Legal development

EU EMIR: EMIR 3 and the active account requirement

spiral background

    Key points

    • From 24 December 2024, entities that are in scope of the AAR should notify ESMA and their competent authority accordingly.
    • When determining whether they are in scope, market participants should use the current clearing thresholds. If these change after ESMA's review (discussed in our earlier briefing), firms may need to re-visit their scoping calculations.
    • When performing AAR scoping calculations, EU-consolidated groups need to include the trading activity of the whole group, including non-EU entities. There is no hedging exemption, but intragroup transactions can be excluded.
    • The AAR comprises two elements: the operational requirement and the representativeness requirement. In-scope entities need to consider whether they are subject to (i) the operational requirement only, (ii) the representativeness requirement only, or (iii) both.
    • Market participants that are in scope of the AAR will be subject to new reporting requirements irrespective of whether they are subject to the operational requirement, the representativeness requirement, or both.
    • In-scope entities have until 25 June 2025 to establish an account with an EU CCP or set up a clearing arrangement through a client clearing service provider. 
    • In relation to active accounts, the consultation recommends that in-scope entities be required to provide (i) evidence of appropriate internal policies, sufficient resources, and adequate collateral, and (ii) signed CCP confirmations of operational capacity and stress testing.
    • The exact parameters of the AAR are still not finalised, but ESMA has proposed the classes and sub-categories of derivative transaction that it thinks should be covered. Several of the recommended classes are already subject to the EU EMIR clearing obligation, which should minimise the operational burden. 
    • ESMA has proposed various exemptions and deviations from certain aspects of the AAR, based on trading levels and quantitative thresholds.
    • From 24 December 2024, clearing members and firms providing client clearing services need to disclose to clients certain information about the CCPs through which they offer clearing. Technical standards on this are not due for 12 months, so affected entities may wish to use existing EU disclosure guidelines in the meantime.

    What has happened?

    On 27 January 2025, ESMA closed its first consultation on draft technical standards under EU Regulation 2024/2987, a new iteration of EU EMIR known as EMIR 3 that entered into force on 24 December 2024. We summarise the changes made by EMIR 3 in this briefing.

    Many of the obligations created by EMIR 3 apply from 24 December 2024, but some, including aspects of the new active account requirement (AAR), will only apply from 25 June 2025. The basic framework of the AAR is set out in EMIR 3, but this needs to be supplemented by technical standards drafted by ESMA. Now that the consultation period has closed, ESMA plans to expedite the review process so that the technical standards can be finalised before 25 June 2025.

    In this briefing, we outline key considerations for market participants, based on ESMA's proposed technical standards.

    The draft technical standards are divided into three sections covering (i) the operational requirement and stress testing for active accounts, (ii) the representativeness requirement, and (iii) the new reporting requirements. We discuss each below. 

    AAR overview

    AAR scope

    The AAR is a new clearing obligation designed to increase clearing activity in the EU. It comprises two elements – the requirement to establish an appropriate account with an EU CCP (known as the operational requirement) and the requirement to clear in that CCP a minimum number of in-scope transactions each year, being a number of transactions that is representative of that entity's non-EU clearing activity (known as the representativeness requirement).

    In order to determine whether one or both of these requirements applies, a number of calculations need to be undertaken. These are described below.

    For a particular entity to determine whether it is in scope of the AAR at all, there are two calculations that it needs to perform: 

    1. it must first be subject to the EU EMIR clearing obligation (i.e. be an FC+ or NFC+ entity); and
    2. its trading of OTC euro-denominated interest rate derivatives, OTC Polish zloty-denominated interest rate derivatives, or euro-denominated short-term interest rate derivatives (together in-scope transactions) must exceed the EUR 3 billion clearing threshold, either on an individual basis for each in-scope transaction type, or in aggregate across all three in-scope transaction types. 

    Euro-denominated short-term interest rate derivatives (EUR STIR) are technically exchange-traded derivatives but can be classified as OTC derivatives under EU EMIR if not executed on an EU regulated market or a non-EU "equivalent" regulated market. In the consultation, ESMA clarifies that EUR STIR that are classified as OTC derivatives need to be included in the AAR scoping calculation. This includes EUR STIR executed on a UK CCP, as the UK market has not been found to be "equivalent". 

