EMIR 3 – Impact On Cleared OTC Derivatives Markets

The Regulation amending the European Market Infrastructure Regulation (known as EMIR 3)¹ brought about numerous changes affecting cleared markets, with potential impacts both within and outside the European Union (EU). Among these is the introduction of the controversial, new "active account" requirement. This will require certain EU counterparties to hold at least one active account at an EU CCP and clear a representative number of trades through that account. This is intended to incentivise the development of clearing in the EU and reduce exposures to and usage by EU entities of non-EU central counterparties (CCPs). However, that is not the only change in EMIR 3.

This bulletin focuses on key changes in EMIR 3 relating to cleared OTC derivatives. This includes new exemptions from the clearing obligation; changes to the cross-border intragroup exemption; the calculation of the clearing threshold for financial counterparties (FCs); and additional requirements for clearing members and clients that provide clearing services. Cleared derivatives will also be impacted by the changes to the calculation of the clearing threshold for non-financial counterparties (NFCs) and reporting changes. We covered these and other changes impacting uncleared OTC derivatives markets in our separate note EMIR 3 – Impact on uncleared OTC derivatives market. We will cover the active account requirement in a separate note.

EMIR 3 entered into force on 24 December 2024, except for the amendments to the calculation of the clearing thresholds for FCs and NFCs which will only apply once the related technical standards enter into force. Until such time as the technical standards relating to other provisions enter into force, in-scope entities should discuss compliance with those provisions with their national competent authority (NCA).

At a glance: Impact on cleared OTC derivatives markets

COUNTERPARTY CLASSIFICATION – FC AND NFC CLEARING THRESHOLD CALCULATION CHANGES

• Calculation of the clearing thresholds for FCs and NFCs will change (albeit not straight away).
• FCs will need to undertake two calculations to determine if they are subject to the clearing obligation. In addition to calculating its aggregate month-end average position (for cleared and uncleared OTC derivatives contracts), an FC will need to calculate its uncleared positions. For this second calculation, where transactions are cleared by an EU-authorised or EU-recognised CCP, the treatment of certain non-EU exchange-traded derivatives as "OTC" for the purposes of the FC clearing threshold falls away.
• NFCs will only need to calculate their uncleared positions and, as for the FC clearing threshold, the treatment of certain non-EU exchange-traded derivatives as "OTC" for the purposes of the NFC clearing threshold will end where transactions are cleared by an EU-authorised or EU-recognised CCP. In addition, there will no longer be a requirement for NFCs to take into account the OTC derivatives of non-financial entities in the wider group.
• Clearing thresholds may need recertifying directly to counterparties or via ISDA interfaces when these change.
• Clearing thresholds are scheduled to change after the active account obligation, resulting in a need to reassess active account applicability.

CHANGES IMPACTING CLEARING MEMBERS

• Clearing members and clients providing clearing services at both EU and non-EU CCPs must make disclosures to their clients and report on their clearing activity at non-EU CCPs.
• NFCs are subject to stricter requirements to gain admission as a clearing member of a CCP and NFCs that are clearing members are only allowed to offer client clearing services to NFCs within their own group.

NEW AND AMENDED CLEARING OBLIGATION EXEMPTIONS

• There is a new exemption from the clearing obligation for post-trade risk reduction (PTRR) services, subject to certain conditions being met.
• There is a new permanent exemption from the clearing obligation where an FC or NFC enters into trades with a non-EU pension scheme arrangement that satisfies certain criteria.
• The cross-border intragroup exemption from the clearing obligation is amended, which means that group entities may benefit from this exemption even where there is no equivalence decision in place, provided that the counterparty is not in a jurisdiction identified by the EU as being higher risk from an anti-money laundering (AML) and counter terrorist financing (CFT) perspective.

