EMIR Clearing Obligation

The obligation to centrally clear certain classes of OTC derivative contracts through a central counterparty (CCP) stems directly from the European Market Infrastructure Regulation (EMIR) and its main objective to reduce counterparty risk and systemic risk.

Will you be subject to mandatory clearing?

  • Two financial counterparties above any of the clearing thresholds (FC+)
  • A FC+ and a NFC+ in respect of the asset class(es) for which the clearing threshold is exceeded
  • Two NFC+s in respect of the asset class(es) for which the clearing threshold is exceeded
  • A FC+ or NFC+ and a non-EEA entity that would be subject to the clearing obligation if it would be established in the EEA

What category do you belong to?

The European Securities and Market Authority (ESMA) has decided to phase in the clearing obligation depending on the categories of the counterparties to the OTC derivative contracts.

The categories are defined in the Regulatory and Technical Standards (RTS) as follows:

Category 1: Counterparties (FC and NFC+) that are clearing members of at least one central counterparty (CCP) which is authorized to clear any class of OTC derivatives that is subject to the clearing obligation, and whose membership enables clearing of one or more of the relevant classes of derivatives.

Category 2: Financial counterparties (FC) not included in Category 1 (non-clearing members and clearing members not meeting the condition of Category 1. Moreover counterparties in category 2 must have average gross notional outstanding over a 3-month period (assessed over January, February and March) exceeding EUR 8bn (un-cleared, at group level) OTC derivative contracts.

Category 3: Financial counterparties (FC) not included in Categories 1 and 2 with a lower level of activity in un-cleared derivatives (i.e. OTC derivative contracts with gross notional outstanding over the 3-month period assessed over January, February and March below EUR 8bn).

Category 4: Non-financial counterparties above any of the clearing threshold (NFC+).

Counterparties that exceed any of the clearing thresholds shall notify ESMA and the relevant competent authority thereof, and become subject to the clearing obligation for all OTC derivative contracts pertaining to any class of OTC derivatives which is subject to the clearing obligation entered into or novated more than four months following the notification.

When will it apply?

The principle is a phase-in for all clearing categories. In general, mandatory clearing (will) start on various dates depending on:

  1. when the relevant classes of OTC derivatives are declared subject to the clearing obligation; and
  2. the categories of the counterparties to the derivative transaction.

For an overview of the phased-in clearing obligation of certain interest rate OTC-derivatives and credit default OTC-derivatives as currently published, we refer to the below tables.

EMIR Refit has extended the temporary exemption from the clearing obligation for pension funds until 18th June 2021 (the European Commission may further extend the exemption twice for a period of one year each time).

For more information on the relevant classes derivatives of OTC and the clearing obligation, please visit the public register for the clearing obligation of ESMA.

Timetable for Interest Rate Derivatives (denominated in the G4 Currencies)

Category of counterparty Clearing obligation
Category 1 21 June 2016
Category 2 21 December 2016
Category 3 17 October 2019
Category 4 21 December 2018

Timetable for Interest Rate Derivatives (denominated in PLN, NOK and SEK)

Category of counterparty Clearing obligation
Category 1 9 February 2017
Category 2 9 August 2017
Category 3 17 October 2019
Category 4 17 October 2019

Timetable for Index Credit Default Swaps

Category of counterparty Clearing obligation
Category 1 9 February 2017
Category 2 9 August 2017
Category 3 17 October 2019
Category 4 9 May 2019


If an OTC derivatives transaction is entered into by counterparties in different categories, the date from which the clearing obligation takes effect is the later date.

There is no mandatory clearing for Small Financial Counterparties (SFC) and Non-Financial counterparties below the clearing thresholds (NFC-).

Clearing Process

Clearing is a process by which the OTC derivatives contract of two counterparties is replaced with two separate contracts with a central counterparty (CCP). This translates into the CCP taking over each party’s position, and therefore the two original counterparties no longer have a contract with each other, but have it with a CCP (in the end, all clients and banks face the central counterparty, either directly or indirectly). Different models may be used to achieve the clearing of OTC derivatives:

  • a market participant can become a clearing member of a CCP (Member Clearing)
  • a market participant can become a client of a CCP clearing member (Client Clearing)
  • a market participant could also become the client of a clearing member’s client (Indirect Clearing)

emir-tabel-3
Fig 1. Scheme of Direct Clearing and Contracts between Different Counterparties

Third (non-EEA) countries

Regarding third (non-EEA) countries, there are three main areas of concern that were identified by ESMA: recognition of third country (non-EEA) CCPs, recognition of third country (non-EU) trade repositories (TRs), and identification of potentially duplicative or conflicting requirements regarding reporting and clearing obligations and risk mitigating techniques under EMIR.

The Clearing obligation applies to derivative contract between FC+ or NFC+ when the third country entity (TCE) would be subject to clearing obligation if it were established in the EEA (as FC+ or NFC+). The clearing obligation applies irrespective of the place of execution of the contract (in or outside EEA).

Moreover, the risk mitigation requirements apply to contracts between non-EU country entities if the contract has a “direct, substantial and foreseeable effect within the EU” or where such “an obligation is necessary or appropriate to prevent the evasion of any provisions of EMIR”. The “direct, substantial and foreseeable effect within EU” is further defined as follows:

  • At least one of the counterparties benefits from a legally enforceable guarantee provided by an FC established in the EEA (exceeding a threshold of EUR 8bn equivalent gross notional of un-cleared OTC derivative contracts); or
  • The two counterparties enter into the OTC derivative contract via their EEA branches and would qualify as financial counterparties if they were established in the Union.

Summary of the scope of application of EMIR to third country entities pursuant to the RTS and Article 13 of EMIR:

emir-tabel-4


Financial Products in Detail

ESMA determines the classes of OTC derivatives that must be centrally cleared. Over time, ESMA will develop various technical standards setting out which relevant classes of OTC derivatives will be subject to the clearing obligation. The main requirements for products to be centrally cleared are their standardization, liquidity and suitability for risk management/modeling. An overview of Regulatory Technical Standards and relevant products can be found at here.

For more information about EMIR Clearing, please visit the Q&A section on this website, or visit the ESMA Q&A on EMIR.