ジャンプリンクテキスト
Of the many aims of the EU’s latest revisions to the European Market Infrastructure Regulation[1] (EMIR), the most controversial and intensely debated is mandating clearing at EU CCPs. Since Brexit, the EU has been concerned about the continued use by EU counterparties of U.K. and U.S. CCPs, even though the financial markets are global and nobody “owns” their location or success. The European Commission (the “Commission”) has put forward a political thesis based on the alleged risks of reliance on foreign regulators and a wish for capacity building of clearing in the EU. In 2022, it proposed a new EU requirement for EU counterparties to hold “active accounts” at EU-regulated CCPs for all products, and to use such accounts. These proposals were heavily criticized and became a focus of much lobbying by financial institutions and market associations, who unanimously opposed the proposals.[2] Certain member states, particularly Germany, and the Parliament were in favor of the Commission’s proposals, but many member states and most of the Council were opposed, agreeing with market associations that the proposals would have made European banks and brokers less competitive. Ultimately, the original proposals on this topic have been considerably diluted in the final text, known as EMIR 3. This text was provisionally agreed between the Council of the European Union and European Parliament on February 7, 2024.[3] It requires only the largest EU counterparties to clear on average a minimum of five trades per year in each of the most relevant subcategories per class of derivative contracts that are within the scope of the requirement.
Other changes have also been made to the Commission’s original proposals, such as a new exemption from the clearing obligation for post-trade risk reduction exercises and making permanent the exemption from bilateral margin requirements for single-stock options and equity index options.
At this time, it is unclear when the EMIR 3 Regulation will enter into force, since that depends on when it is published in the Official Journal of the European Union (the “OJ”). The Regulation will apply 20 days after publication in the OJ, except for the clearing threshold provisions, which will only apply once related technical standards enter into force. Many of the other changes resulting from EMIR 3 will also be further detailed in technical standards or through regulatory guidance. This client note is based on the provisionally agreed text, published on February 14, 2024, which remains to be formally adopted by both bodies before it becomes effective. We highlight the differences between the Commission’s original proposals and the final text. We previously discussed the Commission’s original proposals in our client note, “Clearing in the EU After EMIR 3.” We also refer to related U.K. developments, where appropriate. Counterparties, clients, CCPs and other affected entities should plan now for these changes.
The controversial requirement for EU counterparties to hold “active accounts” at EU CCPs for all products, and to use such accounts for certain products, has been substantially watered down from the Commission’s original proposal. According to the final text, counterparties subject to the “active account” requirements will, for in-scope products, be required to open and maintain at least one operationally functional account with an EU CCP, and certain counterparties will have to clear some transactions through an EU CCP.
In-Scope Counterparties: the active account requirement will apply to EU Financial Counterparties (FCs) and EU Non-Financial Counterparties (NFCs) subject to the clearing obligation and that exceed the clearing threshold in any of the in-scope products. The threshold could be exceeded in a particular product category or on an aggregate basis across all categories.
In-Scope Products: the active account requirement will only apply to trades in interest rate derivatives denominated in euro and Polish zloty and Short-Term Interest Rate Derivatives (STIR) denominated in euro. CDS denominated in euro are not in scope, contrary to the Commission’s original proposal. Other classes of derivatives may be brought in scope of the requirement in the future.
The Active Account Requirement: EU counterparties subject to the active account obligation must ensure that an active account is permanently functional, that it has the systems and resources to keep the account operational and that new trades can be cleared through the account at all times. A counterparty subject to this requirement that clears at least 85% of its trades in the relevant derivatives at an EU CCP will be exempt from these obligations, as well as certain reporting obligations (discussed below). This is clearly intended to incentivize EU counterparties to clear their trades with an EU CCP.
Clearing Through an Active Account: the requirement to clear through an active account with an EU CCP will only apply to the EU’s largest derivatives traders (with EUR 6 billion + of open positions). Such persons only will be required to clear a “representative number” of trades in EU CCPs, which means on an annual average basis, at least five trades in each of the most relevant subcategories per class of derivative contracts. Client transactions are out of scope of the requirement and are not to be counted for the purposes of assessing the EUR 6 billion threshold.