MEASURES IMPACTING EU CCPS

• The regulatory regime for EU CCPs has been simplified to reduce procedural requirements for new product launches and simpler margin model changes by CCPs.
• The porting provisions now provide that a receiving clearing member may accept new clients without delaying doing so to comply with their regulatory obligations under other EU legislation.
• Unless already provided, an EU CCP will be obliged to provide a clearing member, upon request, with the information regarding its margin model to assist the clearing member to comply with its new disclosure requirement.

Counterparty classification – FC and NFC clearing threshold calculation changes

OVERVIEW

Counterparty classification is important under EMIR because it determines which of certain obligations in the legislation apply, and how onerous those requirements are. Broadly speaking (and exemptions aside), an entity is classified as:

1. A FC, which includes credit institutions, investment firms, insurance or reinsurance undertakings, pension schemes, certain funds and central securities depositories.
2. An NFC, which includes most other types of entities, including corporates and SPVs.
3. A non-EU equivalent of an FC or NFC.

The FC and NFC categories are split into: (a) FCs and NFCs which exceed the "clearing threshold" (FC+s and NFC+s respectively); and (b) FCs and NFCs which do not exceed the "clearing threshold" (FC-s and NFC-s respectively).²

The difference between FC+s and FC-s is critical as it determines whether the mandatory clearing obligation will apply. However, the difference between NFC+s and NFC-s is not only relevant for the purposes of the application of the mandatory clearing obligation; it also determines whether, among other things, the obligation to exchange margin in relation to non-centrally cleared OTC derivatives applies. For both FCs and NFCs, this classification is now also crucial to establishing whether the active account requirement applies.

EMIR 3 changes the way that both the FC and NFC clearing thresholds (which have always been calculated differently) are determined. The FC clearing threshold calculation is discussed in more detail below. We discuss the changes to the calculation of the NFC clearing threshold in our note, EMIR 3 – Impact on uncleared OTC derivatives market.

TIMING

The EMIR 3 changes relating to the calculation of the FC and NFC clearing thresholds will not come into effect until the related clearing threshold regulatory technical standards (Clearing Threshold RTS) are effective. EMIR 3 mandates ESMA to submit draft Clearing Threshold RTS to the European Commission by 25 December 2025 and so, while a more expedited timeframe cannot be excluded, it is possible we may not see these changes enter into effect until 2026 (well after the active account obligation comes into force, requiring a re-assessment of applicability of that regime, and others). ESMA published the consultation paper (CP) on its proposed amendments to the clearing thresholds on 8 April 2025.³ The consultation is intended to allow stakeholders to provide feedback to ESMA before it submits the draft Clearing Threshold RTS to the Commission and so the proposals are subject to change.

KEY CHANGES TO THE FC CALCULATION OF THE CLEARING THRESHOLD

FCs are now required to perform two calculations to determine their status:

• "Uncleared positions", which will take into account OTC derivatives not cleared by an authorised or recognised CCP. This mirrors the change made to the NFC clearing threshold.
• "Aggregate positions", which will take into account all cleared and uncleared OTC derivatives.

An FC must be under both thresholds for the clearing obligation not to apply (i.e., to be an FC-). Both the uncleared positions and aggregate positions must take into account OTC derivatives entered into by the FC or any entity within the FC's group.

KEY CHANGES PROPOSED BY ESMA'S CP IMPACTING BOTH FCS AND NFCS

The CP proposals for the values of the clearing thresholds (now the scope of the derivatives counted towards the thresholds has changed) are set out in the below table, which also shows the existing thresholds.⁴

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For uncleared positions (applying to both FCs and NFCs), the stated aim is to capture "a similar population of entities" as that covered by the existing scope, noting of course that we are now only looking at uncleared trades. Significantly, the CP proposes that the "commodity and other" derivative asset class is amended to cover "commodity and emission allowance derivatives", to align with the EMIR reporting regime and to reduce the burden on market participants. There is also the possibility of designating a "sixth bucket" for other asset classes "at a later stage".⁵ The CP mentions crypto-assets and renewable energy as potential future asset classes for an additional bucket.

