European regulators have united in agreeing to banish front-loading requirements for OTC derivatives deals entered into from 18 March, with uncertainty still surrounding which instruments will be affected under new rules.
The controversial requirements would have forced certain outstanding swaps trades to be subject to central clearing at a later date, creating a wave of uncertainty through the market.
In a letter to the European Securities and Markets Authority (ESMA) the European Commission has now agreed that the requirements should not be enforced.
Swap dealers and banks faced an uncertain future under the front-loading rules, with the cost of trading OTC derivatives under the new regulation increasing substantially.
Though ESMA had requested the removal of the rule, participants remained worried about a similar reaction from the Commission when a delay of trade reporting requirements was overlooked at the end of 2013.
In a victory for buy-side firms though, the decision of which OTC instruments will have to be centrally cleared later this year will not be backdated to 18 March.
This will be made formal in November when the Commission ratifies ESMA’s technical standards.
Michel Barnier, vice-president of the European Commission, cited in his letter to ESMA that ‘such application could jeopardise the principle of legal certainty’.
“The Commission considers that before ESMA submits the technical standards to the commission, counterparties cannot reasonably foresee the terms of the front-loading obligation,” Barnier added in his letter to Steven Maijoor, chairman of ESMA.
ESMA is moving forward with new central clearing rules as part of a global overhaul of the derivatives markets.
Implementing the rules has taken longer than its US counterparts and for buy-side firms, the mandatory clearing of OTC derivatives is set to take effect in 2016.
Firms are still waiting to see which types of OTC instruments will fall under the new regulations.