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 Thursday 25 February 2016


On 21st June 2016 the first phase of mandatory clearing under EMIR (Category 1 entities) will begin for certain G4 (EUR, GBP, USD, JPY) interest rate products.

The clearing requirement will apply on a phased basis depending on the category that applies to market participants.

An entity is classified as either a financial counterparty (“FC”) or non-financial counterparty (“NFC”). Non-financial counterparties above the clearing threshold are also referred to as NFC+.

There are four categories:

Category 1 – Entities that are clearing members of at least one CCP.

Category 2 – FCs and Alternative Investment Funds (AIFs) that qualify as NFC+ above EUR 8 billion threshold.

Category 3 – FCs and AIFs NFC+ below EUR 8 billion threshold.

Category 4 – Other NFC+ entities.

Counterparties that are identified as a qualifying third counterparty entity (TCE) will also be captured under the EMIR clearing requirements.  TCEs are non-EU entities with a link to the EU (e.g. a non-EU entity acting through an EU branch or a non-EU entity guaranteed by an EU entity) and would, if they were based in the EU, be classified as an FC or NFC+ under EMIR.

What is Frontloading?

Frontloading is a unique obligation under EMIR.  It involves the preparatory work which needs completion before the relevant Clearing Start Date

Category 1 entities and Category 2 FCs who enter into eligible products with a minimum remaining maturity (6 months) during the frontloading period will be required to clear the trades as soon as the clearing obligation comes into effect. 

The frontloading window for Category 1 started on 21st February 2016 and mandatory clearing of eligible products will come into force on 21st June 2016. 

For Category 2, the frontloading process will start on 21st May 2016 and run until the clearing obligation commences on 21st December 2016.  It only applies to FCs.

Other non-G4 IRS and certain CDS indices are the next products that are anticipated to be subject to the mandatory clearing obligation and it is expected that frontloading periods will also be applied for these.

Frontloading ATE

There is a risk that parties enter into trades during the frontloading period believing that they will be able clear the trades when the clearing requirement comes into force but find that this is not possible.  An example could be where the relevant clearing documentation between the contracting parties (e.g. ISDA/FIA Cleared Derivatives Execution Agreement) has not been executed in time.  If this were to happen then the parties would be in breach of this regulatory requirement.

In order to address this issue ISDA published the Frontloading ATE Amendment Agreement in June 2015.  This updates the ISDA Master Agreement in place between the parties by incorporating an Additional Termination Event which allows the parties to terminate Affected Transaction(s) entered into during the frontloading window which are not cleared by the Clearing Start Date.

Frontloading is a controversial concept and has led to uncertainty in the market.  To this end, many major dealers have opted to start clearing eligible derivatives in advance of the frontloading period in order to reduce/eliminate the risk of trades not being cleared. 

Posted by Abigail Harding

Tagged: ISDA OTC derivatives clearing Frontloading

Category: ISDA negotiation

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