Part of the European Commission’s (Commission) Capital Markets Union Clearing Package released on December 7, 2022, the proposal to amend the European Market Infrastructure Regulation (EMIR 3) will, amongst others, reduce EU reliance on third-country central counterparties (CCPs) by requiring all relevant market participants to hold active accounts at EU CCPs.
EMIR was first adopted in 2012 to increase transparency in the over-the-counter (OTC) derivatives markets (e.g. reporting of detailed information on each derivative contract to trade repositories…), mitigate credit risk (e.g. clearing of all standardised OTC derivatives contracts through CCPs, application of risk mitigation techniques for non-cleared derivatives…), and reduce operational risk (monitoring and mitigation of operational risks).
EMIR was further amended by:
EMIR Refit whose objective was “to address disproportionate compliance costs, transparency issues and insufficient access to clearing for certain counterparties.” It (i) introduced a new category of small financial counterparties, (ii) brought into the scope of regulation alternative investment funds and their managers, (iii) further the requirements with regard to clearing, risk mitigation and reporting.
EMIR 2.2 whose objective was to foster market integration, financial stability and a level-playing field by (i) providing a more effective supervisory framework of CCPs, (ii) introducing new classification of third country CCPs depending on the systemic risk they may pose for the Union, and (iii) introducing a regular monitoring of regulatory and supervisory developments in third countries.
EMIR 3 incorporates various proposals that will increase the competitiveness of the EU CCPs by tackling the issues caused by the current framework (e.g., approval procedures for launching new clearing services and activities…).
Key highlights of the changes
The provision pertaining to exempted intragroup transactions (domestically and cross border) from clearing obligations and margin requirements will be removed and replaced by a list of jurisdictions for which exemptions cannot be granted.
Financial and non-financial counterparties will be required to have an active account with an EU CCP.
Information related to clearing services
Clearing members and clients that provide clearing services both at EU & third-country CCPs will be required to inform their clients about the possibility of clearing their contracts through the EU CCPs.
Clearing members and clients established in the EU that cleared in a recognised third-country CCP will be required to report, on an annual basis, the scope of their clearing activities to their competent authority.
EMIR 3 will remove the exemption from the reporting obligation applicable to transactions between counterparties within a group, where at least one of the counterparties is a non-financial counterparty.
Calculation of the clearing thresholds
When calculating the thresholds towards the clearing obligation, financial counterparties will have to include only derivatives contracts that are not cleared at an EU CCP or a recognised third-country CCP.
The requirements related to non-financial counterparties is amended to require ESMA to review 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 non-financial entities become subject to the clearing obligation, as well as the current asset classes of OTC derivatives (interest rate, foreign exchange, credit and equity derivatives).
Risk mitigation techniques
Non-financial counterparties, subject for the first time to the requirement to exchange collateral for OTC derivatives contracts not cleared through a CCP, will benefit from a 4 month implementation period.
Streamlined process for the authorisation/recognition, extension of services and activities & refusal of CCPs
The requirements are amended to provide a shorter and less complex framework. ESMA will develop regulatory and implementing technical standards specifying the content, format of documents that must be provided.
The Proposal will now be subject to the regular legislative procedure and submitted to the European Parliament and to the Council (Member States) for review.