EMIR 3.0: Key Changes for Derivative End-Users

In recent developments, the European Parliament has officially approved EMIR 3.0, marking a significant step towards enhancing the safety and efficiency of central counterparties within the EU. This update aims to promote increased clearing activities within the EU while ensuring robust risk management practices.

Key aspects of EMIR 3.0 include the introduction of an active account requirement, adjustments to clearing thresholds for both financial and non-financial counterparties, exemptions for specific transactions, stringent reporting obligations, penalties for non-compliance, and heightened transparency measures for central counterparties. While the implementation timeline is set for later this year, certain provisions will only take effect following the issuance of technical standards by ESMA.

Notably, the UK's version of EMIR is subject to further review, potentially leading to divergence from the EU's framework. It's crucial for affected parties to stay abreast of these developments and proactively prepare for compliance with the forthcoming regulatory requirements.

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EMIR 3.0: What are the high level changes on the horizon for derivative end users in the EU?

The European Parliament has recently approved the final EMIR texts, known as “EMIR 3.0” that were agreed between the Council of the EU and the European Parliament in February and which int…

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EMIR 3.0: What are the high level changes on the horizon for derivative end users in the EU?

The European Parliament adopted the final texts of EMIR 3.0, which aims to increase safety and efficiency of EU central counterparties and encourage more clearing in the EU. The new regulation introduces an active account requirement, changes to clearing thresholds for financial and nonfinancial counterparties, exemptions for certain transactions, reporting requirements, penalties for non-compliance, and additional transparency measures for CCPs. The implementation period is expected to occur later in the year, with some provisions not taking effect until ESMA issues technical standards. UK EMIR will undergo further review, leading to potential divergence from EU EMIR. Counterparties should monitor developments and prepare for compliance with the new requirements.

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EMIR 3.0 Implementation

Stakeholders are keen to know when the European Market Infrastructure Regulation (EMIR) 3.0 will go into effect as it gets ready to be published in the EU Official Journal. This post discusses EMIR 3.0's anticipated implementation schedule and important points to remember for all parties involved.

EMIR 3.0 is anticipated to be published in the Official Journal of the EU within the current year. Following publication, it will come into effect 20 days thereafter, with the exception of the new clearing thresholds. However, certain provisions, such as the active account requirement and the new clearing thresholds, necessitate the formulation of regulatory technical standards by the European Securities and Markets Authority (ESMA). Consequently, the precise details concerning these provisions will only be clarified upon the enforcement of the relevant ESMA technical standards, which may extend into the year 2025.

Changes in EMIR 3.0 Clearing Threshold Calculations

Significant changes are now being made to the way clearing thresholds are calculated for financial counterparties (FCs) and non-financial counterparties (NFCs) in light of EMIR 3.0. The subtleties of these modifications and their effects on market players are explained in this section.

• Changes for Financial Counterparties (FCs): The changes pertain to Month-end average positions in uncleared OTC derivatives for the previous 12 months and aggregate month-end average positions in cleared and uncleared derivatives (aggregate threshold).

(If an FC surpasses the clearing thresholds, yet to be defined by ESMA in regulatory technical standards, or fails to perform these computations, it will become subject to the clearing obligation for all OTC derivative contracts across all asset classes within a span of 4 months.)

• Changes for Non-Financial Counterparties (NFCs): With some exclusions allowed under the hedging exemption, NFCs are required to review their uncleared positions in OTC derivative contracts once every twelve months. Notably, NFCs will now be able to take use of the hedging exemption on a group basis. Within a year of EMIR 3.0 going into effect, ESMA is supposed to create draft regulatory technical standards that define clearing criteria for NFCs' uncleared positions and assess the current hedging exemption.

• Timeline for Implementation: The EMIR 3.0 clearing threshold modifications won't go into effect until the related ESMA Regulatory Technical Standards (RTS) are put into effect.

EMIR 3.0: Understanding the Active Account Requirement

A crucial feature of EMIR 3.0 is the requirement for active accounts, which indicates a move away from Tier 2 central counterparties (CCPs) and toward more clearing activity in the EU derivatives market. The essential conditions for this new provision are covered in detail in this section.

