[ESMA70-156-6473 ] Public statement on the derivative trading obligation in the context of the migration of credit default swap contracts out of ICE Clear Europe

The European Securities and Markets Authority (ESMA) has issued a public statement on the derivative trading obligation (DTO) in the context of the migration of credit default swap (CDS) contracts out of ICE Clear Europe (ICEU).
This statement aims to support the orderly migration of positions from ICE Clear Europe to other central counterparties (CCPs) following the announcement of the closure of ICE Clear Europe’s credit default swap clearing service on 27 October 2023.
The migration would require market participants to move their positions at ICE Clear Europe to other CCPs clearing those contracts. However, some CDS contracts are subject to the DTO, which means executing replacement trades on trading venues could expose stakeholders to operational and execution risks, creating an obstacle to an orderly migration.
ESMA recognizes the concerns and the potential risks associated with applying the DTO to replacement trades. The enforcement of the DTO for these trades could lead to a disorderly migration and introduce market, execution, and operational risks, as well as replacement cost risks to participants. ESMA notes that these trades are non-price forming, administrative in nature, and their sole objective is to move risk from one CCP to another.
Therefore, to support the orderly migration of positions and mitigate the materialization of the abovementioned risks, ESMA expects national competent authorities not to prioritize their supervisory actions in relation to the DTO for transactions in certain index credit default swaps. In addition, national competent authorities should generally apply their risk-based supervisory powers in a proportionate manner to enforce applicable legislation in this area.
Considering that migrating positions has a global dimension, both in terms of CCPs as well as clearing members and clients involved, stakeholders have reached out to the UK Financial Conduct Authority (FCA) and the US Commodity Futures Trading Commission (CFTC) with similar requests. ESMA has closely coordinated its approach with both authorities to support the orderly migration of positions.