Take On Me: OTC Derivatives Client Clearing in the European Union

Abstract

This paper focuses on the EU regime for client clearing, including recent amendments to this regime introduced by 2019 regulatory reforms. It begins by providing the legal and regulatory context to clearing using central counterparties and the authorities’ interest in promoting it in the post-crisis regulatory reforms. It then explains the significance of client clearing for those many entities unable or unwilling to become a member of a central counterparty. Focusing on the EU regulatory regime, and informed by recent empirical work undertaken for the Financial Stability Board, the paper proceeds by exploring the use of client clearing in practice and, in particular, engages with the complexities of these arrangements and the difficulty in accessing clearing reported by some entities. Informed by those fundamental aspects of the clearing regime, the paper then evaluates recent measures intended to promote client clearing which were introduced in 2019 in the course of the so-called ‘EMIR Refit’. It looks in detail at the so-called ‘FRANDT’ requirement, namely that financial intermediaries providing access to clearing services do so on ‘fair, reasonable, non-discriminatory and transparent commercial terms’. By way of contribution to the ongoing policy debates, the paper exposes the difficulty in meeting the desired policy objectives using current means, but also suggests ways in which this area of financial markets regulation may be revised.

Keywords: CCP, central clearing, clearing mandate, client clearing, FRANDT, OTC derivatives