ESMA to Amend Derivatives Obligations Owing to Benchmark Transition

As a result of the benchmark reforms, EONIA and LIBOR are due to cease at the end of 2021, with the exception of USD LIBOR, publication of which is scheduled to run until June 2023. Thus, the new derivative contracts are expected to no longer reference EONIA or LIBOR from January 03, 2022, whereas derivatives referencing risk-free rates such as €STR in EUR, SONIA in GBP, or SOFR in USD are being traded and cleared. At present, three Commission Delegated Regulations on the clearing obligation and one on the trading obligation for derivatives mandate a range of interest rate and credit derivative classes to be cleared, with a subset of these to also be traded on venue. In view of the benchmark transition, there is a need to review the scope of these standards for the classes and currencies impacted by these changes, namely interest rate derivative classes in EUR, GBP, JPY and USD. For the draft regulatory technical standards amending the scope of clearing obligation, this consultation covers two aspects: which classes should be removed from the clearing obligation and which classes should be added. As per the proposal, ESMA would: 

• Remove the classes referencing EONIA, GBP LIBOR, and JPY LIBOR as these benchmarks will cease to be produced at the end of the year
• Keep the classes referencing USD LIBOR in the clearing obligation and will decide later whether to remove these at the time of the final report or later, depending on the responses to the consultation and as well as on how the situation evolves
• Introduce the classes of interest rate derivatives referencing some risk-free rates for which there seems to be apparent liquidity—namely, Overnight Index Swaps referencing €STR for short maturities and Overnight Index Swaps referencing SONIA for a much larger maturity range
• Include SOFR Overnight Index Swaps for short maturities and will conduct further assessment based on how the liquidity evolves and based on the responses to this consultation

To reflect the change of classes to be in scope of the clearing obligation, ESMA is proposing to amend the Annex of the Commission Delegated Regulation where the classes are listed. Also, given that GBP LIBOR will no longer be subject to clearing obligation and will cease to exist by the end of 2021, fixed to-float interest rate swap referencing GBP LIBOR should no longer be subject to the trading obligation for derivatives as per the proposal. 

Related Links

• Press Release
• Consultation Paper (PDF)

Comment Due Date: September 02, 2021

Keywords: Europe, EU, Banking, Securities, Clearing Obligation, Derivatives Trading Obligation, Benchmarks Reforms, Regulatory Technical Standards, Derivatives, LIBOR, EONIA, Benchmark Reforms, Benchmark Transition, ESMA