    The clearing obligation calculations (limb 1 above) should be undertaken in the usual way (i.e. aggregate month-end average positions for the previous 12 months, with the group scope depending on whether the calculating entity is an FC or an NFC).

    The AAR calculations (limb 2 above) should also be based on aggregate month-end average positions for the previous 12 months, with EU-consolidated groups counting all group activity, including that of non-EU entities. There is no differentiation for FCs and NFCs and no hedging exemption, but intragroup transactions can be excluded.

    If the clearing thresholds change after ESMA's expected review, market participants may need to re-visit their scoping calculations. This could result in a change in status for some entities, which would be operationally burdensome and possibly costly. However, in the consultation ESMA indicates that any future change to the thresholds is unlikely to be substantial. Furthermore, the Recitals to EMIR 3 suggest that the European Commission expects ESMA's review to focus predominantly on the commodity derivatives threshold, which should limit its impact.

    Once an entity has determined that it is in scope of the AAR, it needs to then consider separately whether it is subject to (i) the operational requirement only, (ii) the representativeness requirement only, or (iii) both the operational and the representativeness requirements. It is possible to be subject to the operational requirement but not the representativeness requirement, and vice versa.  See the scoping flowchart at Annex 1 for a summary.  

    An entity that is in scope of the AAR will be subject to the reporting requirements discussed below irrespective of whether it is subject to the operational requirement, the representativeness requirement, or both.

    Notification requirement

    If an EU entity exceeds both of the thresholds described above, it is within scope of the AAR and must notify ESMA and its competent authority accordingly. ESMA has published a standardised notification template for this.

    Operational requirement

    Scope

    In an entity is in scope of the AAR, unless the 85% operational account exemption described in Exemptions and deviations below is applicable, the operational requirement will apply. 

    ESMA suggests that the 85% threshold should be calculated on an aggregated basis, at group level for EU-consolidated groups, excluding intragroup transactions. However, this is not explicitly stated in the EMIR 3 regulation and may change in the final technical standards.

    The obligation

    If the operational requirement applies, the in-scope entity has six months to establish with an appropriate EU CCP an active account that meets the specified operational criteria. For entities that are in scope from 24 December 2024, this means having one or more operational accounts in place by 25 June 2025. 

    ESMA suggests in the consultation that this requirement can be satisfied on a group-wide basis by one entity within the group. However, it is unclear how this would operate in practice, so it will be necessary to consider how, if at all, this is reflected in the final technical standards.

    Account criteria

    Each account needs to meet certain operational criteria. Among other things, accounts must be (i) permanently functional, (ii) operationally able to clear all the entity's new in-scope transactions, and (iii) able to accept multiple in-scope transactions from other CCPs at short notice. 

    ESMA's draft technical standards build on these requirements, specifying that in-scope entities should establish:

    • a contractual arrangement with an EU CCP, a clearing member, or a client providing client clearing services for in-scope transactions;
    • internal policies and procedures to access the clearing services of an EU CCP, either directly or indirectly via a clearing arrangement; 
    • cash and collateral accounts with sufficient financial resources to meet the obligations arising from participation in an EU CCP; and
    • an IT system with connectivity to an EU CCP, a clearing member, or a client providing client clearing services.

    These are all standard requirements when establishing a clearing arrangement, so should not prove unduly onerous. However, the draft standards also go further, requiring in-scope entities to:

    • set up internal systems to monitor exposures and internal arrangements to support a large inflow of transactions from systemically important non-EU CCPs; 
    • appoint at least one appropriate staff member to support the clearing arrangements; and
    • obtain from the CCP a signed written statement confirming that the account would be able to clear up to three times the notional outstanding in-scope transactions cleared over the previous 12 months.

