EUROPE – The European Securities and Markets Authority (ESMA) has launched a consultation on the "best candidates" of over-the-counter (OTC) derivatives to be covered by incoming European clearing obligations (COs).

Releasing a consultation on the scope of COs under the European Market Infrastructure Regulation (EMIR), the regulator outlined some of the definitions it would apply to areas of the derivatives market, including index credit default swaps (CDS), single-name CDS and interest rate derivatives.

ESMA chairman Steven Maijoor said the consultation, open to responses until mid-September, was the "first important step" in clearly establishing rules on which trades would have to be cleared by central counterparties (CCPs) and trade repositories.

Insisting this would "reduce the risks associated" with the market, he added: "Having these trades centrally cleared and ultimately making post-trade data available to investors will increase the robustness, transparency and stability of the financial system."

The discussion paper appeared to recognise the challenge ESMA faced in drafting regulatory technical standards (RTS) at a pace that would be viable for the market.

Mentioning the potential obstacles to imposing clearing obligations for Index CDS, the paper said: "Given that a new series is created every six months, which is less than the time needed for a new RTS on the CO according to the standard process […], it would not be possible to develop a new RTS every time a new series is launched."

The regulator instead suggested it could include all series from a certain point onwards in the clearing obligations, add new series automatically, as well as remove older series, or draft standards that cover a limited number of series in advance.

However, ESMA viewed interest rate derivatives as easier to classify due to their "relatively standardised and homogeneous" characteristics, if it focused on the "economic result" a participant sought when employing such derivatives.

It added that interest rate derivatives could be "appropriately defined by one primary key", namely the type of product.

It went on to question respondents if the proposed definition "adequately captured" the essence of the derivative, or whether it overlooked information relevant to assessing a trade's clearing obligation.

It further asked whether respondents had any views on which derivatives would be the "best candidates" to come under clearing obligations, considering ESMA's role in reducing the derivative market's risk profile.

The paper also sought to define equity, foreign exchange and commodity derivatives, asking respondents to answer nearly 20 questions on its approach.