EMIR: Third-Country Pension Scheme Clearing
ESMA advises EU authorities to ease supervision on derivative transactions involving exempted third-country pension schemes, aligning with EMIR 3's provisional agreement.
In anticipation of the completion of the European Market Infrastructure Regulation (EMIR) review, the European Securities and Markets Authority (ESMA) released a statement on March 27, 2024, addressing the deprioritization of supervisory actions related to the clearing obligation for third-country pension scheme arrangements (TC PSA). This decision is in line with the provisional agreement on the EMIR 3 text that was achieved by the European Parliament and the Council of the EU on February 7, 2024. This agreement establishes an exemption regime from the EMIR clearance duty for TC PSAs that are exempted under the national law of their third country. Competent authorities (NCAs) in Member States are advised by ESMA not to give priority to supervisory actions pertaining to derivative transactions involving TC PSAs that are exempt from national law during this time. Furthermore, ESMA advises NCAs to use their risk-based supervisory authority.
Key elements of the proposal
- History and Timeline: On December 7, 2022, the European Commission proposed changes to the European Market Infrastructure Regulation (EMIR), often known as EMIR 3. After much discussion, on February 7, 2024, the European Parliament and the Council reached a temporary agreement. This agreement was published on February 14, 2024, after being confirmed by COREPER, the Committee of Permanent Representatives of the Governments of the Member States of the European Union.
- Articles Concerning Third-Country Pension Scheme Arrangements (TC PSA): A clause pertaining to pension scheme arrangements set up in third countries (TC PSA) is included in the published EMIR 3 text. This clause creates a framework for exemptions from the EMIR clearing requirement in cases where the national laws of the TC PSA's third country exempt it from being cleared. Under EMIR 3, counterparties engaging in Over-The-Counter (OTC) derivatives with TC PSAs would therefore not be obliged to clear these transactions.
- Stakeholder Concerns: Aware that clearing OTC derivative transactions would become unnecessary after EMIR 3 takes effect, stakeholders have expressed worries about the operational and execution difficulties they might encounter.
- Absence of Official Authority for Disapplication: under terms of law, neither the European Securities and Markets Authority (ESMA) nor the relevant national authorities are formally able to disapply a directly applicable EU legal text under extraordinary situations. It is also not within ESMA's purview to offer forbearance in order to deal with such extraordinary situations. EU legislation would therefore be needed to be implemented before any modifications to the way EU regulations are applied, such as the creation of exemptions or the granting of certain suspension powers.
- ESMA's Expectations: ESMA anticipates that national competent authorities will not give supervisory actions pertaining to the clearing obligation—which is not subject to formal disapplication powers—less weight when it comes to transactions involving TC PSAs that are exempt from the national law of their third country. In order to enforce relevant laws in this area, ESMA advises national competent authorities to use their risk-based supervisory powers appropriately in their daily operations.
Source
[1]
Alessandro Micagni
[2]
Alessandro Micagni
EMIR 3: From Proposal to Provisional Agreement
The European Commission proposed amendments to the European Market Infrastructure Regulation (EMIR) on December 7, 2022, known as EMIR 3. After negotiations, the Council and European Parliament reached a provisional agreement on February 7, 2024. This agreement was confirmed by the Committee of Permanent Representatives of the Governments of the Member States of the European Union (COREPER), with further legal revisions published on February 14, 2024. The final EMIR 3 text is expected to be adopted and published in the Official Journal by the end of 2024, entering into force 20 days thereafter.
Highlights of the amendments:
- Third-Country Pension Scheme Arrangements (TC PSAs) Exemption Regime: EMIR 3 includes a clause that releases TC PSAs from the clearing requirement if their third country's national law exempts them from it. Counterparties engaging in Over-The-Counter (OTC) derivatives with TC PSAs are excluded from clearing these transactions due to this exemption.
- Challenges and Legal Restraints: Given that clearing OTC derivative transactions will no longer be necessary after EMIR 3 is implemented, stakeholders have expressed concerns about the operational and executional difficulties this requirement would present. ESMA and national competent bodies do not, however, have explicit authority to give forbearance or to disregard EU legal provisions. Any modifications to EU regulations, including the creation of exemptions or the use of suspension powers, would need to be put into effect by EU law.
