Central clearing obligation

EMIR sets rules for the central clearing of certain OTC derivatives by a central counterparty (CCP). A CCP becomes the counterparty of the buyer as well as the seller.

The central clearing of OTC derivatives is aimed at contributing to the stability of the financial system. The intervention of a CCP has to avoid that the bankruptcy of one entity leads to the bankruptcy of another entity due to the risks they run on each other. The CCP removes the counterparty risk that parties run on each other. This prevents a domino effect.

 

Most frequently asked questions about central clearing obligation

The central clearing obligation does not apply to every class of OTC derivatives. The central clearing obligation applies to the most common forward rate agreements and interest rate swaps, overnight index swaps and some index-based credit default swaps.

The European Securities and Markets Authority (ESMA) decides which classes of derivatives have to be cleared centrally. The main requirements for products to be centrally cleared are their standardization, liquidity and suitability for risk management/modelling. ESMA has an updated list of in-scope OTC derivatives on its website here .

The main objective to centrally clear certain classes of OTC derivatives is to reduce counterparty and systemic risks. The central clearing obligation applies to financial counterparties that exceed the clearing threshold (FC’s+) and non-financial counterparties that exceed the clearing threshold (NFC’s+). The central clearing obligation also applies to parties that are established outside of the European Economic Area (EEA), in case the central obligation would have applied to them if they had been established in the EEA.

The clearing threshold for the portfolio(s) must be calculated per category of OTC derivative transactions. Every 12 months, a financial counterparty taking positions in OTC derivative transactions may calculate its aggregate month-end average position for the previous 12 months. In calculating the positions, the financial counterparty shall include all OTC derivative transactions entered into by that financial counterparty or entered into by other entities within the group to which that financial counterparty belongs. The average position must be compared to the applicable clearing thresholds below.

The European supervisory authority (ESMA) has determined the following thresholds:

Asset Classes Clearing threshold in gross national value
Credit derivatives € 1 billion
Equities derivatives € 1 billion
Interest rate derivatives € 3 billion
Foreign exchange derivatives € 3 billion
Commodity and other derivatives € 3 billion

Note: This applies to all OTC derivative transactions that your company has concluded. This means not only the transactions that you have entered into with ABN AMRO, but also the transactions that you have entered into with other parties.

ABN AMRO sends its counterparties that are classified as financial counterparties that exceed the clearing threshold (FC’s+) and non-financial counterparties that exceed the clearing threshold (NFC’s+) an ISDA/FIA Europe Cleared Derivatives Execution Agreement. In this agreement a number of procedures is described. For example, what has to happen when a transaction that has to be centrally cleared cannot be centrally cleared and specifying details on how to unwind the transaction.