Central clearing of OTC derivatives in the EU

This paper aims to determine the general rules and particularities of central clearing of OTC derivative contracts in the EU.

The reform of OTC derivatives market has become a regulatory response to the Global financial crisis which has negatively affected the major economies of the West. According to the G20 obligations, one of the methods applied to eliminate consequences of the crisis and to prevent the same situations on financial markets was introduction of obligatory central clearing of OTC derivatives transactions. This obligation was implemented into the ‘EMIR’ Regulation № 648/2012/EU, and was afterwards developed in delegated regulations and regulatory technical standards in the EU.

Central clearing was invented in XIX century, but it hasn’t been widely used until end XX century. Central clearing is applied for risk mitigation in financial transactions. There are various models of central clearing. The most popular of them are novation, non-defined legal construction and agency model. Central counterparties, clearing members and their clients are empowered to render clearing services in the EU.

According to the new regulation, all OTC derivatives market participants are divided into financial and non-financial counterparties. Level of the activity determines whether a non-financial counterparty has to centrally clear OTC derivatives contracts.

European Securities and Markets Authority (ESMA) carries out supervision of central counterparties, as well as establishes financial and administrative requirements for them. The paper examines supranational aspects of OTC derivatives clearing, as well as practical issues depicted by examples of major EU central counterparties.