Targeted area of supervision deprioritisation
The amendment suggests deprioritizing supervisory measures regarding the clearing duty for transactions involving pension plan arrangements established in third countries (TC PSA) in light of the implementation of EMIR 3. Specifically, under EMIR 3, counterparties engaged in Over-The-Counter (OTC) derivatives with TC PSAs exempted from the clearing obligation under their third country’s national law would not be compelled to clear these transactions. Concerns about the operational and execution difficulties of complying with this criterion have been raised by stakeholders, especially in light of the fact that it would become obsolete upon the implementation of EMIR 3.
The European Securities and Markets Authority (ESMA) anticipates that national competent authorities will not give supervisory actions pertaining to the clearing duty for transactions involving exempted TC PSAs priority in light of these difficulties. It is recommended that authorities exercise their risk-based supervisory powers appropriately while enforcing pertinent legislation in this domain on a daily basis. With this strategy, possible stakeholder burdens should be reduced, and the EMIR 3 regulatory framework should be implemented more smoothly.
Regulatory changes of EMIR Amendment:
- Exemption Regime for TC PSA Clearing requirement: If TC PSAs are already exempt from the clearing requirement under the national legislation of their third country, then they may be exempt from the clearing obligation under EMIR 3. This implies that counterparties participating in OTC derivatives under EMIR 3 would not be required to clear these transactions if they used TC PSAs.
- Community Concerns Resolved: The European Securities and Markets Authority (ESMA) expects national competent authorities to refrain from giving supervisory actions pertaining to the clearing obligation for transactions involving TC PSAs exempted under the national law of their third country priority, acknowledging the operational and execution challenges stakeholders face in complying with the requirement until EMIR 3 comes into force. Rather, they are urged to employ risk-based oversight authority in a reasonable manner while enforcing pertinent laws on a daily basis.
- Legal Requirements and EU Legislation Constraints: Notwithstanding the concerns of stakeholders, neither ESMA nor national competent authorities possess formal authority to deviate from EU legal texts or to give forbearance in extraordinary situations. Any modifications to the way EU regulations are applied, such as the introduction of exclusions or the suspension of certain authorities, must be carried out by EU legislation.
ESMA's Approach and Regulatory Outlook in Response to EMIR 3 Amendment
Through cooperation and negotiation amongst key stakeholders, the European Market Infrastructure Regulation (EMIR) has been amended through the proposal known as EMIR 3. EMIR 3, which was first proposed by the European Commission on December 7, 2022, was designed to bring about significant changes to the legal framework that oversees derivatives trading in the European Union (EU). On February 7, 2024, the European Parliament and the Council reached a provisional agreement after protracted deliberations, signifying significant advancements toward reaching an understanding on the suggested modifications.
Main conclusions of the proposal:
- After additional linguistic and legal changes, COREPER validated the provisional agreement on EMIR 3 on February 14, 2024, indicating alignment among EU member states.
- Regarding pension plan arrangements made in third countries (TC PSAs), EMIR 3 has provisions that permit exemptions from the clearing requirement in the event that TC PSAs are exempted under the national legislation of the respective third countries.
- Under EMIR 3, these exemptions simplify the regulatory process for counterparties doing OTC derivatives transactions with TC PSAs.
- Stakeholders voice concerns with the scheduling and implementation of the clearance obligation criteria under EMIR 3, notwithstanding the progress made.
- Differences between the current regulations and what is anticipated to happen when EMIR 3 is implemented could lead to operational and implementation challenges.
- ESMA emphasizes the importance of appropriate oversight by national competent authorities (NCAs) in enforcing relevant laws
In summary, the process of revising EMIR via the EMIR 3 proposal is a cooperative endeavor to improve the legal structure that oversees the trading of derivatives in the European Union. Even while there are still difficulties and worries, especially with regard to the timing and execution of regulatory modifications, proactive steps like appropriate supervision by NCAs can assist reduce possible risks and guarantee a seamless transition to EMIR 3 compliance after it becomes effective.
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