The Council of the EU has adopted a regulation requiring financial firms to clear over-the-counter (OTC) derivatives contracts through a central clearing counterparty (CCP) and report them to trade repositories.
It said that the regulation, which will apply from the end of 2012, is aimed at increasing transparency in the OTC derivatives markets and shielding other market participants from the fall-out of a major counterparty collapse. Its adoption follows an agreement reached with the European Parliament, which was passed at first reading on 3 July. To be authorised, a CCP will have to hold a minimum amount of financial resources in the form of a mutualised default fund to which members of the CCP have to contribute.
Trade repositories would have to publish aggregate positions by class of derivatives under the watchful eye of the European Securities and Markets Authority (ESMA), which will be responsible for the surveillance of trade repositories and for granting and withdrawing their registration. ESMA will also be responsible for the identification of contracts subject to the clearing obligation, while national competent authorities will be responsible for authorisation and supervision of CCPs. CCPs from third countries will be subject to checks and balances undertaken by ESMA.
If a contract is not eligible for clearing by a CCP, the regulation requires the application of different risk management techniques, including the exchange of collateral and the holding of additional capital.
The obligation to clear OTC derivatives contracts through a CCP and report them to trade repositories applies to financial firms. Non-financial firms will only be subject to the clearing obligation, provided their OTC derivatives positions reach specified clearing thresholds, to be set by ESMA and the European Commission (EC).
The regulation also provides for multilateral trading platforms or exchanges to have open access to any CCP to clear OTC derivatives transactions, and vice versa, subject to technical and safety requirements.
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