Regulation (EU) No 648/2012 of the European Parliament and of the CouncilShow full title

Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (Text with EEA relevance)

Article 4U.K.Clearing obligation

1.Counterparties shall clear all OTC derivative contracts pertaining to a class of OTC derivatives that has been declared subject to the clearing obligation in accordance with Article 5(2), if those contracts fulfil both of the following conditions:

(a)they have been concluded in one of the following ways:

(i)

[F1between two financial counterparties that [F2are subject to the conditions] set out in the second subparagraph of Article 4a(1);

(ii)

between a financial counterparty that [F3is subject to the conditions] set out in the second subparagraph of Article 4a(1) and a non-financial counterparty that [F3is subject to the conditions] set out in the second subparagraph of Article 10(1);

(iii)

between two non-financial counterparties that [F4are subject to the conditions] set out in the second subparagraph of Article 10(1);

(iv)

between, on the one side, a financial counterparty that [F5is subject to the conditions] set out in the second subparagraph of Article 4a(1) or a non-financial counterparty that [F5is subject to the conditions] set out in the second subparagraph of Article 10(1), and, on the other side, an entity established in a third country that would be subject to the clearing obligation if it were established in the [F6United Kingdom];]

(v)

between two entities established in one or more third countries that would be subject to the clearing obligation if they were established in the [F7United Kingdom], provided that the contract has a direct, substantial and foreseeable effect within the [F7United Kingdom] or where such an obligation is necessary or appropriate to prevent the evasion of any provisions of this Regulation; and

[F1(b) they are entered into or novated on or after the date on which the clearing obligation takes effect, provided that, on the date they are entered into or novated, both counterparties meet the conditions set out in point (a).]

2.Without prejudice to risk-mitigation techniques under Article 11, OTC derivative contracts that are intragroup transactions as described in Article 3 shall not be subject to the clearing obligation.

The exemption set out in the first subparagraph shall apply only:

(a)where two counterparties established in the [F8United Kingdom] belonging to the same group have first notified [F9the FCA] in writing that they intend to make use of the exemption for the OTC derivative contracts concluded between each other. The notification shall be made not less than 30 calendar days before the use of the exemption. Within 30 calendar days after receipt of that notification, [F10the FCA] may object to the use of this exemption if the transactions between the counterparties do not meet the conditions laid down in Article 3, without prejudice to the right of [F10the FCA] to object after that period of 30 calendar days has expired where those conditions are no longer met. F11... ;

(b)to OTC derivative contracts between two counterparties belonging to the same group which are established in [F12the United Kingdom] and in a third country, where the counterparty established in the [F13United Kingdom] has been authorised to apply the exemption by [F14the FCA] within 30 calendar days after it has been notified by the counterparty established in the [F13United Kingdom], provided that the conditions laid down in Article 3 are met. F15...

3.The OTC derivative contracts that are subject to the clearing obligation pursuant to paragraph 1 shall be cleared in a CCP authorised under Article 14 or recognised under Article 25 to clear that class of OTC derivatives and listed in the register in accordance with Article 6(2)(b).

For that purpose a counterparty shall become a clearing member, a client, or shall establish indirect clearing arrangements with a clearing member, provided that those arrangements do not increase counterparty risk and ensure that the assets and positions of the counterparty benefit from protection with equivalent effect to that referred to in Articles 39 and 48.

[F163A.Clearing members and clients which provide clearing services, whether directly or indirectly, must—

(a)provide those services under fair, reasonable, non-discriminatory and transparent commercial terms, and

(b)take all reasonable measures to identify, prevent, manage and monitor conflicts of interest, in particular between the trading unit and the clearing unit, that may adversely affect the fair, reasonable, non-discriminatory and transparent provision of clearing services.

3B.The duty under paragraph 3A(a)—

(a)does not oblige clearing members or clients to contract, and

(b)does not prevent clearing members or clients from taking steps to control the risks related to the clearing services offered.

3C.The duty to take the measures described in paragraph 3A(b) includes a duty to do so where trading and clearing services are provided by different legal entities belonging to the same group.

3D.The duties under paragraph 3A (read with paragraphs 3B and 3C) apply in relation to an undertaking with an indirect contractual arrangement with a clearing member of a CCP which enables that undertaking to clear its transactions with a CCP as they apply in relation to a client.]

[F174.The FCA may make technical standards specifying the contracts that are considered to have a direct, substantial and foreseeable effect within the United Kingdom or the cases where it is necessary or appropriate to prevent the evasion of any provision of this Regulation as referred to in paragraph 1(a)(v).

The Bank of England may make technical standards in relation to CCPs specifying the types of indirect contractual arrangements that meet the conditions referred to in the second sub-paragraph of paragraph 3.

The FCA may make technical standards for cases other than CCPs specifying the types of indirect contractual arrangements that meet—

(a)the conditions referred to in the second sub-paragraph of paragraph 3; and

(b)conditions for reasonable and transparent commercial terms.]

[F184A.The FCA may make rules specifying the conditions under which the commercial terms referred to in paragraph 3A(a) are to be considered fair, reasonable, non-discriminatory and transparent.]

[F195. Paragraph 1 of this Article shall not apply with respect to OTC derivative contracts that are concluded by covered bond entities in connection with a covered bond, or by a securitisation special purpose entity in connection with a securitisation, [F20as defined in regulation 3(1) of the Securitisation Regulations 2024] provided that:

(a) in the case of securitisation special purpose entities, the securitisation special purpose entity shall solely issue securitisations [F21of one or more of the following kinds—

(i)an STS securitisation as defined in regulation 9 of the Securitisation Regulations 2024,

(ii)an overseas STS securitisation as defined in regulation 12(2) of those Regulations;

(iii)a qualifying EU securitisation as defined in regulation 12(3) of those Regulations.]

(b) the OTC derivative contract is used only to hedge interest rate or currency mismatches under the covered bond or securitisation; and

(c) the arrangements under the covered bond or securitisation adequately mitigate counterparty credit risk with respect to the OTC derivative contracts concluded by the covered bond entity or securitisation special purpose entity in connection with the covered bond or securitisation.

F225A.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6. In order to ensure consistent application of this Article, and taking into account the need to prevent regulatory arbitrage, the [F23FCA may make] technical standards specifying criteria for establishing which arrangements under covered bonds or securitisations adequately mitigate counterparty credit risk, within the meaning of paragraph 5.

F24...]

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