On 7 December 2022, the European Commission (the Commission) published a proposal1 including amendments to EMIR2 (EMIR 3).
The Commission identified various concerns, including around "excessive reliance of EU financial markets on a few CCPs based in the UK" and that "the energy crisis has ... brought to light the difficulties certain energy firms are facing in order to meet CCP margin calls"3.
The proposed amendments are focussed on changes to the clearing system and other post-trade arrangements in the derivatives market. This note summarises some key proposed changes.
EMIR 3 Proposals
EU active account requirement.One of the most significant measures proposed by the Commission is the introduction of a requirement for financial counterparties (FC) and non-financial counterparties that are subject to the clearing obligation (NFC+) which clear any of the following categories of derivative contracts to clear at least a certain proportion of such contracts at EU CCPs:
- interest rate derivatives denominated in euro and Polish zloty,
- credit default swaps denominated in euro, or
- short-term interest rate derivatives denominated in euro,
with the Commission empowered to make amendments to this list of categories through delegated act following an assessment by the European Securities and Markets Authority (ESMA). The exact proportion of the activity to be cleared at EU CCPs is to be established by ESMA.
Obligation to provide information on EU clearing services and report on non-EU clearing.It is also proposed to require clearing members and clients that provide clearing services at both an EU CCP and a non-EU CCP to inform their clients of the possibility to clear a relevant contract at the EU CCP. In addition, EU clearing members and EU clients must report the scope of clearing undertaken at non-EU CCPs to their competent authority, with ESMA required to develop draft regulatory and implementing technical standards specifying the required information.
Reform of clearing and margining exemption for intragroup transactions.EMIR 3 additionally proposes to reform the framework for exempting intragroup transactions from the clearing and margining obligations of EMIR. The intragroup exemption currently relies on the issuance of jurisdiction-specific equivalence decisions by the Commission pursuant to Articles 3 and 13. In order to provide more legal certainty and predictability, the Commission proposes to amend Article 3 and delete Article 13 to replace the need for equivalence decisions with a list of jurisdictions for which the intragroup transaction exemption cannot be granted (due to concerns around money laundering, terrorist financing or non-cooperative jurisdictions for tax purposes), which the Commission may supplement with further jurisdictions (taking into account other risks).
It is unclear whether the intention is to delete Article 13 entirely so as to also remove the possibility of relying on third-country equivalence decisions to permit substituted compliance for other EMIR requirements, e.g., margin.
Clearing exemption for third-country pension schemes.An amendment of Article 4 is proposed to introduce an exemption from the clearing obligation where an EU FC or NFC+ enters into a transaction with a third-country pension scheme arrangement that is itself exempted from the clearing obligation under its national law.
Changes to the calculation methodology of clearing thresholds for FCs and NFCs.Amendments of Article 4a (for FCs) and Article 10 (for NFCs) are proposed to carve out derivative contracts that are cleared at an EU CCP or a recognised third-country CCP when calculating clearing threshold positions. This would be helpful from the perspective of EU counterparties with UK exchange traded derivatives, which started to count towards their clearing thresholds post-Brexit.
Review of the criteria for the calculation of clearing thresholds for NFCs.Amendment of Article 10 is proposed to require ESMA to:
- develop regulatory technical standards specifying the criteria for establishing which OTC derivative contracts are "objectively measurable as reducing risks" (the hedging exemption); and
- regularly review the clearing thresholds and consider whether the current classes of OTC derivatives for which clearing thresholds have been set remain relevant.
Increasing transparency and margin call visibility.Amendment of Article 38 is proposed to require clearing members and clients providing clearing services to provide information to clients and potential clients, including around margin requirements and default management procedures.
Requirement to continuously revise margin levels.Amendment of Article 41 is proposed to ensure that CCPs continuously monitor/revise their margin levels while taking into account any potentially procyclical effects of such revisions, reflecting current market conditions and considering the potential impact of their intraday margin collections and payments on the liquidity position of their participants.
Acceptance of bank guarantees and public guarantees as eligible collateral.Amendment of Article 46 is proposed to allow bank guarantees and public guarantees to be considered eligible as highly liquid collateral.
Additional participation requirements for NFCs. Amendments to Article 37 are proposed to set out additional requirements relating to margin and default funds that CCPs must abide by when they accept an NFC as a clearing member. In addition, NFCs may not offer client clearing services and may only keep accounts at the CCP for assets and positions held for their own account.
Four-month implementation period for NFCs exchanging collateral for the first time. Amendment of Article 11 is proposed to allow a 4-month implementation period for NFCs that newly become subject to the obligation to exchange collateral.
Clarification of the process for reviewing third-country CCP recognition.Amendment of Article 25 is proposed to clarify that, where ESMA undertakes a periodic review of a third-country CCP's recognition (where no change to the range of its activities/services in intended), that CCP need not submit a new application but should provide ESMA with all information necessary for such review.
Additionally, ESMA would be required to tailor cooperation arrangements to different jurisdictions based on the CCP(s) established in that jurisdiction. For Tier 2 CCPs, as compared to Tier 1 CCPs, cooperation arrangements should cover a broader range of information to be exchanged between ESMA and the relevant third-country authorities and with an increased frequency. ESMA would be granted the right to be informed when a Tier 2 CCP intends to activate its recovery plan or where there are indications of an emerging crisis situation.
Simplification of CCP authorisation extension process.Amendments to Articles 14, 15 and 17 are proposed to make the relevant procedures for CCPs wishing to expand their offering shorter, less complex and more certain in their outcome for EU CCPs. Addition of a new Article 17a would provide CCPs with the possibility of undergoing a non-objection procedure for less material changes to their existing authorisation.
Removal of reporting exemption for NFC intragroup transactions.Amendment of Article 9 is proposed to remove the existing exemption from reporting requirements for intragroup transactions where at least one of the counterparties is an NFC.
EMIR 3 will need to follow the usual legislative process and be approved/modified in the European Parliament and the Council before it can be adopted.
2. Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, as amended.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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