The European Securities and Markets Authority (ESMA) recently drew attention to concerns about clearing access for smaller derivatives users. In a July 2016 consultation paper, it notes that “certain financial counterparties with a limited volume of activity appear to be facing difficulties in getting access to … clearing”. In response, ESMA has proposed more time for these entities to implement the clearing mandate.

The issue of clearing access for smaller derivatives users in the US has also been raised as a concern. To further examine these issues, ISDA conducted an analysis of publicly available data on clearing. The Association also surveyed and held discussions with small derivatives users in both the US and European Union (EU).

Among our findings:

• Over the past 18 months, there have been significant changes in the market share and the level of required client segregated funds for cleared swaps held by the top US futures commission merchants (FCMs). These changes likely reflect FCM business model shifts due to the impact of new capital requirements, as well as rising operational costs.
• As a result, some derivatives users have faced dislocation from their existing FCMs, and have needed to establish new FCM relationships in order to continue using swaps that are mandated for clearing.
• While it appears they have largely been successful in doing so, their costs are increasing, as FCMs impose minimum revenue thresholds for their swaps clearing clients.
• Monthly mandatory minimum clearing fees or minimum revenue thresholds appear to be standard among larger clearing members in the EU and are increasingly common in the US.
• In Europe, where there is no exemption from clearing for small financial end users (as there is in the US), these fees will be especially significant. ISDA’s analysis indicates the fees will range from $100,000 to $280,000 per year.
• It is difficult to precisely determine the total clearing costs that will be incurred in aggregate by small derivatives users based in the EU. ESMA estimates there are approximately 5,500 Category 3 financial counterparties. But a number of these are likely to be individual accounts managed by large asset managers that would not be subject to monthly minimums.