ESMA has written to the European Commission seeking its views on a proposed easing of the frontloading requirement under EMIR. The frontloading requirement is the obligation to clear OTC derivative contracts entered into after a central counterparty has been authorised under EMIR and before the date of application of the clearing obligation. The implication is that bilateral OTC derivative contracts which have been entered into following authorisation of the CCP might, at an unspecified future date, become subject to clearing prior to close-out of the contract.

Following the approval, on 18 March 2014, of the first CCP to be authorised under EMIR, the frontloading requirement came into play and the existing industry concern in relation to this obligation was brought sharply into focus. Therefore, since this date, counterparties entering into OTC derivatives trades are aware that at an unspecified future date they may have to clear these trades.  A joint letter from ISDA and the FIA on 20 March 2014 outlined these concerns, highlighting the associated pricing uncertainty and requested a “without prejudice” indication of categories of OTCs that were unlikely to be suitable for clearing at this stage.

ESMA has proposed that frontloading apply only to contacts entered into during the period between (i) the date the RTS on clearing take effect and (ii) the date of application of the clearing obligation. This will, according to ESMA, provide counterparties with “legal certainty on the contracts which are subject to the clearing obligation, on the date from which the clearing obligation takes effect and on the CCPs available to clear the relevant classes of derivative”.

Contributed by Catharine Dwyer