Legal development

EU EMIR: ECB responds to proposed EMIR 3.0

Insight Hero Image

    What has happened?

    On 28 April 2023, the European Central Bank published its Opinion on the European Commission's proposed reforms to EU EMIR1 , commonly referred to as EMIR 3.0.

    What would the reforms mean for market participants?

    If the reforms are implemented in their current form they will have significant consequences for market participants, including:

    • firms that benefit from the intragroup reporting exemption for transactions involving a non-financial counterparty or third-country equivalent will lose the exemption and will need to report;
    • EU firms that currently clear through non-EU CCPs will need to monitor their levels of EU and non-EU clearing and maintain prescribed EU clearing levels. This may require the transfer of cleared trades from non-EU CCPs to EU CCPs; and
    • on the plus side, non-financial counterparties that become subject to the margin rules for the first time will benefit from a four-month "grace period" to establish the necessary contractual and operational arrangements.

    Is the ECB in favour of the Commission's proposals?

    The ECB is generally in favour of the proposals but suggests modifications in places. Key elements of the Opinion include:

    • the ECB supports the proposed "active account" requirement for EU entities subject to the clearing obligation to clear a proportion of certain types of transaction through an EU CCP, subject to an appropriate phase-in period;
    • the ECB supports the proposed requirement for in-scope entities to report their compliance with the active account requirement but would like the reporting frequency to be quarterly rather than annually;
    • the ECB supports the proposed requirement for EU clearing members and clients that offer clearing through both EU and non-EU CCPs to inform clients and prospective clients of the possibility of clearing through an EU CCP;
    • the ECB supports the introduction of a four-month implementation period for non-financial counterparties coming into scope of the margin rules for the first time;
    • the ECB supports the removal of the reporting exemption for intragroup transactions involving a non-financial counterparty or third-country equivalent;
    • the ECB opposes the removal of equivalence as a pre-condition to availability of the intragroup exemption and its replacement with a third country "blacklist" regime; and
    • the ECB has proposed the introduction of a competent authority right of veto of in-scope counterparties' proposed initial margin models.

    ECB support for "active account" requirement

    The most controversial of the Commission's proposals would require EU market participants that are subject to the EU EMIR clearing obligation to clear a proportion of certain types of transaction (including euro-denominated interest rate derivatives and credit default swaps) through an EU CCP. This is ostensibly to reduce the risk of financial instability by limiting EU entities' exposure to non-EU CCPs, but has been described by market participants as a "land grab" – an attempt by the EU to divert clearing business from UK CCPs to less commonly-used EU CCPs. The required level of EU clearing activity would be established through regulatory technical standards developed by ESMA in collaboration with other relevant EU bodies.

    Unsurprisingly, the ECB is in favour of this proposal. It says that continued overreliance on non-EU CCPs poses a risk to the EU's financial stability and needs to be addressed. 

    Phase-in and gradual shift

    To avoid a sudden implementation of this requirement, the ECB is also in favour of phase-in periods, which would allow counterparties to progressively fulfil their clearing obligations. It considers that a phased-in approach would also allow the EU clearing market, which is not yet as deep or robust as the UK market, to gradually broaden and develop, making it more attractive to EU market participants. The Opinion says that a gradual implementation would also allow the required clearing levels to be adapted to reflect market developments. 

    In practice, if this requirement is introduced, it will result in a gradual shift of EU market participants' clearing business from UK CCPs  - which are currently favoured over EU CCPs because of the range of clearing services available - to EU CCPs, as the latter gradually increase the breadth of their clearing offerings.

    Reporting of active account compliance 

    The Commission's original proposal would require in-scope EU entities to determine and report their compliance with the active account requirement annually, by calculating and reporting the level of trading activity cleared through an EU CCP. The ECB has suggested amendments to this proposal, which would (i) require the calculation of non-EU cleared, as well as EU cleared, trading activity, allowing a comparison of EU and non-EU clearing levels, and (ii) require quarterly, rather than annual, reporting.

    The ECB also says that technical standards prescribing the reporting format should be developed by ESMA, to ensure a uniform approach.

    ECB support for offering EU clearing and reporting clearing activity

    Under the Commission's proposal, EU clearing members and clients that offer clearing through both EU and non-EU CCPs would have to inform clients and prospective clients of the possibility of clearing through an EU CCP. They would also have to report their levels of non-EU clearing, to allow competent authorities to monitor activity levels, as would non-EU clearing members within a group that is subject to consolidated supervision in the EU, and clients in similar groups. 

    The ECB agrees with this proposal. However, as with active account reporting, it would prefer the reporting requirement to be extended to also cover EU clearing levels, to facilitate a comparison of EU and non-EU clearing. The ECB also suggests quarterly, rather than annual, reporting, in line with its suggestion on the reporting of active account compliance.

    In a bid to reduce the growing reporting burden on in-scope entities, the ECB recommends that, when determining the content of the reporting requirement, ESMA takes into account the information that is already provided under the existing reporting framework, with a view to avoiding undue operational and cost burdens.

