On 7 February 2024, the European Parliament, the Council of the EU and the European Commission (“the Commission”) reached agreement on the final text of the proposal for a review of the European Market Infrastructure Regulation (“EMIR review proposal”). This legislative proposal was published by the Commission in December 2022 as part of the wider Capital Markets Union Clearing Package (“CMU Clearing Package”). It is commonly referred to as EMIR 3.0.

To date EMIR has only been amended twice – by EMIR Refit and EMIR 2.2 – and while the former recalibrated some of the requirements under EMIR to ensure their proportionality, the latter revised the supervisory framework and set out a process for assessing the systemic nature of third-country central counterparties (“CCPs”).

The main objective of EMIR 3.0 is to increase the competitiveness of the European central clearing framework, in particular vis-à-vis UK CCPs. This stems from a lengthy and highly politicised debate on the location of Euro clearing, which intensified following Brexit. In the light of this, the Commission proposed an active account requirement, which has been one of the most contentious and politicised issues in the negotiation. The Commission proposal also introduced targeted measures intended to further improve the functioning of the overall EMIR framework.

Now that the legislative process is coming to a conclusion, we set out 10 key things to know about EMIR 3.0 and the accompanying CMU Clearing Package measures.

1. Obligation for FCs and NFCs to have an active account with an EU CCP

In its 2022 proposal, the Commission proposed to introduce an obligation for financial counterparties (FCs)[1] and non-financial counterparties (NFCs)[2] subject to the clearing obligation to have, directly or indirectly, an active account with an EU CCP and clear at least a proportion of such trades in the said EU CCP. This obligation would apply when a counterparty clears any of the following contracts: interest rate derivatives denominated in EUR and PLN, credit default swaps denominated in EUR and short-term interest rate derivatives denominated in EUR.

The active account requirement has proven to be the most controversial issue during the negotiations between the European Parliament and the Council of the EU. Under the compromise, FCs and NFCs subject to the clearing obligation and that exceed the clearing threshold in any of the listed financial instruments must have an active account at an EU CCP. The financial instruments listed in the compromise are interest rate derivatives denominated in EUR and PLN and short-term interest rate derivatives denominated in EUR. The active account must be permanent and be able to be used at short notice for large volumes of derivative contracts in such financial instruments. In addition, in-scope FCs and NFCsmust clear at least five trades in each of the most relevant subcategories per class of in-scope derivative contracts during a pre-determined reference period (subject to exemptions). ESMA will set the reference period and provide a list of the most relevant subcategories. 18 months following the entry into force of EMIR 3.0, ESMA will assess whether the active account requirement should be expanded to include quantitative clearing thresholds, under which FCs and NFs would have to clear a predetermined share of in-scope financial transactions with an EU CCP.  Following ESMA’s report, the Commission has six months to write its own report, which may include a legislative proposal further amending EMIR.

2. Obligation to provide information on clearing services

To encourage more clearing in the EU,  EMIR 3.0 requires that, in the event that clearing members and clients provide clearing services both at an EU CCP and a recognised third-country CCP, they should provide information to their clients about the possibility of clearing the relevant contracts at the EU CCP. Clearing members and clients established in the EU or part of a group subject to consolidated supervision in the EU, and clearing in a recognised third-country CCP, will have to report to their Member State competent authority (NCA) on the scope of their clearing activity in such CCP. ESMA is provided with a mandate to develop draft technical standards detailing the reporting obligations within one year following the entry into force of EMIR 3.0.

3. Amendments to intragroup transactions

EMIR exempts intragroup transactions from the clearing obligation and the margin requirements. The Commission originally proposed to amend the criteria set out in Article 3 of EMIR which determines an intragroup transaction in relation to both financial and non-financial entities. In particular, it proposed to delete the Article 13 requirements that linked certain exemptions from intragroup clearing, reporting and risk mitigation requirements with the adoption of an equivalence decision by the Commission. The final compromise text remains near to the Commission proposal such that where one of the FCs or NFCs to which the intragroup transaction exemption could apply is established in a third country, there is no longer a need for an equivalence determination vis-à-vis that third country. Instead, the intragroup transaction exemption will apply to such a transaction unless the third country is listed as a high-risk third country that has strategic deficiencies in its anti-money laundering and counter terrorist financing regime, or is listed on the EU list of non-cooperative jurisdictions for tax purposes.

4. Clearing obligation for FCs and NFCs

The EMIR 3.0 will introduce an exemption from the clearing obligation in the event that an EU financial or non-financial counterparty, subject to the clearing obligation, enters into a transaction with a pension scheme arrangement established in a third-country that is exempted from the clearing obligation under its national law. In addition, in respect of the calculation of thresholds towards the clearing obligation by FCs, EMIR 3.0 lays down that only derivative contracts that are not cleared at an EU CCP or a recognised third-country CCP should be included in that calculation.

