The European Securities and Markets Authority (ESMA) has proposed a phased-in approach for OTC clearing, which Profit & Loss understands could mean that mandatory FX clearing will not be introduced until the end of 2016, or even later.
The elongated timeline released by ESMA appears to show a similar approach to that taken by US regulators, which will result in a gradual implementation of clearing mandates to allow participants, particularly on the buy side, ample time to prepare.
ESMA's proposals outline the technical implementation of how the new clearing requirements will be introduced under the European Market Infrastructure Regulation (EMIR).
Profit & Loss sources say it is the first real insight into how ESMA plans to approach mandatory clearing, starting with Rates and credit initially before beginning to phase in FX.
“What’s interesting is the industry was expecting Rates and credit to be ready for mandatory client clearing Q1 or Q2 of next year,” says a senior level source from a major bank.
“The way ESMA lays it out is the earliest that client clearing could happen for Rates will be June 2016, and then credit clearing will begin a month or two after that. That means that FX clearing is at least two years away in Europe, or more.”
Under the elongated timeline it would be reasonable to expect FX clearing to be introduced around December 2016 at the earliest, they add.
The market can respond to the two separate consultation papers issued before the final rules are formulated towards the end of the year.
Each asset class will be introduced in three phases for each class of counterparty.
The final group of participants affected by EMIR comprises non-financial firms such as large corporates.
ESMA has proposed giving these companies three years from when the rules are finalised to start clearing their interest rate and CDS trades.
The consultation period for interest rate swaps runs until 18 August and the consultation for credit default swaps runs until 18 September.