Clearing obligation

Find out more about the clearing obligation under Article 4 of EMIR and the recent changes to the clearing obligation regime under EMIR REFIT.

Under EMIR, the clearing obligation under Article 4 requires that all OTC derivative contracts (that are entered into or novated on or after the relevant clearing obligation start date) within scope will be subject to mandatory clearing and must be cleared in an EMIR EU authorised, or non-EU recognised, CCP.

This obligation has been in force since 21 June 2016 subject to phase-ins that are based on firms’ categorisation and derivatives volumes. Please refer to the implementation timetables below for more detailed information on phase-ins.

Who is caught by the clearing obligation

The clearing obligation applies to contracts between any combination of financial counterparties (FCs) and non-financial counterparties who exceed the clearing thresholds (NFCs), subject to certain exemptions. See non-financial counterparties for further information on the clearing threshold.

Under EMIR REFIT, the definition of FC has been expanded to capture EU Alternative Investment Funds (AIFs) established in the Union irrespective of the location of their manager. In addition, where relevant, the definition continues to capture those AIFs (irrespective of location) with an authorised or registered AIFM.

There are, however, new carve-outs for UCITS and AIFs which are set up exclusively for the purpose of serving one or more employee share purchase plans.

EMIR REFIT – a new clearing regime

EMIR REFIT introduces a new clearing regime for firms intended to bring more proportionality to the clearing obligation.

Key changes for firms include:

  • the creation of a new category of "small financial counterparties" (SFCs) considered to be below the thresholds. These SFCs are exempted from the obligation to clear their derivative contracts through a central counterparty (CCP), while remaining subject to risk mitigation obligations.
  • non-financial counterparties (NFCs) above the thresholds and subject to the clearing obligation will be subject to reduced clearing obligations. Under EMIR REFIT, NFCs only have to clear OTC derivative contracts pertaining to the asset class(es) they exceed the threshold(s) in.
  • the temporary exemption from the clearing obligation of pension scheme arrangements has been extended by another two years from the date of entry into force of EMIR REFIT (further extendable twice by an additional year).
  • the “Frontloading” requirement is removed and therefore entities that become subject to mandatory clearing for new classes of derivatives do not need to clear any pre-existing transactions.

In order to know whether they are subject to the clearing obligation, firms have to determine their 12-month average aggregate group position of OTC derivatives in each asset class and compare it to a set of clearing thresholds (EUR 1bn for credit and equity, EUR 3bn for interest, FX and commodities).

Firms that exceed the thresholds are required to start clearing their OTC derivatives contracts within 4 months of their notification being submitted.

To find out more about notifications please refer to our EMIR exemptions and notifications page.

To find out more about when to notify ESMA and the FCA please refer to OTC Question 2 of the updated ESMA Q&As.

Which derivatives are subject to the clearing obligation

Currently, EMIR mandates clearing for the following types of derivatives:

Interest Rate Derivatives denominated in the G4 Currencies

These include certain classes of OTC interest rate derivatives contracts denominated in the G4 currencies (EUR, GBP, USD and JPY). These classes are set out in the Annex to the Delegated Regulation, and include the following types of contract:

  • fixed to-float interest rate swaps (IRS)
  • basis swaps
  • forward rate agreements
  • overnight index swaps

Credit default derivative contracts

The specific classes that are within scope are set out in the Annex to the Delegated Regulation and include the following types of contracts:

  • untranched iTraxx Index credit default swaps (Europe Main, 5-year tenor, series 17 onwards, with EUR as the settlement currency)
  • untranched iTraxx Index credit default swaps (Europe Crossover, 5-year tenor, series 17 onwards, with EUR as the settlement currency)

Interest Rate Derivatives denominated in the non-G4 Currencies

These include certain classes of OTC interest rate derivatives contracts denominated in some non-G4 currencies (SEK, PLN and NOK). These classes are set out in the Annex to the Delegated Regulation, and include the following types of contract:

  • Fixed to-float interest rate swaps (IRS)
  • Forward Rate Agreements

PRE-EMIR REFIT Firm categorisation

Firms and their derivatives counterparties may fall within any of the 4 EMIR clearing categories as listed below.

  • Category 1: Firms that are already clearing members of a CCP. A list of clearing members is publicly available on the relevant CCP websites.
  • Category 2: Non Category 1 firms whose group’s aggregate month-end average of outstanding notional amount of OTC derivatives is above €8bn (assessed over Jan/Feb/Mar).
  • Category 3: Non Category 1 or Category 2 firms whose group’s aggregate month-end average of outstanding notional amount of OTC derivatives is below €8bn (assessed over Jan/Feb/Mar).
  • Category 4: Non-financial counterparties.

Firms need to determine their own clearing categorisation as well as determine the clearing category of their counterparties in order to know when the clearing obligation will apply.

Timetable for implementation

Timetable for IRS (denominated in the G4 Currencies – EUR, GBP, USD and JPY)

Contract between Clearing obligation
Cat 1 and Cat 1 21 June 2016
Cat 2 and Cat 1/2 21 December 2016
Cat 3 and Cat 1/2/3 21 June 2017
Cat 4 and Cat 1/2/3/4 21 December 2018

Timetable for IRS (denominated in non-G4 Currencies - NOK, PLN and SEK)

Contract between Clearing obligation
Cat 1 and Cat 1 9 February 2017
Cat 2 and Cat 1/2 9 July 2017
Cat 3 and Cat 1/2/3 9 February 2018
Cat 4 and Cat 1/2/3/4 9 July 2019

Timetable for CDS

Contract between Clearing obligation
Cat 1 and Cat 1 9 February 2017
Cat 2 and Cat 1/2 9 August 2017
Cat 3 and Cat 1/2/3 9 February 2018
Cat 4 and Cat 1/2/3/4 9 May 2019

Suspension of the clearing obligation

Under EMIR REFIT, the European Commission (at ESMA’s request, which may follow an NCA request to ESMA) is to have power to temporarily suspend the clearing obligation (and the related trading obligation under MiFIR) for an initial period of up to 3 months.

This suspension can be extended for further periods of up to 3 months, for a maximum aggregate period of 12 months. If the clearing obligation is suspended, the MiFIR trading obligation can also be suspended.

Exemptions from the clearing obligation

Under EMIR there are exemptions from the clearing obligation for:

  • intragroup transactions (provided certain conditions are met)
  • certain pension scheme arrangements

See the exemptions and notifications page for more information.