    Market participants are required to demonstrate compliance with the above to their competent authority every six months. Under the draft technical standards, this would include written confirmations (including the statement from the CCP), summaries of material changes since the last report, and information on the account statements for cash and collateral. Firms would also need to provide signed confirmation from the EU CCP as to operational capacity and stress testing. In an indirect clearing scenario, the draft technical standards provide for in-scope entities to request the necessary CCP confirmations from the firm providing the clearing service.

    This may require the implementation of internal processes to ensure that the new requirements are met on time.

    Stress testing

    Entities that are subject to the operational requirement need to stress test their active accounts at least once a year. ESMA says in the consultation that it understands the term "stress testing" to mean "running appropriate tests on the systems and resources of the counterparty, as well as the [EU CCP] account".

    In the draft technical standards, ESMA proposes that firms should have to conduct (and provide written confirmation of this to ESMA) technical and functional tests to verify operational capacity and IT connectivity with the CCP, and also provide a signed written statement from the CCP confirming that the account can withstand an increase in clearing activity of up to 85% of the total clearing activity in in-scope transactions by entities subject to the AAR. 

    The consultation indicates that the 85% stress test should be carried out every six months for counterparties with a "notional clearing volume outstanding" of above EUR 100 million, and every 12 months for other entities. Acknowledging that "notional clearing volume outstanding" is not a commonly used metric, ESMA suggests that it should be interpreted to mean the cleared outstanding notional amount, in line with the metric used to measure against the clearing thresholds under the clearing obligation. The term is also used in relation to the EUR 6bn threshold exemption discussed below, in which context the same interpretation should be used.

    Representativeness requirement

    Scope

    If an entity is in scope of the AAR, unless the EUR 6bn threshold exemption described in Exemptions and deviations below is applicable, the representativeness requirement will apply. 

    The obligation

    The representativeness requirement is the most complex of the two AAR elements and mandates the clearing of a minimum number of transactions per year in an EU CCP. The minimum number is to be determined regularly by each in-scope entity, based on various parameters.

    In-scope counterparties will need to clear through an EU CCP at least five transactions falling within the required number of most relevant sub-categories for each class, for each reference period. This needs to be considered on an annual average basis, so competent authorities will need to consider the total number of trades over a year when assessing compliance.

    These parameters are explained below, and in the summary table attached as Annex 2.

    The EMIR 3 text specifies the broad categories of transaction that are in scope of the AAR. These are:

    • OTC euro-denominated interest rate derivatives;
    • OTC Polish zloty-denominated interest rate derivatives; and
    • euro-denominated short-term interest rate derivatives.

    ESMA's technical standards build on these broad categories by sub-dividing them further, into sub-groups based on (i) classes of in-scope transaction and (ii) sub-categories of class. Once in final form, the technical standards will specify which sub-groups of each type of in-scope transaction are subject to the representativeness requirement, based on a combination of class and sub-category. 

    Recommended classes

    ESMA's recommended classes for each in-scope transaction type are:

    • for OTC euro-denominated interest rate derivatives, the fixed-to-float interest rate swaps, forward rate agreements and overnight indexed swaps that are subject to the existing clearing obligation (euro classes); 
    • for OTC Polish zloty-denominated interest rate derivatives, the fixed-to-float interest rate swaps and forward rate agreements that are subject to the existing clearing obligation (PLN classes); and
    • for euro-denominated short-term interest rate derivatives, cash-settled futures and options that are executed on any EU or third-country exchange, where the underlying is a three-month EURIBOR- or €STR-denominated reference rate (STIR classes).

    Recommended sub-categories

    For each class of derivative, in-scope entities will need to clear in their EU account at least five transactions falling within each of their "most relevant transaction sub-categories" per reference period, on an annual average basis. 

    This involves:

    1. for each class of derivative, identifying what the reference period is (as indicated in the table in Annex 2); and
    2. for each class of derivative (for example, euro-denominated fixed-to-floating interest rate swaps), identifying the OTC derivative transactions cleared in a non-EU CCP during that reference period and allocating them to the appropriate sub-category for that class of derivative.