Key Requirements for the New Active Account Requirement:

• Scope of application:
  • Interest rate futures denominated in euros.
  • Polish interest rate derivatives denominated in zlotys.
  • Short-term interest rate futures denominated in euros.

• Objective:
  • The main objective of the requirement for active accounts is to reduce reliance on Tier 2 CCPs.
  • It aims to strengthen clearing operations for specific derivatives deals on the EU market.

• Implementation Implications:
  • Organizations participating in the previously described derivative transactions are required to comply with the active account requirement as outlined in EMIR 3.0.
  • Maintaining an active account status in accordance with the specified criteria constitutes compliance, which in turn corresponds with the overall goals of the regulatory framework.

Entities Affected by the Active Account Requirement of EMIR 3.0

Both Financial Counterparties (FCs) and Non-Financial Counterparties over clearing levels (NFC+s) are covered by the active account requirement under EMIR 3.0. At least one operational, active account must be kept up to date by these organizations at a central counterparty (CCP) approved by the EU. In addition, depending on specific requirements and operational components, they would have to approve a specified number of transactions at these CCPs.

The representativeness obligation is one important feature. It requires FCs and NFC+s with a sizable notional clearing volume to clear a representative number of derivative transactions within ESMA-specified subcategories. There are, however, several exceptions. These include a de minimis bar for businesses with few transactions and an exception for companies who offer client clearing services or clear a percentage of their derivatives contracts at EU CCPs. Moreover, EMIR 3.0 has a review clause that assigns ESMA the responsibility of assessing its effects and suggesting appropriate actions, such as quantitative thresholds, to lower exposures to Tier 2 CCPs that are systemically important.

EMIR 3.0 Exemptions: Key Provisions

A number of exclusions are introduced by EMIR 3.0 in an effort to simplify regulatory requirements and promote more seamless operations in the derivatives market. The main exclusions listed in EMIR 3.0 are explained in this section along with how they affect market players:

• Exemption for intragroup transactions: Intragroup transaction exemptions are made simpler by EMIR 3.0, which does away with the requirement for a European Commission equivalency ruling. Clearing and margin requirements do not apply to transactions between EU entities and entities in third countries that are part of the same group, as long as the latter is not listed among the jurisdictions with strategic shortcomings in terms of tax cooperation, counterterrorism financing, or anti-money laundering regulations.

• Exemption for Third-Country Pension Scheme Arrangements: If a third country's national legislation exempts derivative transactions involving third-country pension scheme arrangements from clearing responsibilities, then those transactions are also exempt from clearing obligations under EMIR 3.0.

• Clearing Exemption for Services Related to Post-Trade Risk Reduction (PTRR): A special exemption for transactions involving eligible PTRR services is introduced by EMIR 3.0. PTRR providers need to be independent of counterparties and fulfill specific permission requirements, such as MiFID II authorization, in order to be eligible for the exemption.

• Permanent Exemption for Equity Options from Margin: Single-stock options and equity index options are permanently exempt from initial margin requirements under EMIR 3.0. Compared to earlier temporary exemptions, this exemption offers a longer-term solution because it is subject to review by ESMA every three years.

Navigating EMIR 3.0 Changes: Insights for Market Participants

EMIR 3.0 brings about a number of noteworthy modifications that will affect market players, especially non-financial counterparties (NFCs), who will be subject to margin requirements for the first time. NFCs have an extra four months during the implementation period to create and test new collateral arrangements. In addition, NFCs may now choose, under certain restrictions, to employ uncollateralized bank guarantees as collateral. Enhanced CCP supervision and a coordinated approach to initial margin models are intended to improve efficiency and provide more transparency in the derivatives market.

The significance of complying with operational requirements is highlighted by penalties for non-compliance, and modifications to the Capital Requirements Directive (CRD) reinforce supervisory measures aimed at reducing concentration risks associated with exposure to CCPs. All things considered, the goals of these actions are to support regulatory compliance and improve the derivatives market's efficiency and stability.