The European Securities and Markets Authority (ESMA) has finalised and issued a draft regulatory technical standard (RTS) for the central clearing of Credit Default Swaps (CDS).

ESMA is required to develop RTS which implement the European Market Infrastructure Regulation (EMIR). The draft RTS defines the types of CDS contracts which will have to be centrally cleared, the types of counterparties covered by the obligation and the dates by which central clearing of CDS will become mandatory.
 
This submission follows the first RTS on Interest Rate Derivatives developed by ESMA and adopted by the European Commission on 6 August 2015. The new rule on Index CDS mirrors the overall approach of the first RTS, in particular with regards to the categorisation of counterparties, the scope for frontloading and the treatment of intragroup transactions.
 
EMIR, with the overarching objective of reducing systemic risk, introduces the obligation to clear certain classes of OTC derivatives in central clearing houses (CCP) that have been authorised (European CCPs) or recognised (third-country CCPs) under its framework. Central clearing of OTC derivatives is part of the G20 commitments aimed at reducing risk in the global financial system and requires a process for the identification of classes of OTC derivatives that should be subject to mandatory clearing. ESMA’s assessment whether a class of OTC derivatives should be subject to central clearing is based on a number of criteria, including liquidity, price availability and standardisation.
 
CDS contracts are amongst the types of OTC derivatives that contributed to financial market instability during the 2008 financial crisis. The addition of some CDS classes to the clearing obligation is therefore an important step in reducing systemic risk.
 
The draft RTS adds two iTraxx Index CDS to the clearing obligation:
• Untranched iTraxx Index CDS (Main, EUR, 5Y) ; and
• Untranched iTraxx Index CDS (Crossover, EUR, 5Y).