For aggregate positions (applying to FCs), the CP proposals are in line with the current application of the clearing obligation, which only applies to certain interest rate and index CDS transactions, as shown in the above table. ESMA is proposing thresholds of EUR3bn for interest rate derivative contract thresholds, and EUR1bn for credit derivative contract thresholds. It does not propose thresholds for any other products. The aim is to ensure that market participants with large, cleared portfolios are caught to the extent that they are not caught by the uncleared threshold.

It is noted that, in respect of the calculation of the NFC clearing threshold, it is possible to exclude OTC derivative contracts which are "objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of the non-financial counterparty or of that group" (the "hedging exemption"). ESMA was mandated to consider the hedging exemption in the context of the Clearing Threshold RTS. In the CP, ESMA is not proposing any specific amendments to the hedging exemption at this stage. However, ESMA does request input from stakeholders as to how the hedging exemption could be modified to reflect particular fact patterns so changes may be made to the draft RTS depending on where this comes out. Note that industry has already been advocating for some changes in the context of power purchase agreements (PPAs). This is discussed in the CP and ESMA has requested suggestions as to how legislation could be modified to address the issues relating to virtual PPAs and whether there are any other fact patterns that should be considered.

The CP provides that, although ESMA was invited to consider this by the level 1 text, ESMA is not intending to introduce separate thresholds for the various commodity derivatives sub-asset classes and is not proposing more granular thresholds for commodity derivatives based on ESG factors or crypto-related features (at least at this point in time).

The draft RTS also covers mechanisms triggering a review of the values of the clearing thresholds.

FCs, such as funds, credit institutions and investment firms, and NFCs should monitor the progress of the consultation. Once the proposals are finalised, FCs and NFCs will need to carefully work through the changes to determine how they are impacted.

Over time, we may increasingly start to see a greater divergence between the UK and EU EMIR regimes. The Commission and ESMA are responsible for preparing reports on numerous implementation aspects of the EMIR 3 changes. This means that the EU continues to assess the suitability of the EMIR framework for OTC derivatives trading and clearing.

EU and UK counterparty pairings will need to track developments closely to ensure compliance with their own regulatory obligations but also to assess any impacts of both rulesets applying when trading with each other. In particular, depending on when the EMIR 3 changes to the calculation of clearing thresholds enter into effect and whether any corresponding changes are made to UK EMIR, it is possible that we could see a divergence between EU and UK EMIR counterparty scope – this is one to watch for EU entities trading with UK counterparties.

Changes impacting clearing members

OVERVIEW

As part of the Commission's push for greater transparency on the location of clearing, a number of changes are being made as regards clearing member requirements. Clearing members and clients providing clearing services at both EU and non-EU CCPs must make disclosures to their clients and report on their clearing activity at non-EU CCPs.

NFCs are subject to stricter requirements to gain admission as a clearing member of a CCP and NFCs that are clearing members will only be allowed to offer client clearing services to NFCs within their own group.

The UK has not introduced any of these requirements.

ADDITIONAL INFORMATION TO BE PROVIDED TO CLIENTS

Clearing members and clients that provide clearing services at both EU and non-EU CCPs will need to notify their clients (both when a new client clearing relationship is established and existing clients) on at least a quarterly basis of the ability to clear contracts through an EU CCP, where that option is available.

Information on the fees charged to clients for providing clearing services, and any other fees which represent costs passed on to clients, should also be supplied for each CCP at which the clearing member or client provides clearing services. ESMA will consult on RTS detailing the fee information and is required to submit the proposed RTS to the Commission by 25 December 2025.

Clients that provide clearing services will become subject to the obligation (which was already in place for clearing members) to tell existing and potential clients about potential losses or costs they might incur following default management procedures, as well as loss and position allocation arrangements under the relevant CCP's rules. This information should be sufficient to ensure their clients understand their worst-case scenario losses in the event of a default.

