United States: ISDA And FIA Voice Support For ESMA Proposal To Extend Temporary Intragroup Exemption

ISDA and FIA expressed support for extending the derogation from the clearing obligation for certain intragroup transactions with respect to third-country entities. In a joint response to the European Securities and Markets Authority ("ESMA") July 2018 consultation paper (the "Consultation") on whether to extend such intragroup exemption until December 21, 2020, ISDA and FIA asserted that if such derogation from clearing was not extended, the ability of European derivative market participants to function on a cross-border basis would be substantially and negatively affected.

Currently, European Market Infrastructure Regulation excludes certain intragroup transactions from the clearing obligation. Where the intragroup transaction is between an EU entity and a third-country entity, the intragroup exemption cannot apply until an "equivalence" decision has been made in respect of that third country. The European Commission ("EC") published three delegated regulations on the clearing obligation in the absence of the relevant equivalence decision. The regulations contain a deferred date for intragroup transactions satisfying certain conditions and where one of the counterparties is in a third country.

In response to the Consultation, ISDA and FIA explained that international financial groups operate through a network of subsidiaries and branches, both within the EU and across third countries. ISDA and FIA stated that (i) international financial groups need to be able to centrally manage the risk associated with cross-border trading and (ii) the ability of EU investment firms to carry out intragroup transactions without being required to clear those transactions allows EU financial markets to remain competitive. Were this not the case, ISDA and FIA claimed that the collateral cost to EU investment firms could make central risk management models prohibitively costly, and impede investment firms' ability to operate in international derivative markets.

ISDA and FIA suggested that the EC should consider extending this proposed two-year exemption by one year on a rolling basis.

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