Thousands of firms across Europe face being shut out of clearing markets because of high minimum commissions, a report has warned.

A report by ISDA into the impact of the Esma clearing mandate has found that smaller financial end users of swaps in the European Union are facing annual fees of between $100,000 and $280,000 to clear their positions.

The fees relate to the minimum charges clearing providers are imposing on clients, which stem from the high capital allocation that the Basel III leverage ratio imposes on banks providing clearing for OTC derivatives. 

In the US, smaller financial end users with assets of less than $10bn are exempt from the Dodd-Frank clearing mandate meaning that only 120 of the 14,700 such financial institutions are required to clear.

However, there is no such exemption in the European Union where up to 5,521 firms could be caught under the mandate according to Esma estimates.

ISDA found that transaction fees for a $100m cleared trade range from between $5,750 to $11,500 meaning that firms would be required to trade $100m notional roughly twice a month in order to meet the minimum fee requirements.

The rules also risk increasing concentration risk with firms reporting to ISDA that they were unable to secure agreements with back-up clearing firms and the provision of clearing services is restricted to the largest banks.

In July, Esma published a consultation paper on proposals to delay clearing for smaller financial end users by two years.

However, it is clear that unless the Basel III requirements are changed, there will be no solution to the challenge facing these firms in meeting the clearing mandate. 

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