Mandatory central clearing is a vital part of the response to the financial crisis; it follows commitments made by world leaders at the G-20 Pittsburgh Summit in 2009, to improve transparency and mitigate risks.
Jonathan Hill, EU Commissioner for Financial Stability, Financial Services and Capital Markets Union, commented saying that a new delegated regulation was a significant step to implement the EU' obligations approved at G-20 meeting in September 2009.
According to the EU commitments, the member states shall strengthen financial stability and boost market confidence. Such efforts, he said, went along the EU efforts towards fair, open and transparent financial markets.
Background
The Commission 2015 Work Program includes a commitment to legislate for a European framework for the recovery and resolution of CCPs. Already in 2009, G-20 leaders agreed that standardised OTC derivative contracts should be centrally cleared through CCPs.
A "central counter-party" (CCP) clears a transaction between two parties, helping to manage the risk that can arise if one party defaults on its payments. By making it necessary for some classes of interest rate derivative contracts, or 'interest rate swaps', to be cleared through CCPs, financial markets become more stable and less risky. This creates an environment more conducive to investment and economic growth in the EU.
The EU co-legislators (Parliament and the Council) enshrined these commitments in Regulation (EU) No 648/2012 on OTC Derivatives, Central Counterparties and Trade Repositories (EMIR). According to Article 5 of EMIR, the European Commission, on the basis of a proposal from the European Securities Markets Authority (ESMA), should determine the types of OTC contracts that should be subject to mandatory clearing by a central counterparty (CCP).
On the basis of this mandate, the European Commission has adopted a delegated Regulation introducing a clearing obligation for OTC interest rate swaps.
EMIR mandates the European Securities and Markets Authority (ESMA) to review clearing eligible contracts and, with the overarching aim of reducing systemic risk, to propose clearing requirements for products meeting certain criteria.
This is the first clearing obligation that has been proposed by ESMA and it is expected that ESMA will propose obligations for other types of OTC derivative contracts in the near future.
While mandatory clearance through CCPs brings many benefits, it also increases the systemic importance of those CCPs within the financial system, and the consequences if a CCP were to fail.
