The European Securities and Markets Authority (ESMA) has launched a consultation on the calculation of counterparty risk by Undertakings for Collective Investment in Transferable Securities (UCITS) which enter into OTC derivative transactions which need to be centrally cleared under the European Markets Infrastructure Regulation (EMIR).
The UCITS Directive allows UCITS to invest in both exchange-traded derivatives (ETDs) and OTC derivatives. However, only investments in OTC derivatives are subject to counterparty risk exposure limits.
The Discussion Paper is seeking stakeholders’ views on how the limits on counterparty risk in OTC derivative transactions that are centrally cleared should be calculated by UCITS, and whether the same rules should be applied by UCITS for both centrally cleared OTC transactions and ETDs.
The paper is focused on the impact of a default of a clearing member or of other clients of that member on UCITS that enter into centrally cleared OTC derivative transactions. This takes into account the fact that European clearing houses (CCPs) and non-EU CCPs recognised by ESMA are already subject to stringent collateral requirements, and should generally be considered as entailing low counterparty risk.
This discussion paper distinguishes between different clearing arrangements:
1. Direct clearing arrangements, i.e. the UCITS is a client of the clearing member with:
· Individual client segregation;
· Omnibus client segregation;
· Other types of segregation arrangement; or
· Segregation arrangements with a non-EU CCP outside the scope of EMIR.
2. Indirect clearing arrangements between the CCP, the clearing member, the client of the clearing member and the UCITS.
Next steps
The consultation is open for feedback until 22 October 2014. ESMA will use the feedback received from the public consultation to determine its final views on the appropriate way forward, including a possible recommendation to the European Commission on a modification of the UCITS Directive.