A decision by European regulators to reduce the timeframe for buy-side compliance with new clearing rules for interest rate swaps has been welcomed, but contentious ‘frontloading’ requirements are a continuing concern.
Frontloading requires certain trades already entered into before the new derivatives rules apply to be centrally cleared at a later date.
Despite mounting pressure from the derivatives industry to remove the rule, the European Securities and Markets Authority (ESMA) maintained the frontloading rule when it published its final rules on OTC clearing last week.
The rules will apply to clearing members and major buy-side firms, classed by ESMA as category one and two firms.
“Frontloading is still here, and despite the hopes of some participants that it would only apply to category one, ESMA has confirmed it will also apply to category two,” said Lee McCormack, clearing business development manager, global markets, Nomura.
“The time for discussing the merits of the rules is over now. They are set and they are what they are. We can move on and work out how we are all going to implement them. Finally there is a little bit of certainty in the market.”
The consultation on interest rate swaps, which ESMA launched this summer, prompted responses from a range of buy- and sell-side firms along with trade associations, who made it abundantly clear that they believed changes needed to be made to the frontloading requirements.
The majority of the feedback to ESMA’s consultation also sought a reduced amount of time before buy-side firms fall under the mandatory clearing obligations.
In response, ESMA has shortened the compliance date from 18 to 12 months after the European Commission approves the rules, which is expected to occur at the beginning of next year.
This pencils in the date for around January 2016 however the frontloading requirements make this seemingly distant deadline a much more immediate reality for buy-side firms.
Jamie Gavin, senior director, prime clearing services at Newedge, welcomed the six-month cut from the initial rules, believing it will urge firms to prepare in time.
"It is positive that ESMA has listened to the feedback they received in consultation and have dealt with the problems and uncertainty highlighted with the 18 month phase-in, such as onboarding bottlenecks and frontloading,” he said.
“While the change in timeline affects the more sophisticated interest rate clients, many of whom should have begun their clearing onboarding process, it will ensure the focus of those still left to make up their minds and be ready by the end of 2015.”
The new deadline brings the issue of clearing six months closer, and while some smaller buy-side firms may be less prepared, McCormack added that most of Nomura’s clients have been addressing the issue for some time now.
“Clients have taken their time, but there is greater understanding now of what clearing is and how it works,” he said. “Some of the conversations we have had with clients have been going on for two or three years, so they understand the pricing and the concepts. They are also getting to the point where they know they need to get this implemented.”
The final regulatory technical standards mandate that four interest rate classes denominated in four currencies be subjected to the new rules. The instruments were all deemed liquid enough to be transitioned through clearing houses.
ESMA will set its sights on credit default swaps next, which could only be two or three months behind interest rates. As reported by theTRADEnews.com last week, the regulator will then turn its attention to foreign exchange non-deliverable forwards, which it has launched a consultation on.
The reforms are being introduced in line with requirements set in 2009 during the G-20 meeting in Pittsburgh. Europe follows the US in implementing the changes, however both missed the original intention of having the new rules in place by 2012.