ESMA (the European Securities and Markets Authority) has published an Opinion calling for an amendment to the UCITS Directive to take into account the clearing obligations for certain types of over the counter derivatives transactions as outlined under EMIR (the European Market Infrastructure Regulation).
ESMA believes that the UCITS Directive should no longer distinguish between OTC financial derivative transactions and ETDs (exchange traded derivatives). Instead, the distinction should be between cleared and non-cleared OTC financial derivative transactions. For OTC financial derivative transactions that are not centrally cleared, ESMA is of the view that there is no need to modify the UCITS Directive and the current counterparty risk limits of Article 52 of the UCITS Directive should continue to apply.
“The clearing obligation under EMIR has a significant impact on the calculation of counterparty risk of cleared OTC financial derivative transactions by UCITS which cannot be appropriately resolved under the current UCITS Directive,” says Steven Maijoor, chairman of ESMA. “ESMA, therefore, invites the EU institutions to consider amending the UCITS Directive to make it more compatible with the clearing obligation under EMIR.”
ESMA’s opinion is that counterparty risk limits should be calibrated to the different types of segregation arrangements taking into account elements such as the portability of the position in the case of a default of the clearing member. In particular, ESMA believes that under individual segregation, UCITS should not apply counterparty risk limits to clearing members whereas under omnibus client segregation UCITS should apply some counterparty risk limits.
Moreover, ESMA believes that UCITS’ counterparty risk limits to EU CCPs (central counterparty clearing houses) and some non-EU CCPs recognised by ESMA should take into account the relatively low counterparty risk of these entities.