Reporting: in-scope counterparties must calculate their activities and risk exposures in in-scope products and report that information every six months to their EU national regulator. The information used for complying with their EMIR reporting obligation may be used. The information must also demonstrate that it has in place the legal documentation, technological connectivity and internal processes related to the active account.
Penalty for Non-Compliance: a counterparty that breaches any of the active account requirements could face a penalty or periodic payment penalty, imposed by its national EU regulator. The periodic payment penalty may not exceed three percent of the counterparty’s average daily turnover in the preceding business year and may not be in place for longer than six months without a review by the counterparty’s regulator.
Timing: the active account requirement will apply to FCs and NFCs that are subject to the clearing obligation from the date that the EMIR 3 Regulation enters into force, and that exceed the clearing threshold in any in-scope products. A counterparty must notify the European Securities and Markets Authority (ESMA) and its national EU regulator that the active account requirement applies to it and must establish an active account within six months of becoming subject to the obligation. According to the final text, the provisions on the active account requirement will apply from 20 days after EMIR 3 is published in the OJ.
EU clearing members and clients providing clearing services at both an EU CCP and a non-EU CCP will be required to inform their clients of the possibility (if one exists) of clearing through an EU CCP. The disclosure must include details on the costs that will be charged to the client for clearing at each CCP at which they provide clearing services. This disclosure must be made when the client clearing relationship is established and on at least a quarterly basis thereafter. The Commission had previously proposed an unworkable structure for this disclosure to be mandatory on a trade-by-trade basis prior to clearing, but this was dropped in the final text.
As originally proposed, EU clearing members and clients that clear through a non-EU CCP will need to report the scope of that clearing activity annually, including:
The existing clearing thresholds in EMIR created problems for industry related to Brexit, because non-EU exchange-traded derivatives (ETDs) are deemed to be OTC. EMIR defines OTC derivatives as derivatives that are not traded on an EU-regulated market or equivalent third-country trading venue, but the U.K.’s exchanges have not been declared equivalent. “OTC derivatives” therefore include those traded on U.K. markets under EMIR.
The clearing obligation threshold will now be calculated differently. As per the Commission’s original proposal, instead of the calculation for the threshold looking at the trading venue, it will relate to derivatives not cleared with an EU-authorized CCP or non-EU recognized CCP. Since, unlike exchanges, U.K. CCPs are so recognized, this resolves the issue. The new text is, however, odd as a concept, since “OTC” as a concept refers to when an instrument is traded either on a venue or bilaterally, and many OTC derivatives are cleared.
ESMA will be given a new power to review the clearing thresholds periodically, and may recommend changes to the relevant classes of derivatives or the monetary threshold for any class of derivative. However, it is encouraged to focus on the threshold for commodity derivatives.
A new exemption from the clearing obligation is introduced in the final agreed text. The exemption will apply to OTC derivative contracts that are initiated and concluded as the result of an eligible post-trade risk reduction exercise. To qualify, the post-trade risk reduction (PTRR) services, the EU investment firm providing those services and each counterparty must satisfy certain conditions, which include:
In advance of the investment firm providing PTRR services, its national EU regulator must notify ESMA of the firm’s name and provide its assessment of how the investment firm will satisfy the requirements for conducting PTRR services. The national EU regulator will be responsible for monitoring ongoing compliance with these requirements.
The intention of this exemption is to facilitate the availability of PTRR services, thereby improving the resilience of the OTC derivatives markets.
EMIR 3 will, as proposed by the Commission, introduce an exemption from the clearing obligation for FCs or NFCs for derivatives trades with a third-country pension scheme arrangement that meets certain conditions, including that the pension scheme arrangement:
Notably, there is no equivalence requirement. This EU exemption will therefore allow U.K. pension schemes to trade derivatives with EU counterparties on an uncleared basis.