      ESMA has proposed sub-categories for each of the recommended classes. These sub-categories are based on a combination of maturity range and trade size, as indicated in the table in Annex 2 (see the columns headed "Maturity ranges" and "Trade size ranges"). Within each class of OTC derivatives, each pairing of a specified maturity range and a specified trade size range will constitute a sub-category.

      For example, euro-denominated fixed-to-floating interest rate swaps have four proposed maturity ranges and three proposed trade size ranges, resulting in a total of 12 sub-categories for that class of derivative.

    3. for each class of derivative, ranking the sub-categories in order, based on the number of OTC derivative transactions in each sub-category cleared in a non-EU CCP during that reference period.
    4. for each class of derivative, identifying from the technical standards how many "most relevant sub-categories" apply to that class.

      ESMA has proposed the number of most relevant sub-categories for each class of derivative (as per the table in Annex 2 – see the column headed "Number of most relevant sub-categories"). For example, five most relevant sub-categories need to be identified for euro-denominated fixed-to-floating interest rate swaps, while only four need to be identified for euro-denominated STIR transactions referencing 3-month Euribor.

    5. for each class of derivative, identifying which sub-categories are the most relevant sub-categories for the reference period (by reference to the outcome of (3) and (4) above).
    6. for each of those most relevant sub-categories, ensuring that the requisite number of trades is cleared through an EU CCP in that reference period.  

    ESMA's proposed parameters are deliberately wide and give in-scope entities broad scope to ensure compliance with the representativeness requirement.

    Reference periods

    ESMA must also set the reference periods that will be used to determine whether the required minimum number of transactions is actually cleared over the year. EMIR 3 requires ESMA to specify different minimum reference periods for entities with an outstanding cleared notional amount in in-scope transactions of under €100 billion (small counterparties) and entities with an outstanding cleared notional amount in in-scope transactions of above €100 billion (large counterparties), excluding transactions that are entered into as part of a client clearing arrangement.

    ESMA recommends the following reference periods (as indicated in the table in Annex 2):

    • for the euro classes, six months for small counterparties and one month for large counterparties;
    • for the PLN classes, twelve months for all counterparties; 
    • for the STIR classes where the underlying rate is EURIBOR, six months for small counterparties and one month for large counterparties; and
    • for the STIR classes where the underlying rate is €STR, twelve months for small counterparties and six months for large counterparties.

    It is not clear whether firms are required to clear five trades in the sub-categories that have the most trades during the current reference period or the previous reference period.

    Although the parameters of the AAR are not yet settled, in-scope entities may wish to use the consultation as an indication of ESMA's direction of travel and establish their accounts and start clearing on the basis of the recommendations.

    Exemptions and deviations

    Various exemptions and deviations apply in certain circumstances:

    • Under the 85% operational account exemption, entities that already clear at least 85% of their in-scope transactions through an EU CCP are exempted from the operational requirement and the related stress-testing and reporting obligations, on the basis that they obviously already have the necessary infrastructure in place to clear large volumes of in-scope transactions through an EU CCP. 
    • Under the EUR 6bn threshold exemption, the representativeness requirement will not apply to entities with a total outstanding notional amount of cleared in-scope transactions of less than €6 billion, so no EU clearing will be mandated for these entities (although the operational requirement may still apply).
    • If the minimum number of trades to be cleared by a particular entity in a reference period exceeds 50% of its total trades over the previous year, the representativeness requirement falls from clearing five trades in each of the sub-categories per reference period to clearing just one trade.
    • The representativeness requirement will not apply to the provision of client clearing services. 

    Finally, in the consultation ESMA addresses industry concerns by clarifying that firms are not expected to enter into transactions solely for the purpose of complying with the AAR.

    New reporting requirements

    AAR reporting

    Every six months AAR in-scope entities will need to report to their competent authorities their in-scope transaction activity and risk exposure, so that AAR compliance can be assessed. In its consultation, ESMA specifies how firms should calculate and report this, referencing data already used for trade reporting. Helpfully, the draft technical standards contain reporting tables populated with reporting fields that cross-refer to the EU regulation on EU EMIR trade reporting. ESMA also refers market participants to existing reporting guidelines for further guidance.

