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Clearing obligation

One of EMIR’s central aspects is the obligation for standardised over-the-counter (OTC) derivative transactions to be settled using a central counterparty (CCP) authorised under EMIR. ESMA determines by means of Regulatory Technical Standards which categories of OTC derivatives shall be subjcet to the clearing obligation (see ESMA table of OTC derivatives subject to clearing).

Pursuant to Article 4 EMIR, the counterparties of an OTC derivative contract are obliged to settle all OTC derivative transactions which are subject to the Article 5 EMIR clearing obligation using a CCP that is authorised under EMIR.

When are counterparties affected by the clearing obligation?

Since EMIR REFIT 2.1, the counterparties to an OTC derivative transaction are only subject to the clearing obligation pursuant to Article 4(1) EMIR if the relevant transaction was concluded under the following conditions:

  • between two financial counterparties that meet the conditions set out in the second subparagraph of Article 4a(1) EMIR;
  • between a financial counterparty that meets the conditions set out in the second subparagraph of Article 4a(1) EMIR and a non-financial counterparty that meets the conditions set out in the second subparagraph of Article 10(1) EMIR;
  • between two non-financial counterparties  that meet the conditions set out in the second subparagraph of Article 10(1) EMIR;
  • between, on the one side, a financial counterparty that meets the conditions set out in the second subparagraph of Article 4a(1) EMIR or a non-financial counterparty that meets the conditions set out in the second subparagraph of Article 10(1) EMIR and, on the other side, an entity in a third countrythat would be subject to the clearing obligationif it were established in the European Union;
  • between two entities established in one or more third countriesthat would be subject to the clearing obligation if they were established in the European Union, provided that the OTC derivative contract has a direct, significant and foreseeable effect within the European Union or where the clearing obligation is necessary or appropriate to prevent the evasion of any provisionsof EMIR.

When does the clearing obligation apply for counterparties?

Pursuant to EMIR REFIT 2.1, the clearing obligation applies to financial and non-financial counterparties if they use OTC derivative contracts to a greater extent, thereby exceeding specific clearing thresholds set out in the Regulatory Technical Standards.

Provisions for financial counterparties (FC):

Pursuant to Article 4a(3) EMIR, an FC may calculate its OTC derivative positions against the clearing thresholds, and in doing so, it shall include all OTC derivative contracts entered into by that FC or by other entities within the group (FC and NFC) to which that FC belongs. The FC shall immediately notify ESMA and FMA, where it either does not calculate its relevant positions, or where the result of that calculation exceeds any of the specified clearing thresholds. In both cases, the FC shall 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.

Provisions for non-financial counterparties (NFC):

In calculating its OTC derivative positions against the clearing thresholds, an NFC shall include all the OTC derivative contracts entered into by it or by other non-financial entities within the group to which the NFC belongs, which are not objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of the non-financial counterparty or of that group. The NFC shall also immediately notify ESMA and FMA, where it does not calculate its positions, or where the result of that calculation in respect of one or more classes of OTC derivatives exceeds the specified clearing thresholds. The applicability of the clearing obligation depends on whether the NFC does not calculate or exceeds the clearing thresholds:

  1. Where the NFC does not calculate its relevant positions pursuant to Article 10(1) EMIR, it becomes subject to the clearin obligation for all OTC derivative contracts that pertain to any class of OTC derivatives which is subject to the clearing obligation.
  2. In contrast, where the NFC’s OTC derivative position exceeds the relevant clearing thresholds, the clearing obligation only applies to those OTC derivatives in respect of which the result of the calculation exceeds these clearing thresholds.

Calculation of the clearing threshold

Delegated Regulation (EU) No 149/2013 determines the relevant clearing thresholds as follows:

  • EUR 1 billion gross notional value for OTC credit and equity derivative contracts
  • EUR 3 billion gross notional value for interest rate and foreign exchange derivative contracts
  • EUR 4 billion gross notional value for OTC commodity derivative contracts and all other OTC derivative contracts

Exemptions from the clearing obligation

OTC derivative contracts entered into by a non-financial counterparty or by other non-financial entities within the group to which this non-financial counterparty belongs, which are objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of the non-financial counterparty or of that group shall not be included in calculating the relevant clearing threshold pursuant to Article 10(3) EMIR. Therefore, they are not subject to the clearing obligation.

Pursuant to Article 89(1) EMIR (as amended in Delegated Regulation (EU) No 2021/962), the clearing obligation set out in Article 4 EMIR shall not apply to OTC derivative contracts entered into by pension scheme arrangements until 18 June 2022.

Intragroup OTC derivative transactions may be exempted from the clearing obligation. A notification or application must be submitted to the Financial Market Authority. Further information can be found here.

Clearing obligation for OTC derivatives

The clearing obligation was etablished by the European Commission through the adoption of regulatory technical standards (RTS), developed by ESMA. ESMA maintains a public register of derivatives subject to a clearing obligation in the EU.

The relevant ESMA table lists all OTC derivates currently subject to the clearing obligation:

 

More information

Forms

Reporting form for exceeding or falling below the threshold for the clearing obligation