On June 7, 2016, the European Commission (EC) announced that it extended the transition period for recognition of central clearing counterparties (CCPs) by the European Securities Markets Association (ESMA) until December 15, 2016. This extension allows US CCPs registered with the CFTC (which clear derivatives) or the SEC (which clear security-based swaps) an additional six months to gain recognition by the ESMA.

During the transition period, CCPs that clear OTC derivatives for institutions established in the European Union may continue to do so as if they were recognized CCPs. Mandatory clearing under EMIR begins June 21, 2016, and the extended transition period means that CCPs that have not yet been officially recognized by ESMA may continue their clearing activities without incurring additional capital costs for their clearing members (see Practice Note, EMIR: requirement to clear OTC derivative contracts through a CCP).

ESMA previously established a memorandum of understanding (MOU) with the CFTC, which recognized the equivalence of the CFTC regulatory regime for CCPs and allowed CFTC-registered CCPs to seek recognition in the EU (see Legal Update, CFTC and ESMA Enter into MOU on Clearinghouse Equivalence).

The EC extended the transition period because it became clear that certain entities would not meet the previous deadline of June 15, 2016, including two CCPs established in the European Union currently awaiting authorization and additional CCPs registered in the United States awaiting recognition. Without the extension, disruption of the markets and clearing in international markets may have occurred due to increased capital requirements.