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OTC derivatives, central counterparties and trade repositories

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OTC derivatives, central counterparties and trade repositories

OTC derivatives are generally negotiated privately. The information concerning them is consequently only available to the contracting parties, which can make it difficult to identify the nature and level of risks involved. To overcome these shortcomings and to increase the efficiency and safety of OTC derivatives markets, this Regulation lays down provisions regarding OTC derivative contracts, central counterparties and trade repositories, in line with the G20 commitments made in Pittsburgh in September 2009.

ACT

Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (Text with EEA relevance).

SUMMARY

This Regulation aims to cover certain derivatives such as OTC derivative contracts , through the introduction of mandatory clearing and bilateral risk management. It also covers mandatory reporting of all derivative contracts, as well as uniform requirements concerning the performance of activities of CCPs and trade repositories .

The Regulation applies to:

  • CCPs and their clearing members;
  • financial and non-financial counterparties;
  • trade repositories;
  • trading venues, in certain cases.

This Regulation does not apply to:

  • members of the European System of Central Banks (ESCB);
  • Union public bodies managing public debt.
  • the Bank for International Settlements.

OTC derivatives: risk management

OTC derivative contracts suitable for mandatory central clearing are subject to mandatory clearing by a CCP. To assess whether OTC derivatives should be subject to the clearing obligation, the European Securities and Markets Authority (ESMA) must take into account, certain criteria such as:

  • the degree of standardisation of the contractual terms;
  • the volume and liquidity of the relevant class of OTC derivatives;
  • the availability of fair, reliable and accepted pricing information.

ESMA is responsible for maintaining a public register and updating the classes of OTC derivatives and the authorised CCPs, as well as the duration of derivative contracts.

The trading venue must provide data on transactions to any CCP upon request by the CCP.

Financial counterparties and non-financial counterparties must measure, monitor and mitigate operational risk and counterparty credit risk using robust formalised procedures.

CCPs: requirements and monitoring

CCPs are subject to the following requirements:

  • authorisation: in order to provide clearing services, a CCP must obtain authorisation from the competent authority in the Member State where it is established. It has the option to extend its activities to other services and has initial capital of EUR 7.5 million.
  • third countries: A CCP established in a third country may provide clearing services to trading venues in the EU only where that CCP is recognised by ESMA.
  • organisation: a CCP is required to establish a risk committee composed of representatives, its clearing members, independent members of the board and representatives of its clients. This committee is responsible for advising the board on any arrangements that may impact the risk management of the CCP.
  • record keeping: a CCP must keep all information on all the contracts it has processed for at least ten years.
  • measure and assessment: a CCP can measure and assess its liquidity and credit exposures to each clearing member and, where relevant, to another CCP with which it has concluded an interoperability arrangement, on a near to real-time basis.
  • margins, losses and default funds: a CCP shall impose, call and collect margins to limit its credit exposures from its clearing members. The margins must be sufficient to cover losses that result from at least 99 % of the exposures movements over an appropriate time horizon. A pre-funded default fund must be established to cover losses that exceed this threshold.

Interoperability arrangements

Following prior authorisation by the competent authorities, the CCPs which conclude an interoperability arrangement must:

  • identify, monitor and manage the risks arising from the arrangement;
  • agree on their respective rights and obligations;
  • identify, monitor and manage credit and liquidity;
  • identify, monitor and manage the interdependencies resulting from the arrangement.

Trade repositories

Trade repositories established in the EU are required to register with ESMA. They must have robust governance arrangements and a clear organisational structure with well defined lines of responsibility.

Reporting obligation

A uniform derivatives data reporting requirement is laid down at EU level. All counterparties and CCPs must report details of OTC derivative contracts to trade repositories. These details must be reported no later than the working day following the contract’s conclusion, modification or termination.

Exchange of information

In the interests of the transparency of the OTC market, the competent authorities, ESMA and other relevant authorities are permitted access to the information held by trade repositories.

For further information: Financial Markets Infrastructure

REFERENCES

Act

Entry into force

Deadline for transposition

Official Journal

Regulation (EU) No. 648/2012

16.8.2012

-

OJ L 201 of 27.7.2012

Amending/Supplementing act(s)

Entry into force

Deadline for transposition

Official Journal

153/2013

15.3.2013

-

OJ L 52 of 23.2.2013

Regulation (EU) No 575/2013

28/06/2013.Application: from 01/01/2014, with the exception of certain provisions.

-

OJ L 176 of 27.6.2013

Regulation (EU) No 149/2013

15.3.2013

-

OJ L 52 of 23.2.2013

Regulation (EU) No 150/2013

15.3.2013

-

OJ L 52 of 23.2.2013

Regulation (EU) No 151/2013

15.3.2013

-

OJ L 52 of 23.2.2013

Regulation (EU) No 152/2013

15.3.2013

-

OJ L 52 of 23.2.2013

Regulation (EU) No 153/2013

15.3.2013

-

OJ L 52 of 23.2.2013

Regulation (EU) No 876/2013

3.10.2013

-

OJ L 244 of 13.9.2013

Regulation (EU) No 1002/2013

8.11.2013

-

OJ L 279 of 19.10.2013

Regulation (EU) No 1003/2013

22.10.2013

-

OJ L 279 of 19.10.2013

Last updated: 12.03.2014

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