On 7 December 2022, the European Commission (“the Commission”) published a Capital Markets Union Clearing Package (“CMU Clearing Package”), which includes, among other measures, a proposal for a review of the European Market Infrastructure Regulation (“EMIR review proposal”).

By means of background, to date EMIR has 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 clearing counterparties (“CCPs”).

The current review follows the Commission’s targeted consultation on the review of the central clearing framework in the EU that took place in early 2022. In line with the proposed way forward on European clearing as announced by Commissioner Mairead McGuinness in November 2021, the main objective of the EMIR review proposal 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 the UK’s departure from the EU. That said, despite various more radical options floated in advance of the EMIR review proposal being published, such as punitive capital charges, the Commission has opted for a softer approach to encourage the transfer of more Euro clearing from the UK to EU CCPs. The Commission has also proposed more targeted measures intended to further improve the functioning of the overall EMIR framework.

Set out below are 10 key things to know about the EMIR review proposal and the accompanying CMU Clearing Package measures:

1. Obligation for financial and non-financial counterparties to have an active account with an EU CCP

In line with the Commission’s objective to encourage clearing in the EU, the Commission proposes to introduce an obligation for financial and non-financial counterparties 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 is to 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 actual proportion of transactions in derivatives that will need to be cleared via the active account, as well as the details of the calibration of the activity to be maintained in these active accounts and the reporting requirements of transactions cleared at such active accounts, are to be set out via regulatory technical standards.

2. Obligation to provide information on clearing services

Following on the objective to encourage more clearing in the EU, the Commission proposes that where clearing members and clients provide clearing services both at the 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 national competent authority on the scope of their clearing activity in such CCP.

3. Amendments to intragroup transactions

Article 4(2) and Article 11(5) to (10) of EMIR exempt intragroup transactions from the clearing obligation and the margin requirements. The Commission proposes 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 proposes to delete the much criticised 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. In its place the Commission is proposing a simpler framework with a list of jurisdictions for which an exemption should not be granted. The list will include countries that are deemed to be high risk due to having strategic deficiencies in their anti-money laundering/counter-terrorism financing regime and countries that are listed in Annex I of the EU list of non-cooperative jurisdictions for tax purposes. That said, the Commission is also empowered to adopt delegated acts which may identify third countries whose entities may not benefit from any of the exemptions for intragroup transactions despite not being identified in the list.

4. Clearing obligation for financial and non-financial counterparties

The Commission proposes to introduce an exemption from the clearing obligation where 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 financial counterparties, the Commission proposes that only derivative contracts that are not cleared at an EU CCP or a recognised third-country CCP should be included in that calculation.

In respect of non-financial counterparties, the Commission proposes to mandate the European Securities and Markets Authority (“ESMA”) to review both the hedging exemption criteria (i.e. the criteria for establishing which OTC derivative contracts are objectively measurable as reducing risks), the level of thresholds above which the non-financial entities become subject to the clearing obligation, as well as to consider whether the current asset classes of OTC derivatives (interest rate, foreign exchange, credit and equity derivatives) remain accurate. In particular, ESMA is asked to consider more granularity for commodity derivatives. Finally, the Commission proposes that when calculating the positions towards the thresholds, that only those derivative contracts that are not cleared at a CCP should be included in that calculation.

5. Changes to reporting obligation and risk mitigation measures

In an attempt to increase visibility of intragroup derivatives transactions, the Commission proposes to remove 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. The Commission also proposes some targeted amendments to Article 11 EMIR on risk mitigation measures, namely to ensure that non-financial counterparties that become subject for the first time to the obligation to exchange collateral for non-cleared OTC derivative contracts can benefit from an implementation period of 4 months in order to negotiate and test the arrangements to exchange collateral.

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

The Commission proposes to provide clarification that authorised CCPs should also be able 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. In addition, it proposes amendments that seek to shorten and simplify the relevant procedures for CCPs to expand their product offering. ESMA will be required to develop draft regulatory and implementing technical standards specifying the relevant documents, their format and content.

The Commission also proposes to introduce a non-objection procedure, instead of a regular one, for the authorisation of additional services or activities a CCP intends to offer and which are “non-material”, i.e. do not increase the risks for that CCP.

In terms of third-country CCPs, the Commission clarifies that where ESMA undertakes a review of a third-country CCP’s recognition, that CCP should not be obliged to submit a new application but should provide ESMA with all information necessary for such review. The proposed amendments also allow the Commission to take a proportionate approach and waive the requirement for a third-country to have an effective equivalent system for the recognition of third-country CCPs when adopting an equivalence decision for that third-country.

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

The proposed amendments to the participation requirements set out that where a CCP has on-boarded or intends to on-board non-financial counterparties 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.

In addition, CCPs will be required to regularly review the models and parameters adopted to calculate margin requirements, default fund contributions, collateral requirements and other risk control mechanisms. The models should be subject to stress tests and an opinion of the CCP’s college.

In an attempt to increase predictability and visibility of margin calls, the Commission proposes to require clearing members and clients providing clearing services to ensure better transparency towards their clients. In addition, CCPs will be required to continuously revise the level of their margins.

Finally, in respect of collateral requirements, the Commission proposes to amend provision regarding eligible collateral so that bank guarantees and public guarantees are considered eligible as highly liquid collateral provided that they are unconditionally available upon request within the liquidation period.

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

In the proposed Directive amending the UCITS Directive, Investment Firms Directive (IFD) and Capital Requirements Directive (CRD) the Commission proposes to partially remove 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 is to be amended by eliminating counterparty risk limits for all derivative transactions that are centrally cleared by a CCP that is authorised or recognised. The Commission also proposes targeted amendments to the IFD and the CRD which are aimed at encouraging investment firms and credit institutions to systematically address any excessive concentration risk that may arise from their exposures towards CCPs. The Commission also encourages national competent authorities to review the alignment of credit institutions and investment firms with the relevant EU policy objectives relating to the use of active account structure under EMIR over the short, medium and long term. This is intended to enable competent authorities to address financial stability concerns that could arise from the excessive reliance on certain systemically important third-country CCPs.

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

Finally, proposed amendments to the Money Market Funds Regulation exclude centrally cleared derivative transactions from counterparty risk limits.

9. Addressing role of public entities

In the accompanying Communication on a path towards a stronger EU clearing system and while noting that public entities are exempt from the obligation to clear their derivatives at a CCP under EMIR, the Commission strongly encourages public authorities in the EU to clear at EU CCPs, should they decide to clear and where the products sought are available. By means of leading by example, the Commission commits 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 national competent authorities 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

The EMIR review proposal will now be submitted to the European Parliament and to the Council (Member States) for review, during which both co-legislators can submit amendments, and adoption. The legislative review process is expected to take approximately 12-18 months.