ESMA Changes Derivatives Trading and Clearing Obligations to Facilitate LIBOR Transition

ESMA has proposed changes to the Clearing Obligation (CO) and Derivatives Trading Obligations (DTO) to support the ongoing market transition away from the EONIA and Libor benchmarks.

In its report, the European securities regulator suggested draft regulatory technical standards (RTS) that modify the scope of the trading obligations for over-the-counter (OTC) interest rate derivatives (IDR) denominated in EUR, GBO, JPY and USD. The draft changes have now been submitted to the European Commission for approval.

Under the changes, IRD classes referencing GBP and Libor USD will be removed from both trading obligations. The clearing obligation will specifically have the removal of IRD classes referencing EONIA and JPY Libor and IRD classes referencing the new rates – € STR, SONIA and SOFR – will be added, however, the regulator added that this would have a phase longer than the other changes. .

ESMA has proposed that the new scope of CO and DTO apply from January 3 next year.

The changes were developed with the assistance of third country jurisdictions as part of the continued transition of the broader market of benchmarks EONIA and LIBOR and to new Alternative Risk Free Rates (RFRs) such as € STR after years of market manipulation.

The report follows confirmation from the Financial Conduct Authority (FCA) that LIBOR settings for the British Pound, Euro, Swiss Franc, Japanese Yen, and one-week and two-month US dollar settings will cease to be effective. December 31, 2021.

ESMA said the changes would provide a smooth baseline transition while maintaining effective scope for these two obligations, aligned with G20 goals.

However, despite the approaching deadline, a report from SDL in March found that more than half of seller-side businesses had delayed their LIBOR transition due to the ongoing COVID-19 pandemic, while 40% of companies had not started planning or had only started planning. for the transition in 2021 due to delays.

Further research by Acuti and CurveGlobal – LSEG’s former derivatives exchange – in June also found that the derivatives industry was least prepared for the transition from futures and options LIBOR.

The Commodity Futures Trading Commission (CFTC) also today issued a request for information and commentary on its regulations on swap clearing requirements to better understand how aspects of the swap clearing requirement may be affected by the transition from IBOR rates to alternative benchmarks. .

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