the final version of this “active account requirement” on June 19.
Derivatives users have railed against earlier versions of the rules, arguing they are clumsy and onerous. One particular area of concern has been the reporting requirements for EU firms. In November, ESMA proposed EU derivatives users should report individual trade IDs stemming from their euro interest rate derivatives exposures to regulators in real time. ESMA has since amended that requirement so firms must report their positions every six months and no longer have to provide as many details.
“The initial proposed reporting rules included a lot of data fields that were very onerous, extremely granular and ultimately unnecessary” said Sarah Crowley, director, clearing services at the International Swaps and Derivatives Association. “The final reporting requirement has very much been streamlined and completely revisited compared to consultative version of the rules.”
Derivatives experts also flag improvements to the stress tests that EU firms are required to perform. The final rules should reduce the operational burden of stress tests for clearinghouses, clearing members and their end-clients – and may also allow end-clients to outsource the procedure to their clearing member, Stenning said.
“ESMA has … made several much-needed changes to reduce the unnecessary burden of the AAR,” said Kirston Winters, head of legal, risk, compliance and government and regulatory affairs at post-trade services company OSTTRA.
The European Commission now has three months to decide whether to adopt ESMA’s final version of the AAR. However, Ulrich Karl, head of clearing at ISDA, said firms should already be complying with the rules as the regulatory text that ESMA's final version of AAR is based on came into effect on June 24.
"To me, there is no ambiguity as to which rules firms now have to follow given that the Level 1 text is already live as of June 24," he said.