In the U.K., there is a temporary exemption from the clearing obligation for U.K. and EEA pension scheme arrangements, which is set to expire on June 25, 2025.[5] HM Treasury recently consulted[6] on making the exemption permanent, the outcome of which is expected later this year. The exemption stems from the difficulty that pension funds would find in funding margin calls, nominally, to provide CCPs with time to develop solutions for the transfer of non-cash collateral by pension schemes to meet variation margin calls. CCPs require highly liquid collateral, mostly cash, as variation margin, but pension schemes are not set up to hold large amounts of cash and would have to amend their business model at high costs to do so.
Various proposed amendments aim to improve the regulatory regime for EU CCPs. These were adopted in the final text much as proposed, with minor changes. As originally proposed by the Commission, EMIR 3 will clarify that EU CCPs may be authorized to provide clearing services and to carry on other activities in relation to non-financial instruments. Tweaks are made for the authorization and approval of extension of CCP activities, including making the authorization process clearer and shorter and introducing an accelerated procedure (the Commission had proposed a non-objection procedure) for the authorization of additional services or activities that a CCP intends to offer that do not increase the level of risk for the CCP. Furthermore, CCPs will be able to simply notify their national EU regulator and ESMA where they are implementing an extension of services that are “business as usual changes.” Any such changes will be a particular focus of annual supervisory reviews, as will any model changes. Various changes are also being made to improve supervisory convergence, the efficient functioning of the college system and sharing of information, including the establishment of a central database by ESMA through which regulators and CCPs will be able to access supervisory information. This is arguably a benefit of Brexit, since the EU is trying to compete by removing obviously unnecessary processes.
EU CCPs will be subject to a new reporting obligation requiring them to provide to ESMA monthly information on:
EMIR requires CCPs to have admission criteria that are non-discriminatory, transparent and objective, so as to ensure fair and open access to the CCP. CCPs must also ensure that clearing members have the financial resources and operational capacity required for participating in the CCP. Access restrictions are permissible only to control the CCP’s levels of risk.
Under EMIR 3, a CCP will only be able to accept an NFC as a clearing member if the NFC shows that it can meet margin requirements and default fund contributions, including in stressed conditions. An NFC clearing member will be prohibited from offering client clearing services, except to NFCs in its own group. This means that an NFC clearing member will only be allowed to keep accounts at a CCP for assets and positions held for its own account or those NFCs in its group.
EMIR 3 will also clarify that CCPs may not themselves be clearing members of other CCPs nor have other CCPs or clearing houses as direct or indirect clearing members. Such arrangements may only be established through regulated CCP interoperability arrangements and, as per the final text of EMIR 3, the activities relating to its investment policy, such as sponsored memberships or direct access to cleared repo markets between CCPs. Any non-compliant arrangements must be phased out within two years of EMIR 3 entering into force. Interoperability arrangements will no longer be restricted to transferrable securities and money market instruments; they may now also relate to any financial or non-financial instruments.
The transparency requirements for CCPs and clearing members have been significantly expanded since the Commission published its original proposal. A CCP and its clearing members will need to publicly disclose the prices and fees of each service provided separately, including discounts and rebates and the conditions to benefit from those reductions. In addition, a CCP must:
As originally proposed by the Commission, there will be a new obligation for entities providing clearing services as an intermediary to provide information to their clients about how a CCP’s margin model works. The range of the information required to be provided has been increased, such that in addition to providing a simulation of the margin requirements the client could be exposed to in different scenarios, information must be provided on the situation and conditions that may trigger margin calls and the procedures used to establish the amount to be posted by the clients. These disclosure requirements will apply to margin required by a CCP and any additional margin called for by the clearing member or client providing clearing services. It will apply to clearing members of CCPs and clients of clearing members that offer indirect clearing.
In our previous note on the Commission’s proposals, we mentioned that these requirements could be burdensome and ultimately result in inconsistent messaging, because numerous clearing members would be providing disparate information on a model which is not theirs, potentially leading to conflicting information for clients. The EMIR 3 agreed text provides that CCPs should, upon request, provide such information to a clearing member, which may promote greater consistency. A CCP must also provide its clearing members with a simulation tool to determine the amount of additional initial margin at portfolio level that the CCP might require upon the clearing of a new transaction, including a simulation of the margin requirements that they might be subject to under different scenarios.
