Since June 2016, mandatory clearing of OTC derivatives imposed by EMIR has gradually increased for a large proportion of financial counterparties. It will become a reality for Class 4 counterparties on 21st December 2018 and Class 3 counterparties on 21st June 2019, two years after the date initially set.
The obligation to clear OTC derivatives (interest rate swaps - IRS and Credit Default Swaps - CDS) via a clearing house is applicable since 21st June 2016 to category 1 financial counterparties (clearing members) and since 21st December 2016 to category 2 financial counterparties (counterparties and hedge funds with an OTC derivatives portfolio exceeding €8bn). It will apply to non-financial counterparties from 21st December 2018.
As for category 3 players (financial counterparties and hedge funds with a portfolio of less than €8bn), the obligation was deferred for 2 years and will come into force on 21st June 2019.
The issue is important because many OTC derivatives participants do not necessarily deal with listed derivatives transactions and are therefore not familiar with the clearing process. They must therefore review their transactional and operational models (systematic exchange of collateral, management of margin calls, etc.).
For stakeholders already active in listed derivatives, the process is certainly known, but EMIR's operational and legal impacts remain significant. The deadline is approaching and as a result, there is little time left for the parties concerned to appoint a clearing agent.
CACEIS has been offering a clearing service on IRS OTCs since December 2016. “This offer is part of the continuity of its clearing service for listed derivatives and has the objective and advantage of reducing the operational burden on its clients by offering an integrated "clearing to custody" model. Indeed, flow management is fully automated once the transaction is confirmed in the Markit electronic platform;” adds Florence Besnier.
CACEIS’s model offers both flexibility and security for its clients. The group does not provide an execution service for interest rate swaps, offering only a clearing service, and thus leaving clients free to execute transactions with the counterparties of their choice.
An additional benefit of engaging CACEIS is that as an asset servicer, whose main activity is geared towards services to institutional clients, the group has a limited risk profile. Today, CACEIS is a player that offers one of the highest levels of security in the industry.
As regards collateral management, CACEIS provides clients with a more flexible policy than the CCP, by offering a wider range of eligible securities to cover Initial Margin Requirements (IMR), comprising not only government bonds but also corporate bonds as well as equities.
Clients opting to use CACEIS for clearing both listed and OTC derivatives benefit from a single onboarding process, a single cash and securities account, a single contact point and integrated reporting for both activities.
Our teams are available to provide further information about our clearing services.