The European Securities and Markets Authority (ESMA) has proposed a new frontloading obligation window to the European Commission and is seeking urgent feedback.
In the letter to the commissioner for internal market and services Michel Barnier, ESMA said the frontloading requirement, which took effect after the first central counterparty (CCP) received regulatory approval in March – may introduce “significant uncertainties” in the market.
“Those consequences are legal, operational and financial,” with market participants possibly not hedging to avoid the consequences of the frontloading effect.
The frontloading obligation means eligible swaps entered into after March 18 may also need to be clearing once clearing rules kick-in, expected in early 2015. This has made it difficult for clearing members to price OTC derivatives contracts.
ESMA has met with the European Commission and Members of the European Parliament to discuss the issue last month.
In the letter sent today, ESMA chairman Steven Maijoor said the pan-European regulator is looking at interpreting the clearing rules in a way that means frontloading may only apply to contacts entered during a window it refers to as ‘period B’ – between when technical standards take effect and the date of a clearing obligation application.
According to ESMA, the new frontloading window would allow market participants to have legal certainty on which contracts are subject to clearing, the day it takes effect and which CCPs can clear those classes.
“This means that contracts concluded in period B may be subject to frontloading under some conditions, depending on the way the remaining maturity of contract is framed,” it said.
ESMA would outline possible solutions in a public consultation paper, it said. Following the approval of first CCP, ESMA has up to six months to conduct a public consultation on clearing and submit draft technical standards to the European Commission for approval. The European Parliament and Council will then need to pass the clearing mandate.
ESMA has approved four CCPs so far, including Nasdaq OMX Clearing, EuroCCP, KDPW_CCP and Eurex Clearing.