EMIR requires clearing members to notify their clients of the potential losses and costs that may arise due to the application of default management procedures and loss and position allocation arrangements. The information must include the worst-case losses. This requirement will be extended to clients providing clearing services via indirect clearing.
In response to the recent issues with the size of margin calls in volatile markets, CCPs will now be required continuously (instead of regularly), to monitor and revise margin levels. CCPs will need to consider the potential impact of their intraday margin collections and payments on the liquidity position of their participants, including not retaining, unduly, intraday variation margin calls after all payments due have been received.
EMIR essentially ended the past practice of CCPs taking letters of credit (LCs) as collateral, requiring these to be collateralized in full. As a result, it is cheaper and easier just to remit collateral directly to the CCP. This development made it harder for NFCs to fund margin calls. EMIR 3 will allow clearing members and their NFC clients to post LCs (referred to as bank guarantees or public guarantees) as collateral, provided that they are unconditionally available upon request within the liquidation period. To address possible concentration risks, CCPs would need to take LCs into account when calculating their overall exposure to the bank providing the guarantee. A CCP may set out in its operating rules the minimum acceptable level of collateralization for the guarantees it accepts and may also state that it can accept fully uncollateralized bank guarantees. Uncollateralized bank guarantees must be subject to concentration limits.
In addition, as with their intraday margin calls, a CCP would need to consider any potential procyclical effects when revising the level of haircuts it applies to the assets it accepts as collateral.
In practice, there are few NFC clearing members, partly due to previous EMIR reforms, so it is unclear what impact this liberalization will have, if any.
To improve the resilience of CCPs providing services in the EU, EMIR 3 enhances the existing provisions relating to the exchange of information between ESMA and a CCP’s college in emergency situations relating to a CCP. This is mostly achieved by expanding the situations that must be alerted between the relevant authorities, specifying the information-sharing obligations and bolstering ESMA’s powers to obtain information in situations that are affecting more than one EU CCP or are destabilizing cross-border cleared markets. ESMA will have a new power to recommend that a CCP’s regulator adopts a temporary or permanent supervisory decision to mitigate any significant adverse effects. It is unclear how efficient this college process will be when reconciling potentially competing interests in a hurry.
The Commission proposed to remove an exemption from the reporting obligation for all intragroup transactions where at least one of the parties is an NFC. The provisionally agreed text retains the exemption but provides that where the NFC is subject to the clearing obligation (i.e., an NFC+), the EU parent undertaking will be required to report, weekly, the derivatives positions in aggregate at an entity level and by type of derivative. This change is intended to ensure that EU regulators have sight of the derivative activities and exposures of NFCs with substantial derivatives trading activity.
To mitigate issues relating to poor data quality and inaccurate data reporting, EMIR 3 will require counterparties subject to the reporting obligation to establish procedures and arrangements to ensure data quality. Member States will be empowered to impose penalties for repeated manifest errors in reported data.
The temporary exemption from the risk-management procedures requiring the timely, accurate and appropriately segregated exchange of collateral for uncleared single-stock options and equity index options is going to be made permanent. This is intended to align the EU framework with other jurisdictions, including the U.S., which do not impose bilateral margin requirements for these products. ESMA will monitor the markets, and the Commission is empowered to remove the exemption if a lack of convergence is found between jurisdictions or if the exemption results in risks to financial stability in the EU.
This move to a more permanent exemption will create more certainty for industry and also remove the need for the EU legislation to be periodically updated to extend the temporary exemption, which officially expired on January 4, 2024, leading to the European Supervisory Authorities issuing, in December 2023, a no-action opinion. In December 2023, the U.K. Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) extended the U.K.’s temporary exemption from January 4, 2024, to January 4, 2026,[7] stating that they would further analyze whether a permanent exemption should be implemented.
Under the final text, an NFC that becomes subject for the first time to the obligations to exchange collateral and mark to market for OTC derivative contracts not cleared by a CCP would have an implementation period of four months to negotiate and test the arrangements before becoming subject to the requirements.
