The European Securities and Markets Authority (Esma) has
recommended the mandatory clearing of certain OTC trades be
delayed, possibly until around November this year.
Industry experts have told FOW however, that concerns still
surround this introduction of frontloading relating to price
differentials, valuations and operational risk.
With market participants growing increasingly concerned about
the rules, some believe it should be scrapped altogether.
"Frontloading caused a lot of speculation and you could argue
that it’s not needed at all," said Hans-Ole
Jochumsen, executive vice president, global market services for
"It’s interesting that the US tried to deal with
this but shelved their plans and, so far, we’re
the only region to consider it."
Esma’s suggested relief to participants who would
have had to clear some bilateral transactions came was
deemed neccesary by the regulatory, following
March’s approval of Nasdaq OMX’s
clearing house which triggered the frontloading
Frontloading requires contracts concluded after March 18 to be
subject to clearing obligations before their expiration
With Nasdaq’s approval under the European Market
Infrastructure Regulation (Emir), equity, interest rate and
commodity derivatives were all subject to the new rules,
meaning they would have to be cleared at a later date.
"Esma’s proposals could effectively remove much of
the requirement and we know the clarification will be
welcomed," added Jochumsen.
"Let’s remember this is just one of several issues
to resolve around products, timings and process."
Esma added that the effect of the frontloading rule would be a
reduction in the incentive to hedge risks during a certain
period, which would impact negatively on financial
The regulator has therefore recommended the rules will apply
only to contracts struck between the point when regulatory
technical standards (RTS) kick in and the date of application
of the clearing obligations.
This could give OTC participants relief between March and
November, when RTS are predicted to take hold.
Virginie O'Shea, senior analyst, Aite Group, added that when
the rules do take hold, the concern is the massive price
differential between cleared and uncleared trades.
"Any trades happening in that period would have to be subject
to clearing and at the moment to try and mitigate those issues
they are saying we will have a threshold for the size of the
trades which need to be cleared, but they haven’t
said what the threshold will be," she said.
"So that has got a lot of people worrying. There are a massive
number of legal, financial and operational risks that firms
will be facing if they are bringing this frontloading in."
There is also concern surrounding whether the European
Commission will take the recommendation from Esma.
In September last year, FOW reported that the Commission
rejected Esma’s appeal to push back the trade
reporting deadline, which was due to take hold this
This meant that when reporting rules came into force in
February this year, many participants were not ready for the
If the same stance was taken over frontloading, participants
will be facing the clearing requirements sooner than