Friday, March 22, 2013 8:04:33 AM

ESMA backs swaps reporting choice

The European Securities and Markets Authority (ESMA) is hoping to avoid a repeat of the current row engulfing the Commodity Futures Trading Commission  (CFTC) with a ban on bundled clearing and reporting of OTC derivatives.

ESMA released guidance pertaining to clearing and reporting services earlier this week, after receiving a number of questions on the issue from market participants.

"We have clarified that central counterparties (CCPs) can offer a trade reporting service, but they will not be able to oblige market participants to only report their trades through a repository of their choosing," Rodrigo Buenaventura, head of market division, ESMA, told

The clarification should mean Europe does not become embroiled in the same kind of quarrel that has emerged in the US between the CME Group, which offers clearing and reporting services for swaps, and the Depository Trust and Clearing Corporation (DTCC), which operates a US swaps trade repository.

The DTCC has threaten to sue to the CFTC after it approved the CME Group's rule 1001, which stipulates that trades cleared through its CCP must also be reported to its repository.

"Rule 1001 will cripple market participant choice, is anti-competitive and compromises regulators and market participants' ability to understand, assess and manage systemic risk effectively," said DTCC general counsel Larry Thompson, when the rule was approved earlier this month.

Reporting of interest rate swaps and credit derivatives began in the US for some types of market participant on 31 December 2012. In Europe, trade repositories can now begin seeking authorisation from ESMA after the final sign-off of technical standards related to the European market infrastructure regulation (EMIR) last Friday, with reporting obligations likely to kick in after the summer.

Buenaventura also said ESMA would conduct an assessment into the likelihood of a collateral shortfall prompted by cleared swap margin requirements, but emphasised that this shouldn't be viewed as only a regulatory issue.

"The availability of collateral is clearly not just a regulatory issue and it's not only related to EMIR," he said. "Monetary policy and the issuance of collateral related to the economic cycle and market evolution are also substantial factors that will determine how much collateral will be available."

As well as the need for market participants to establish more formalised initial and variation margin processes for standardised OTC derivatives that need to be centrally cleared under EMIR, prudential capital regulations like Basel III and European short-selling rules will also require banks to find additional collateral to support potentially risky activity.

"The optimal way to analyse the availability of collateral is to look at the regulations and other factors together and draw conclusions based on this," said Buenaventura. "This is something that should be done together with other key stakeholders prior to the introduction of the clearing obligation for OTC derivatives next year and the bilateral margin requirements from 2015 onwards."

A full in-depth interview with Rodrigo Buenaventura will be published in the forthcoming Q1 2013 issue of The TRADE Derivatives.

Anish Puaar +44 (0)20 7397 3817