EU regulation of indirect clearing of derivatives
EU regulation of indirect clearing of derivatives

The following Financial Services guidance note provides comprehensive and up to date legal information covering:

  • EU regulation of indirect clearing of derivatives
  • What is clearing of derivatives?
  • What is indirect clearing of derivatives?
  • EU regulatory framework
  • Indirect clearing RTS under EMIR and MiFIR
  • Leverage ratio—CRR and PRA Rulebook
  • The Companies Act 1989 (Financial Markets and Insolvency) (Amendment) Regulations 2017
  • Documenting indirect clearing arrangements

BREXIT: The UK is leaving the EU on Exit Day (as defined in the European Union (Withdrawal) Act 2018). This has an impact on this Practice Note. For guidance, see Practice Note: Brexit—impact on finance transactions—Key issues for derivatives transactions and Brexit—impact on finance transactions—Derivatives and debt capital markets transactions—key SIs.

What is clearing of derivatives?

Clearing is a process which eliminates the normal risk that a party to a derivatives transaction will default (counterparty risk).

The main parties involved in the clearing process are:

  1. a financial institution known as a clearing house, and

  2. other financial institutions, usually banks or brokers, which enter into a clearing agreement with the clearing house—these institutions are known as clearing members of the clearing house or simply clearing firms

In cleared transactions:

  1. all transactions are entered into by clearing members, which may do this for their own accounts or for the accounts of their clients, and

  2. the clearing house interposes itself between the clearing members who have entered into the transaction, becoming a party to every transaction—each party therefore is exposed to the risk of the clearing house but not to the risk of the other party

Clearing members do not need to be concerned with the identity or credit quality of their clearing member counterparties, but only with the credit quality