Counterparties will need to obtain authorization from their EU national regulator before using or amending a model for an initial margin calculation. To reduce some of the administrative burden, the European Banking Authority (EBA) will be responsible for approving pro forma models and, once EBA-approved, a national regulator may approve its use. Following consultation, the U.K. FCA and PRA confirmed in December 2023 that they had decided not to implement a pre-approval system for bilateral initial margin models.[8]
EMIR currently provides that the Commission may adopt equivalence decisions for non-EU countries for intragroup transactions as exempt from clearing or margin, third-country derivatives reporting by NFCs and the margin requirements for uncleared OTC derivatives. To date, no equivalence decisions have been made for reporting or for intragroup transactions. However, there are several equivalence decisions for the margin requirements, namely for the U.S., Canada, Brazil, Hong Kong, Singapore, Australia and Japan; not yet, surprisingly due to political issues, for the U.K., despite it having essentially identical laws.
The Commission proposed to delete all of these equivalence mechanisms, as well as the other provisions on avoiding duplicative or conflicting rules, although it did not provide any confirmation as to whether the existing equivalence decisions on risk mitigation would still stand. The final text clarifies that the equivalence regime for margin requirements for uncleared OTC derivatives will remain in place; the other equivalence regimes will fall away or be replaced with alternative measures.
EMIR exempts NFC and FC intragroup transactions from the clearing obligation and the margin requirements. For third-country NFCs and FCs, the exemption is only currently available if the equivalence conditions are met. As proposed by the Commission, that framework, as regards the clearing obligation only, will be replaced with a list of jurisdictions for which the exemptions cannot be granted. These would be those jurisdictions that are on the EU lists as high risk for AML and tax purposes. This is intended to provide more legal certainty and predictability for the clearing obligation for intragroup transactions. The Commission will be given a new, wide power to adopt delegated acts identifying third countries whose entities would not benefit from these exemptions despite not being identified on the EU lists, using this mechanism for a third country where other risk factors apply, such as counterparty risk or legal risk.
The Commission proposed to amend the Capital Requirements Regulation (applicable to banks and large investment firms), so that the exemption from the own funds requirements for credit valuation adjustment (CVA) risk for intragroup transactions no longer links to the EMIR equivalence provisions for intragroup transactions. As proposed, instead, the exemption for intragroup transactions with a non-EU firm will be conditional on an equivalence decision on the non-EU country’s prudential supervisory and regulatory requirements. However, the Commission’s proposed transitional arrangement has not been implemented in the agreed text, leaving no recourse for firms to exclude intragroup transactions in the absence of an equivalence decision.
EMIR currently provides that an NFC that is not subject to the clearing obligation (known as an NFC-) and that trades with an FC third-country counterparty are exempt from the reporting obligation, provided that there is an equivalence decision for the relevant third country and the third-country FC has reported the trade under its national laws. The exemption would still be available; however, an equivalence decision is no longer a condition for the exemption to apply.
[1] 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.
[2] In addition to their individual responses to the Commission’s proposals, industry associations issued joint statements: Press Release, “ISDA, AIMA, EFAMA, FIA Statement on EC’s Proposed Amendments to EMIR,” February 2, 2023; Press Release, “Trade Associations Call for Deletion of Active Account Proposal,” September 7, 2023.
[3] On February 14, 2024, the provisionally agreed text of the EMIR 3 Regulation and EMIR 3 Directive were published as an update to the Council of the European Union’s press release announcing the agreement.
[4] Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.
[5] The Pension Fund Clearing Obligation Exemption and Intragroup Transaction Transitional Clearing and Risk-Management Obligation Exemptions (Extension and Amendment) Regulations 2023 (SI 2023/472).
[6] HM Treasury, “Call for evidence: pension fund clearing exemption,” November 2023.
[7] FCA and PRA, Margin requirements for non-centrally cleared derivatives: Amendments to BTS 2016/2251, PRA policy statement 18/23 ꞁ FCA policy statement 23/19, December 18, 2023.
[8] Ibid.