5. Changes to reporting obligation and risk mitigation measures

With the aim of increasing the visibility of intragroup derivatives transactions, the existing exemption from the Article 9 EMIR reporting obligation that is applicable to transactions between counterparties within a group, where at least one of the counterparties is a non-financial counterparty, is removed. In this situation, their derivatives positions should be reported by their EU parent undertaking on an aggregated basis. Article 11 EMIR on risk mitigation measures has also been amended to ensure that NFCs that become subject for the first time to the obligation to exchange collateral for non-cleared over-the-counter (OTC) derivative contracts can benefit from an implementation period of four months to negotiate and test the arrangements to exchange collateral.

6. Simplifying procedures for authorisation and recognition of CCPs, extension of activities and services

EMIR 3.0 provides for the possibility for authorised CCPs to be authorised to provide clearing services and activities in non-financial instruments, in addition to their authorisation to provide clearing services and activities in financial instruments. EMIR 3.0 also contains amendments to EMIR that would shorten and simplify the relevant procedures for CCPs to expand their product offering.

7. Amending rules governing CCPs participation, margin and collateral requirements

The EMIR 3.0 amendments to the participation requirements set out that where a CCP has onboarded or intends to onboard NFCs as clearing members, that CCP should ensure that certain additional requirements on margin requirements and default funds are met. This includes a prohibition for non-financial entities to offer client clearing, with their participation being limited to keeping accounts at the CCP for assets and positions held for their own account. The relevant access criteria will be further set out in secondary legislation. CCPs will also be required to review the models and parameters adopted to calculate margin requirements, default fund contributions, collateral requirements and other risk control mechanisms on a regular basis. The models should be subject to stress tests and an opinion of the CCP’s college.

EMIR 3.0 requires clearing members and clients providing clearing services to ensure better transparency towards their clients with regard to margin calls. In addition, CCPs will be required to continuously revise the level of their margins.

Finally, in respect of collateral requirements, the list of eligible collateral that clearing members can provide is expanded by EMIR 3.0 so that bank guarantees and public guarantees will be considered eligible as highly liquid collateral provided that they are unconditionally available upon request within the liquidation period. This amendment makes permanent a temporary measure taken by the Commission in November 2022.

8. Targeted amendments to UCITS, IFD, CRD, and CRR

A separate directive that was published alongside EMIR 3.0 amends the UCITS Directive, Investment Firms Directive (IFD) and Capital Requirements Directive (CRD). The final text of the directive removes the counterparty risk limit that is currently applicable to UCITS’ exposures to OTC derivatives, irrespective if they are centrally cleared or not.

The UCITS Directive will be amended by eliminating counterparty risk. Targeted amendments to the IFD and the CRD are aimed at encouraging investment firms and credit institutions to systematically address any excessive concentration risk that may arise from their exposures towards CCPs. NCAs will be encouraged to review the alignment of credit institutions and investment firms with the relevant EU policy objectives relating to the use of active accounts under EMIR 3.0 over the short, medium and long term. This would enable NCAs to address financial stability concerns that could arise from excessive reliance on certain systemically important third-country CCPs.

In addition, targeted amendments to the Capital Requirements Regulation will adjust the scope of the own funds requirement for credit valuation adjustment risk by clarifying which intragroup transactions can be excluded from that requirement.

9. Addressing role of public entities

As part of the CMU Clearing package, the Commission published a Communication on a path towards a stronger EU clearing system. Noting that public entities are exempt from the obligation to clear their derivatives at a CCP under EMIR, in the Communication the Commission strongly encouraged EU public authorities to clear at EU CCPs, should they decide to clear and where the products sought are available. The Commission itself committed to clearing most of its centrally-cleared positions at an EU CCP, where the relevant products are available.

In addition, whilst noting some uncertainties around the application of certain national rules in the area of hedge accounting which could in practice discourage transfers of positions from a third-country CCP to an EU CCP, the Commission encourages NCAs to look at national accounting rules and remove or alleviate any obstacles to transferring exposures. In respect of the TARGET2 payment system, the Commission notes concerns expressed by CCPs and credit institutions that the operating hours of the system are too short, in light of the fact that some margins late in a business day are called by EU CCPs in foreign currencies such as the US dollar. To this end, the Commission invites banks and CCPs to engage with the Eurosystem on these topics and discuss all possible ways of using the system.

10. Next steps

EMIR 3.0 and the draft directive amending the UCITS Directive, IFD and CRD are now subject to formal adoption before being published in the EU Official Journal (OJ) The European Parliament plenary is scheduled to vote on the final texts during  the week of 22 April 2024, which is the final plenary session before the European Parliament election recess. Following formal adoption, we expect publication of the legal texts in the OJ later in Q2 2024. Nearly all amendments will become applicable upon its entry into force (20 days following OJ publication). The targeted amendments to UCITS, IFD and CRD will become applicable eighteen months later, as Member States need to implement the amendments in their respective national laws.

[1] Financial counterparties are defined in EMIR as investment firms, credit institutions, insurance or reinsurance undertakings, UCITS and its management company, institutions for occupational retirement provision, alternative investment funds, and central securities depositories.

[2] Non-financial counterparties are counterparties that are not defined as financial counterparties and are not CCPs.