EMIR 3 aims to enhance transparency on margin requirements so that clearing member clients and indirect clients can better predict margin calls and develop their liquidity management strategies. To this end, clearing members and clients that provide clearing services now have to disclose:

• How their CCP's margin models work.
• The circumstances that may trigger margin calls.
• The procedure used to determine how much collateral should be posted by clients.
• A simulation of hypothetical margin requirements under different scenarios. This should include both the margin required by the CCP and any additional margin the clearing member or client providing clearing services might require.

Concerns have been raised about these requirements, including that clearing members may be expected to give clients information they do not possess (in particular on CCP margin models) and the risk that clearing members provide disparate information given they are reporting on a margin model which is not their own. CCPs have been obligated since December 2019 under the EMIR Refit changes to provide clearing members with information on their margin model. EMIR 3 has amended that CCP requirement and CPPs will now also need to provide clearing members with methodologies for add-ons and explain how the margin model operates in stress conditions. In addition, a clearing member may request a CCP to provide the information, which the CCP must provide unless the information is already provided.

ESMA will prepare draft RTS on the detailed margin information required, which must be submitted to the European Commission by 25 December 2025. The final public proposals on transparency and responsiveness of initial margin in the centrally cleared markets, published by the international standard setting bodies in January this year, go beyond the EMIR 3 transparency requirements, including by requiring public disclosure by CCPs of margin-related data and margin responsiveness. The Bank of England, which co-chaired this international work with the U.S. Commodity Futures Trading Commission, will be considering how to incorporate these changes as part of the work to repeal UK EMIR as regards CCPs and move most of the detailed requirements to the Bank's rulebook.

INFORMATION ON CLEARING ACTIVITY TO BE REPORTED TO NATIONAL REGULATORS

EU clearing members and clients that offer clearing services through a non-EU CCP must report that clearing activity to their national regulator (or, if they are part of a group subject to consolidated EU supervision, the EU group parent should report the activity on a consolidated basis to its own national regulator). Reports should detail the scope of the clearing activity on an annual basis, including:

• The type of instruments cleared.
• The average values cleared over the course of the year for each Union currency and asset class.
• The amount of margin collected.
• Default fund contributions.
• The largest payment obligation.

ESMA will prepare draft RTS and ITS on the detailed requirements and format for this information, to be submitted to the European Commission by 25 December 2025. Until those RTS enter into force, counterparties should discuss with their NCA the extent of the detail and format for reporting this information.

ACCEPTANCE OF NFCS AS CLEARING MEMBERS

NFCs are not subject to the same strict prudential and liquidity requirements as FCs, a factor highlighted by the 2022 energy market volatility which drew attention to the difficulties NFCs can have in accessing liquidity. As a result, EMIR 3 introduced more stringent requirements for admitting NFCs as clearing members of CCPs. NFCs seeking to become clearing members will need to demonstrate to their CCP how they will fulfil margin requirements and default fund contributions, including in conditions of market stress. NFCs which act as clearing members will only be allowed to offer client clearing services to NFCs within their own group. This means NFCs can only keep accounts with EU CCPs for assets and positions held for their own account or those of their NFC group members for which they offer clearing services.

Footnotes

1. Regulation (EU) 2024/2987 of the European Parliament and of the Council of 27 November 2024 amending Regulations (EU) No 648/2012, (EU) No 575/2013 and (EU) 2017/1131 as regards measures to mitigate excessive exposures to third-country central counterparties and improve the efficiency of Union clearing markets.

2. The clearing thresholds are currently as follows: (a) EUR1 billion in gross notional value for each of OTC credit and OTC equity derivatives; (b) EUR3bn in gross notional value for each of OTC interest rate and OTC foreign exchange derivatives; and (c) EUR4bn in gross notional value for OTC commodity and any other OTC derivatives contracts.

3. See ESMA's consultation paper on Draft technical standards amending Regulation (EU) 149/2013 to further detail the new EMIR clearing thresholds regime, dated 8 April 2025.

4. As per Commission Delegated Regulation (EU) No.149/2013.

5. See paragraphs 70 to 86 of the CP.

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