When is Clearing mandatory?
The clearing obligation applies to all OTC derivatives of a class that is subject to the clearing obligation. Clearing of Interest Rate derivatives has started and Credit derivatives are to follow. Actual timelines for the clearing of certain foreign exchange, equity and commodity derivatives are not yet firm.
Counterparties in scope for clearing
Financial Counterparties (FC) and Non-Financial Counterparties above the clearing threshold (NFC+) will be required to clear standardised OTC derivatives.
A bilateral trade in an OTC derivative subject to the clearing obligation is mandatory if the bilateral trade is entered into between any combination of FC and NFC+ parties, given that one or more of the parties involved in the transaction is established in the EEA:
- Two financial counterparties (FCs)
- A FC and a non-financial counterparty which exceeds the clearing thresholds (NFC+)
- Two NFC+s
- A FC or NFC+ and a non-EEA entity that would be subject to the clearing obligation if it would be established in the EEA.
Pension funds have been granted an exemption until 15th August 2017. The exemption could be extended further.
Where is clearing done?
Clearing is performed at a central clearing counterparty (hereafter CCP).
What does clearing mean?
For the customers this means that instead of having a bilateral trade with Nordea, the customer will have a cleared trade with the CCP. The CCP becomes the seller to all buyers and buyer to all sellers and thereby becomes the legal counterparty to each of the original trading counterparties. Clearing involves the posting and receiving of collateral, both Initial Margin to protect the CCP from the default of the counterparty and Variation Margin to settle daily market value changes of the trades of the counterparty. Most large banks will become direct clearing members at a CCP, but smaller market participants will typically become clients of a clearing broker.
When does the clearing obligation start?
The timing and scope of these requirements depend on CCP clearing membership and, for non-clearing member financial counterparties, the size of non-cleared OTC derivatives gross notional amounts.
Interest rate swaps
Nordea is classified as a Category 1 counterparty and will CCP clear accordingly.
There is a phase-in period for the clearing obligation depending on the type of counterparty. There is also a frontloading obligation for Category 1 and Category 2 counterparties.
The frontloading obligation means there is the requirement to clear certain trades before the effective start date.
Interest Rate Derivatives in G4 currencies (EUR, GBP, JPY and USD)
Category 1 |
Clearing members of CCPs |
21 Jun 2016 |
YES |
21 Feb 2016 |
Category 2 |
Non-clearing members which are either Financial counterparties or Alternative investment funds (non-financial counterparty) with a gross notional amount of non-cleared OTC derivatives exceeding €8 billion |
21 Dec 2016 |
YES |
21 May 2016 |
Category 3 |
Non-clearing members which are either Financial counterparties or Alternative investment funds (non-financial counterparty) with a gross notional amount of non-cleared OTC derivatives below €8 billion |
21 Jun 2017 |
NO |
|
|
Category 4 |
Non-clearing member non-financial counterparties above the clearing thresholds (NFC+) not included in category 1, 2 or 3. |
21 Dec 2018 |
NO |
|
|
Note: These products are Basis swaps, Fixed-to-float swaps, FRAs and OIS.
Interest Rate Derivatives in non-G4 European currencies (SEK, NOK and PLN)
Category 1 |
Clearing members of CCPs |
9 Feb 2017 |
YES |
9 Oct 2016 |
Category 2 |
Non-clearing members with a gross notional amount of non-cleared OTC derivatives exceeding €8 billion |
9 Aug 2017 |
YES |
9 Oct 2016 |
Category 3 |
Non-clearing members with a gross notional amount of non-cleared OTC derivatives below €8 billion |
9 Feb 2018 |
NO |
|
Category 4 |
Non-clearing member, non-financial counterparties above the clearing thresholds; NFC+ |
9 August 2019 |
NO |
|
Note: These products are Fixed-to-float swaps and FRAs.
Credit Default Swaps
Nordea is classified as a Category 2 counterparty and will CCP clear accordingly.
There is a phase-in period for the clearing obligation depending on the type of counterparty. There is also a frontloading obligation for Category 1 and Category 2 counterparties.
The frontloading obligation means there is the requirement to clear certain trades before the effective start date.
Credit Default Swaps (Specific index credit swaps and single name CDS)
Category 1 |
Clearing members of CCPs |
9 Feb 2017 |
YES |
9 Oct 2016 |
Category 2 |
Non-clearing members with a gross notional amount of non-cleared OTC derivatives exceeding €8 billion |
9 Aug 2017 |
YES |
9 Oct 2016 |
Category 3 |
Non-clearing members with a gross notional amount of non-cleared OTC derivatives below €8 billion |
9 Feb 2018 |
NO |
|
Category 4 |
Non-clearing member, non-financial counterparties above the clearing thresholds; NFC+ |
9 May 2019 |
NO |
|
Note: These products are Index CDS.
If the OTC derivatives transaction is entered into by counterparties in different clearing categories, the date from which the clearing obligation will apply is the latest date.
What does it require to trade and clear with Nordea?
To guarantee the ability to trade and clear with Nordea at a CCP the following must apply:
- Inform Nordea about your Clearing Category via traderepositoryteam@nordea.com or your daily contact person.
- Ensure that you have entered into a Clearing Execution Agreement with Nordea in order to be able to execute OTC derivative trades subject to the clearing obligation.
- Ensure that you are connected to a Central Counterparty (CCP) directly or via a clearing broker in case you expect to trade OTC derivatives that are subject to the clearing obligation.
More information?
https://www.esma.europa.eu/regulation/post-trading/otc-derivatives-and-clearing-obligation (ESMA website)
https://www.esma.europa.eu/sites/default/files/library/public_register_for_the_clearing_obligation_under_emir.pdf (ESMA public register for the clearing obligation)
https://www.esma.europa.eu/databases-library/esma-library (ESMA Library)