    ECB support for four-month margin rules implementation period for NFCs

    There is currently no grace period for entities when they become subject to the EU EMIR margin rules for the first time. In its proposal, the Commission recommended introducing a four-month grace period for non-financial counterparties (NFCs) that cross the clearing threshold and become NFC+ entities. The Commission also proposed that the EBA be mandated to issue guidelines or recommendations to promote a uniform application of the margin rules.

    In its opinion, the ECB agreed with the introduction of the four-month implementation period, but suggested that technical standards would be a more appropriate way of ensuring a uniform application of the rules than non-binding guidelines.

    ECB support for removal of intragroup reporting exemption

    At present, the EU EMIR reporting obligation does not apply to intragroup transactions involving an NFC or a third-country equivalent NFC, subject to certain requirements. In the Opinion, the ECB supports the proposed removal of this exemption, on the basis that it restricts authorities' visibility of NFC risks. It also says that the lack of data around NFCs' significant intragroup energy derivatives trading hampers the ECB's ability to monitor this market sector and contributed to the high volatility levels experienced in the commodity derivatives markets in 2022. 

    The ECB also notes that no such exemption is available under the EU Securities Financing Transaction Regulation2 , which imposes on counterparties to securities financing transactions similar reporting obligations to those imposed on derivatives counterparties under EU EMIR.

    Removal of the NFC intragroup reporting exemption would significantly increase the reporting burden on NFCs within corporate groups, and the related costs.

    ECB preference to retain equivalence-based intragroup exemption framework

    Under EU EMIR, intragroup transactions can be exempted from clearing and margining where certain criteria are met. One such criterion is that, where the transaction is between an EU entity and its non-EU affiliate, the non-EU entity must be established in a jurisdiction in respect of which the EU has determined that the rules are equivalent to corresponding rules under EU EMIR. Such determinations are currently made under Article 13 EU EMIR. 

    In its proposal, the Commission recommended removing Article 13 and replacing the requirement for an equivalence determination with a "blacklist" regime, under which intragroup transactions involving a non-EU affiliate would be eligible for an exemption unless the non-EU counterparty was established in a "blacklisted" jurisdiction. Jurisdictions would be blacklisted if they were (i) non-cooperative tax jurisdictions and/or (ii) high-risk jurisdictions with deficiencies their anti-money laundering and counter-terrorist financing regimes. 

    The ECB considers that the considerations listed in (i) and (ii) above are not sufficient assessment criteria and that the current equivalence framework should be retained.

    Proposed right of veto of initial margin models

    In the Opinion, the ECB introduces a new provision under which in-scope entities would need to notify the relevant competent authority of their intended initial margin models at least three months before implementation. The competent authority would then have the right to object to the model if it did not meet applicable criteria. In such case, the in-scope entity would need to move to a different model within one year of the objection, and would need to notify the authority once it had done so. This goes further than the Commission's original suggestion that the EBA issue guidelines on application of the margin requirement, but is less prescriptive than the Initial Margin Model Validation regime proposed by the EBA in 2021. 

    Under the new provision, financial counterparties would also be required to report details of other "key information" relating to compliance with the margin obligation. The information to be reported would be specified at a later date under technical standards.

    Proposed amendments to Capital Requirements Directive 

    As part of its broader package of reforms, the Commission proposed amendments to the Capital Requirements Directive3  that would require EU firms to monitor and address any excessive concentration risk arising from their exposure to Tier 2 CCPs4 . National competent authorities would also be required to monitor concentration risk, and to ensure firms' compliance with EU requirements (including the active account requirement).

    The ECB is in favour of these proposals but notes that, as this new requirement would be closely linked to the active account requirement, the new concentration risk requirement should not take effect until the active account technical standards are finalised.

    No comment on other proposals

    The ECB has not commented on many of the Commission's other proposals, suggesting that they are not opposed. These include:

    • amendments to the clearing threshold calculation methodology to include non-cleared transactions only (although the ECB does note that consideration should be given to the effect that any such change could have on the scope of the new active account requirement);
    • the review and clarification of the NFC clearing thresholds and the hedging exemption;
    • the introduction of a clearing exemption for transactions with third-country pension scheme arrangements that are exempted under domestic law; and
    • postponement of the next review of EU EMIR from June 2024 until five years after the amending regulation enters into force.

    UK position

    The UK government has not proposed corresponding amendments to UK EMIR and has indicated that its primary legislative focus at present is tabling amendments to other major pieces of financial legislation, including the UK Prospectus Regulation regime and the UK PRIIPs Regulation.

    Authors: Daniel Franks and Kirsty McAllister-Jones

    1. EU Regulation 648/2012
    2. EU Regulation 2015/2365.
    3. EU Directive 2013/36.
    4. These are non-EU CCPs that have been determined by ESMA to be systemically important to the EU and are therefore  subject to ESMA supervision. The UK Tier 2 CCPs are LCH Limited and ICE Clear Europe Limited.