Europe passes rules mandating central clearing for OTC derivatives

Europe passes rules mandating central clearing for OTC derivatives

The European Commission has finally green-lighted new rules that make it mandatory for certain over-the-counter (OTC) interest rate derivative contracts to be cleared through central counterparties.

Phased in over three years, the clearing obligations apply to interest rate swaps denominated in euro, pounds sterling, Japanese yen or US dollars.

Interest rate contracts account for around 80% of all global derivatives issued over-the-counter. The estimated daily turnover in the EU of OTC interest rate derivative contracts denominated in G4 currencies was over €1.5 trillion as of April 2013.

The move to mandatory clearing was first mooted at the G-20 Pittsburgh Summit in 2009, but has since been stalled by a series of compromises and wrangling over the rule-making process.

Jonathan Hill, EU Commissioner for financial stability, financial services and capital markets union, says: "Today we take a significant step to implement our G20 commitments, strengthen financial stability and boost market confidence. This is also part of our move towards markets that are fair, open and transparent."

Attention will now switch to addressing the systemic importance of CCPs within the financial system, and the consequences if a CCP were to fail. The Commission's 2015 Work Programme includes a commitment to legislate for a European framework for the recovery and resolution of CCPs.

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