On August 16, 2012, the European Market Infrastructure Regulation (“EMIR”) came into force, defining the obligations of in-scope entities, amongst other things, to (1) centrally clear certain over the counter derivatives trades and (2) exchange collateral in respect of any trades that are considered unsuitable for clearing. Recitals 16 and 23 of EMIR, however, specify that European legislators recognise these requirements could potentially have a damaging effect on the functioning of the covered bond market. In particular, Recital 16 states that when preparing its technical rules on the applicability of the clearing obligation to particular classes of derivatives, the European Securities and Markets Authority (“ESMA”) should account for “the specific nature of OTC derivative contracts which are concluded with covered bond issuers or with cover pools for covered bonds”. As highlighted in a July 2013 discussion paper1 relating to the clearing obligation (the “Discussion Paper”), ESMA sees this, not as a requirement to provide a blanket exemption from centrally clearing all covered bond swaps but rather to take into consideration the specific nature of the aforementioned contracts.

Two years after EMIR came into force and, partly as a consequence of a rather lengthy authorisation process for Central Clearing Counterparties (“CCPs”), ESMA is only now beginning to define and clarify which trades it believes should be subject to the clearing obligation. On July 11, 2014, ESMA published two consultation papers2, each setting out its views and requesting market feedback, in respect of preparing regulatory technical standards (“RTS”) governing these issues in the context of (1) interest rate and (2) credit derivatives (the “Consultations”). Similar consultations in respect of other classes of derivatives are likely to be published in the future.