ESMA Accelerates Clearing Mandate But Frontloading Headache Remains

The decision from Europe to reduce the mandatory clearing time frame is welcomed but "frontloading" remains a contentious issue
By Editorial
European regulators have decided to reduce the timeframe for buy-side compliance with new clearing rules for interest rate swaps, but concerns remain over the “frontloading” requirements.

Frontloading requires certain trades executed before the new derivatives rules apply to be centrally cleared at a later date.

Despite mounting pressure from the derivatives industry to remove the rule, the European Securities and Markets Authority (ESMA) maintained the frontloading rule when it published its final rules on OTC clearing last week.

The rules will apply to clearing members and major buy-side firms, classed by ESMA as category one and two firms.

“The time for discussing the merits of the rules is over now. They are set and they are what they are. We can move on and work out how we are all going to implement them. Finally there is a little bit of certainty in the market,” says Lee McCormack, clearing business development manager, global markets, Nomura.

The consultation on interest rate swaps, which ESMA launched this summer, prompted responses from a range of firms and trade associations, who made it abundantly clear that they believed changes needed to be made to the frontloading requirements.

The majority of the feedback to ESMA’s consultation also sought a nine month timeline before buy-side firms fall under the mandatory clearing obligations.

In response, ESMA has shortened the compliance date from 18 to 12 months after the European Commission approves the rules, which is expected to occur at the beginning of next year.

This pencils in the date for around January 2016 however the frontloading requirements make this seemingly distant deadline a much more immediate reality for buy-side firms.

“It is positive that ESMA has listened to the feedback they received in consultation and have dealt with the problems and uncertainty highlighted with the 18 month phase-in, such as onboarding bottlenecks and frontloading,” comments Jamie Gavin, senior director, prime clearing services at Newedge.

“While the change in timeline affects the more sophisticated interest rate clients, many of whom should have begun their clearing onboarding process, it will ensure the focus of those still left to make up their minds and be ready by the end of 2015.”

The final regulatory technical standards mandate that four interest rate classes denominated in four currencies be subjected to the new rules.

Jon Watkins +44 (0) 20 7397 3815