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    ESMA to Amend Derivatives Obligations Owing to Benchmark Transition

    July 09, 2021

    The European Securities and Markets Authority (ESMA) is consulting on review of the regulatory technical standards specifying classes of derivatives subject to the clearing and trading obligations in view of the benchmark transition. The consultation is intended to amend the scope of clearing and trading obligations for derivatives to accompany the benchmark transition for OTC derivatives. The proposed amendments have been presented in the form of amending draft standards in Annex II of the consultation report. The comment period on the proposals end son September 02, 2021, with ESMA expecting to submit the final report to EC in Autumn 2021. ESMA aims to ensure that the scope of derivatives classes subject to clearing obligation trading obligation for derivatives reflect transition to the new alternative rates at the beginning of 2022.

    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. 


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    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

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