EUROPEAN UNION: European Commission Rules on Central Clearing for Interest Rate Derivatives

Thursday August 6 2015

The European Commission (EC) has adopted new rules that make it mandatory for certain over-the-counter (OTC) interest rate derivative contracts to be cleared through central counterparties. Mandatory central clearing is a vital part of the response to the financial crisis; it follows commitments made by world leaders at the G-20 Pittsburgh Summit in 2009, to improve transparency and mitigate risks.

The decision takes the form of a Delegated Regulation—the first such to implement the clearing obligation under the European Market Infrastructure Regulation (`EMIR`). It covers interest rate swaps denominated in euro, pounds sterling, Japanese yen or US dollars that have specific features, including the index used as a reference for the derivative, its maturity, and the notional type (i.e. the nominal or face amount that is used to calculate payments made on the derivative).

These contracts are:

• Fixed-to-float interest rate swaps (IRS), known as `plain vanilla` interest rate derivatives;
• Float-to-float swaps, known as `basis swaps`;
• Forward Rate Agreements;
• Overnight Index Swaps.

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