At a Glance: Derivative Clearing, Exchange Trading and Collateral in France

Types of operations

Clearing Transactions

What categories of equity derivative transactions should be centrally cleared and what rules govern the clearing?

The clearing obligation under Regulation (EU) 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR) requires that all relevant OTC derivative contracts are subject to mandatory clearing and must be cleared with a central counterparty (CCP) approved under EMIR (or which is recognized under EMIR for central counterparties outside the EU). Currently, EMIR does not require the clearing of equity derivatives. The specific categories of products that fall within the scope of the mandatory clearing obligation under EMIR are set out in the Annex to the EMIR Delegated Regulation and cover standardized and liquid products (including certain interest rate swaps interest and credit default swaps). While it is expected that equity derivatives will become clearable in the future, the equity derivatives market is already primarily exchange-based. As a result, equity derivatives that remain traded over-the-counter are typically bespoke products and therefore unlikely to easily meet standardization and liquidity requirements for clearable products under EMIR. .

stock market trading

What categories of equity derivatives should be traded on an exchange and what rules govern trading?

There is no legal requirement for any class of equity derivatives to be traded on an exchange, although the types of OTC derivatives that are traded on an exchange are generally stock options and futures. Regulation (EU) No 600/2014 of 15 May 2014 on markets in financial instruments (MiFIR) introduced a mandatory trading obligation for certain types of derivatives (Article 28 of MiFIR). It obliges financial counterparties (FC) and non-financial counterparties above the clearing threshold (NFC+) to enter into derivatives within the scope of application on a trading venue (a regulated market, a multilateral trading system or an organized trading facility) or an equivalent third country trading venue when trading with other FCs or NFC+. This trading obligation applies to any category (or sub-category) of derivatives which has been declared subject to the EMIR clearing obligation, is admitted to trading or traded on at least one trading venue (the test of the platform), is considered sufficiently liquid to be traded only on-site, taking into account the average frequency of transactions, the average size of transactions, the number and type of active participants in the market and the size average of the spreads (the liquidity test), and has been declared by ESMA as subject to the commercial obligation. However, at present, this trading requirement only applies to certain categories of interest rate swaps and credit default swaps and does not apply to equity derivatives.

Guarantee agreements

Describe common collateral arrangements for listed, cleared and uncleared equity derivative transactions.

For uncleared equity derivative transactions, counterparties will typically document their collateral arrangements providing for the exchange of periodic variation margin as a transfer of title under an ISDA collateral support schedule. or French) of the ISDA Framework Agreement or equivalent local collateral annex under the French Banking Federation (FBF) Derivatives Framework Documentation. In this context, EMIR imposes risk reduction and transparency obligations on all EU companies (including, but not limited to, brokers and firms) that enter into derivatives transactions (including equity derivative transactions). In particular, EMIR is considering risk mitigation techniques for OTC derivative transactions not cleared by a central counterparty that include the timely exchange of collateral and periodic compression requirements.

For cleared equity derivative transactions, counterparties will typically document their netting relationship under a principal-to-principal netting model with a clearing broker acting as a risk-free counterparty (such as between the counterparty and the central counterparty ) under the ISDA/FAO Client Cleared OTC Derivatives Addendum (English law), which operates as an addendum to the ISDA Master Agreement (with corresponding adaptations of French law for the FBF Master Agreement). In addition, counterparties subject to clearing requirements under EMIR will also need to put in place specific initial margin arrangements to guard against margin risk period, i.e. the risk that it insufficient collateral deposited as variation margin (initial margin requirements are currently in the final stages of their phasing depending on the nature of the counterparty).

For transactions in listed equity derivatives, collateralisation requirements will be determined by the relevant clearing house.

Warranty exchange

Do counterparties have to exchange collateral for certain categories of equity derivative transactions?

The collateralisation rules for derivative transactions under EMIR are not specific to equity derivative transactions. EMIR requires the exchange of variation margin between financial counterparties (credit institutions, insurance companies, undertakings for collective investment in transferable securities, managers of alternative investment funds, etc.) and between financial counterparties and non-financial counterparties, depending on whether or not they are above the clearing threshold although individual stock options and index options remain out of scope for a transitional period (while this transitional period officially ended on January 4, 2020 , it was later extended until January 4, 2024). Currently, transactions in equity derivatives are also not subject to netting.

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