Classes of OTC Derivatives Subject to the Clearing Obligation

In the aftermath of the 2008 financial crisis, global regulators introduced many measures to reduce counterparty risk in OTC derivatives trading. Clearing obligations are enforced under the European Market Infrastructure Regulation (EMIR) in Europe, the Commodity Futures Trading Commission (CFTC) regulations in the US under the Dodd-Frank Act, the Australian Securities and Investments Commission (ASIC) rules in Australia and the Financial Market Infrastructure Act (FinfraG) in Switzerland.

Clearing Obligations for OTC Derivatives

The clearing obligation under these main regulatory regimes means that OTC derivatives trades must be cleared through a central counterparty or a central counterparty clearing house (CCP). Each regime has certain unique requirements in the way they mandate these obligation.

European Market Infrastructure Regulation (EMIR)

Under EMIR, specific OTC derivatives must be cleared through authorised CCPs to reduce systemic risk. The clearing obligation applies to:

• • • Interest Rate Derivatives: Standardised interest rate Swaps (IRS), overnight index swaps (OIS) and forward rate agreements (FRAs) denominated in major currencies
    • Credit Default Swaps: Certain index-based contracts, including those that reference European corporate entities

EMIR’s clearing obligations apply to financial counterparties (FCs) such as banks and investment firms, as well as non-financial counterparties (NFCs) that exceed the clearing threshold (NFC+). Trades that are not subject to central clearing must adhere to risk mitigation requirements, including margining for certain counterparties.

Commodity Futures Trading Commission (CFTC)

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC mandates that specific classes of OTC derivatives be cleared through Derivatives Clearing Organisations (DCOs). This clearing obligation applies to:

• • • Interest Rate Swaps (IRS): Including fixed-to-floating swaps, basis swaps, forward rate agreements and overnight index swaps in major currencies such as USD, EUR and GBP
    • Credit Default Swaps (CDS): This relates specifically to certain index-based CDS contracts, particularly those referencing North American corporate entities

These requirements apply to transactions involving US Persons, entities with US guarantees, US conduits and foreign branches of US entities. In addition to the clearing obligation, certain swap contracts must be executed on a Swap Execution Facility (SEF), ensuring greater market transparency.

Australian Securities and Investments Commission (ASIC)

Under the rules of ASIC, specific classes of derivatives are mandated for central clearing through authorised central counterparties to mitigate systemic risk. The clearing obligation applies to:

• • • Interest Rate Derivatives: Including standardised interest rate swaps (IRS) in major currencies such as AUD, USD, EUR and GBP

These requirements primarily target transactions between financial institutions that exceed certain thresholds and the overall goal of these obligations is to ensure market stability.

Financial Market Infrastructure Act (FinfraG)

Under FinfraG, certain OTC derivatives are mandated for central clearing through authorised CCPs to enhance financial stability. The clearing obligation applies to:

• • • Interest Rate Derivatives: Standardised IRS including fixed-to-floating swaps, basis swaps, FRAs and OIS across major currencies such as EUR, GBP and USD
    • Credit Default Swaps (CDS): In particular, index CDS referencing European corporate entities such as the iTraxx Europe Main and iTraxx Europe Crossover indices

These requirements primarily apply to Large financial counterparties (FC+), and certain large NFCs (NFC+) and aim to mitigate systemic risk. Small financial counterparties (SFCs) and small non-financial counterparties (SNFCs) are generally exempt from clearing obligations.

Understanding the clearing obligations in different jurisdictions and the nuances of EMIR, CFTC, ASIC and FinfraG is essential for avoiding penalties for non-compliance. Navigating the complexities of multi-jurisdictional reporting can be challenging.