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OTC derivatives, central counterparties and trade repositories

OTC derivatives are generally negotiated privately. The information concerning them is consequently only available to the contracting parties, which can make it difficult to identify the nature and level of risks involved. To overcome these shortcomings, this Regulation aims to lay down provisions regarding OTC derivative contracts, central counterparties and trade repositories.

ACT

Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (Text with EEA relevance).

SUMMARY

This Regulation aims to cover certain derivatives such as OTC derivative contracts *, through the introduction of mandatory clearing * and bilateral risk management. It also covers mandatory reporting of derivative contracts, as well as uniform requirements concerning the performance of activities of CCPs * and trade repositories *.

The Regulation applies to:

This Regulation does not apply to:

OTC derivates: risk management

OTC derivative contracts are subject to mandatory clearing by a CCP. Once concluded, the authorisation must be reported to the European Securities and Markets Authority (ESMA).

In order to avoid systemic risk, certain criteria must also be taken into account, such as:

  • the degree of standardisation of the contractual terms;
  • the volume and liquidity of the relevant class of OTC derivatives;
  • the availability of fair, reliable and accepted pricing information.

ESMA is responsible for maintaining a public register and updating the classes of OTC derivatives and the authorised CCPs, as well as the duration of derivative contracts.

The trading venue must provide data on transactions to any CCP upon request by the CCP.

Financial counterparties and non-financial counterparties must measure, monitor and mitigate operational risk and counterparty credit risk using robust formalised procedures.

CCPs: requirements and monitoring

CCPs are subject to the following requirements:

  • authorisation: in order to provide clearing services, a CCP must obtain authorisation from the competent authority in the Member State where it is established. It has the option to extend its activities to other services and has initial capital of EUR 7.5 million.
  • third countries: A CCP established in a third country may provide clearing services to trading venues in the EU only where that CCP is recognised by ESMA.
  • organisation: a CCP is required to establish a risk committee composed of representatives, its clearing members, independent members of the board and representatives of its clients. This committee is responsible for advising the board on any arrangements that may impact the risk management of the CCP.
  • record keeping: a CCP must keep all information on all the contracts it has processed for at least ten years.
  • measure and assessment: a CCP can measure and assess its liquidity and credit exposures to each clearing member and, where relevant, to another CCP with which it has concluded an interoperability arrangement, on a near to real-time basis.
  • margins, losses and default funds: a CCP shall impose, call and collect margins to limit its credit exposures from its clearing members. The margins must be sufficient to cover losses that result from at least 99 % of the exposures movements over an appropriate time horizon. A pre-funded default fund must be established to cover losses that exceed this threshold.

Interoperability arrangements

Following prior authorisation by the competent authorities, the CCPs which conclude an interoperability arrangement must:

  • identify, monitor and manage the risks arising from the arrangement;
  • agree on their respective rights and obligations;
  • identify, monitor and manage credit and liquidity;
  • identify, monitor and manage the interdependencies resulting from the arrangement.

Trade repositories

Trade repositories are granted the status of a legal person established in the EU and are required to register with ESMA. They must have robust governance arrangements and a clear organisational structure with well defined lines of responsibility.

Key terms of the Act
  • OTC derivative contracts derivative contract the execution of which does not take place on a regulated market.
  • Clearing: the process of establishing positions, including the calculation of net obligations, and ensuring that financial instruments, cash, or both, are available to secure the exposures arising from those positions.
  • CCP: a legal person that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer.
  • Trade repository: a legal person that centrally collects and maintains the records of derivatives.

REFERENCE

ACTEntry into forceDeadline for transpositionOfficial Journal

Regulation (EU) No. 648/2012

16.8.2012

-

OJ L 201 of 27.7.2012

This summary is for information only. It is not designed to interpret or replace the reference document, which remains the only binding legal text.

Last updated: 04.01.2012

See also

  • Directorate-General for the Internal Market and Services - Derivatives
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