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ESMA releases discussion paper on clearing of OTC derivatives

The European Securities and Markets Authority (ESMA) has released a discussion paper to prepare the regulatory technical standards (RTS) that will implement the provisions of the European Market Infrastructure Regulation (EMIR) regarding the obligation to centrally clear over-the-counter (OTC) derivatives. Feedback is invited by 12 September.

The consultation aims to assist ESMA in developing its approach to determining which classes of OTC derivatives need to be centrally cleared and the phase-in periods for the counterparties concerned.

EMIR is due to come into force within the next six months and is intended to improve transparency, establish common rules for central counterparties (CCPs) and for central trade repositories (TRs), as well as reduce the risks associated with the OTC derivatives market in-line with the wishes of the Pittsburgh G20 meeting back in 2009. It is the European equivalent of Dodd-Frank in this regard and provides for the obligation to centrally clear OTC derivative contracts or to apply risk mitigation techniques such as the exchange of collateral.

“Our consultation is a first important step in shaping the details of how central clearing of OTC derivatives will work in the European Union [EU],” said Steven Maijoor, ESMA chair. “Having these trades centrally cleared and ultimately making post-trade data available to investors will increase the robustness, transparency and stability of the financial system.”

The discussion paper is open for feedback until 12 September 2013 and many financial market participants can be expected to take up the offer. ESMA will use the feedback received to draft its technical standards on the clearing obligation, which will be presented in future public consultations.