06 August 2015

European Commission: Financial stability - new rules on central clearing for interest rate derivatives

The European Commission has adopted new rules that make it mandatory for certain over-the-counter (OTC) interest rate derivative contracts to be cleared through central counterparties. Mandatory central clearing is a vital part of the response to the financial crisis; it follows commitments made by world leaders at the G-20 Pittsburgh Summit in 2009, to improve transparency and mitigate risks.

Jonathan Hill, EU Commissioner for Financial Stability, Financial Services and Capital Markets Union, said: "Today we take a significant step to implement our G20 commitments, strengthen financial stability and boost market confidence. This is also part of our move towards markets that are fair, open and transparent."

The decision takes the form of a Delegated Regulation—the first such to implement the clearing obligation under the European Market Infrastructure Regulation ('EMIR'). It covers interest rate swaps denominated in euro, pounds sterling, Japanese yen or US dollars that have specific features, including the index used as a reference for the derivative, its maturity, and the notional type (i.e. the nominal or face amount that is used to calculate payments made on the derivative).

These contracts are:

-         Fixed-to-float interest rate swaps (IRS), known as 'plain vanilla' interest rate derivatives;

-         Float-to-float swaps, known as 'basis swaps';

-         Forward Rate Agreements;

-         Overnight Index Swaps.

Recent statistics show that interest rate derivatives constitute the largest segment of all OTC derivative products, making up around 80% of all global derivatives as of December 2014. The estimated daily turnover in the EU of OTC interest rate derivative contracts denominated in G4 currencies was over €1.5 trillion as of April 2013.

The clearing obligations will enter into force subject to scrutiny by the European Parliament and Council of the EU and will be phased in over three years to allow additional time for smaller market participants to begin complying.

Full press release

© European Commission