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Clearing Amp Settlement
Europe reveals post-crisis swaps rules
From the Financial Times of Thu, 02 Oct 2014 16:25:32 GMT

Europe has published rules enforcing compulsory clearing of interest rate swaps from the middle of next year, a key component of the region’s plans to shore up markets after the financial crisis.

Regulators at the European Securities and Markets Authority circulated their first set of final rules tightening up off-exchange derivatives markets.

It outlined the four main classes of interest rate swaps that banks, institutional investors and corporations will be required to clear as part of its global overhaul of swaps trading.

The Paris-based regulator also set phase-in periods for market participants based on the notional value of the derivatives they trade in recommendations made late on Wednesday.

Authorities around the world have pushed for more OTC derivatives to be processed through clearing houses, which ensure a trade is completed in the event of a default.

Europe has been slower in drawing up precise rules to cover a range of products and instruments than the US, which began clearing last year.

Final rules for clearing credit default swaps are expected in coming weeks.

“The countdown to mandatory clearing has effectively started,” said John Wilson, a consultant and former global head of OTC clearing at Newedge, the derivatives broker. “It’s politically interesting that some of the non-eurozone currencies have been omitted. Esma is largely product-aligned with the US.”

Esma recommended that many tenors of basis swaps, fixed-to-float swaps, forward-rate agreements and overnight index swaps denominated in euros, yen, sterling and US dollars be cleared, although the two regulators differed on length of clearing for overnight index swaps.

The regulator also recommended that the rules be phased into the market over the next three years.

A definitive date for mandatory clearing is dependent on final approval by both the European Commission, the union’s executive arm, and the parliament. The rules are likely to come into force in January.

Esma recommended that market participants have a phase-in period with heavy users of derivatives required to clear after six months.

Institutional investors and alternative investment funds will have a year’s grace while a newly-defined category – a “ low level of activity” user trading less than a notional value of $8bn- will have an 18-month deadline, Esma said.

Large energy and industrial groups like Shell and BP will retain a three-year phase in period.

The regulator said it was still analysing whether swaps denominated in other currencies would be mandated for clearing.

Nasdaq OMX and Poland’s KDPW­ CCP have been mandated to clear swaps in their local currencies.

Esma also cut the time for so-called “front-loading” of trades, which has become contentious among derivatives markets participants.

Brokers have been unsure how to price swaps set for clearing that would straddle the deadlines.

www.ft.com/tradingroom



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