    The data to be reported is divided by ESMA into two categories:

    • general information on the counterparty itself, including the counterparty's LEI, its EU EMIR status, and a list of all the entities within its group; and 
    • information relating to the counterparty's risk exposure, including notional amounts, trade volume, details of posted initial and variation margin (on an aggregated, cumulative basis), and whether any trades have been entered into under a client clearing arrangement. 

    ESMA proposes that entities should report notional amounts on both a gross and a net basis.

    EU-consolidated groups are required to report certain information for all EU and non-EU group entities.

    There are further reporting requirements for entities which are subject to the representativeness requirement. They need to report (i) their in-scope transaction EU and non-EU clearing activity (ii) whether they are required to clear five trades or one trade per sub-category, and (ii) what their reference period is, so that the competent authority can assess AAR compliance. Entities that are subject to the operational requirement also need to submit reports to demonstrate compliance with that requirement.

    Further ESMA guidance and next steps

    ESMA guidance

    In the consultation, ESMA notes that the anticipated AAR reporting is separate from the existing trade reporting regime, not least because under the existing regime reports are made to trade repositories rather than directly to competent authorities. ESMA also notes the lack of a mandate for it to develop implementing technical standards for AAR reporting, commenting that this could lead to a divergence in reporting methods. To mitigate this, ESMA proposes two solutions:

    • the use of technical standards to mandate twice-yearly reporting, on 1 January and 1 July; and
    • the use of supplementary technical standards with additional level 3 guidance addressing reporting formats and methods.

    Next steps

    ESMA plans to implement the AAR technical standards on an expedited basis, so that they are in place before 25 June 2025. It may be problematic for firms to start implementation measures without final technical standards, but the consultation gives a strong indication of ESMA's views and should serve as a useful steer.

    For more information on and EU EMIR and UK EMIR, please see our EMIR Hub or contact your usual Ashurst contacts.

    Annex 1 – EMIR 3 AAR scoping flowchart

    Annex 2 

    Category

    Classes

    Maturity ranges

    Trade size ranges

    Number of "most relevant" sub-categories

    Reference period

    Number of trades to be cleared per reference period

    EUR-denominated interest rate derivatives

    EUR Fixed-to-float

    0-5Y
    5Y-10Y
    10Y-15Y
    15Y+

    0-25M
    25M-50M
    50M+

    5 (of 12 sub-categories)

    • 1 month for large counterparties
    • 6 months for small counterparties

    At least 5 in each of the 5 "most relevant" sub-categories

    EUR OIS

    0-1Y
    1Y-2Y
    2Y-5Y
    5Y+

    0-25M
    25M-100M
    100M+

    5 (of 12 sub-categories)

    • 1 month for large counterparties
    • 6 months for small counterparties

    At least 5 in each of the 5 "most relevant" sub-categories

    EUR FRA

    0-6M
    6M-12M
    12M-18M
    18M+

    0-75M
    75M-200M
    200M+

    5 (of 12 sub-categories)

    • 1 month for large counterparties
    • 6 months for small counterparties

    At least 5 in each of the 5 "most relevant" sub-categories

    PLN-denominated interest rate derivaties

    PLN Fixed-to-float

    Any

    Any

    1 (of 1 sub-category)

    • 12 months for all counterparties

    At least 5

    PLN FRA

    Any

    Any

    1 (of 1 sub-category)

    • 12 months for all counterparties

     At least 5

    EUR-denominated short-term interest rate derivatives

    EUR STIR referencing 3-month Euribor

    0-6M
    6M-12M
    12M-18M
    18M+

    Any

    4 (of 4 sub-categories)

    • 1 month for large counterparties
    • 6 months for small counterparties

    At least 5 in each sub-category

    EUR STIR referencing 3-month €STR

    0-6M
    6M-12M
    12M-18M
    18M+

    Any

    4 (of 4 sub-categories)

    • 1 month for large counterparties
    • 6 months for small counterparties

    At least 5 in each sub-category

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.