Legal development

EU EMIR: EU adopts EMIR 3

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    On 24 April 2024, after much back and forth between the co-legislators, the EU adopted the final text of "EMIR 3", the latest regulation to amend EU EMIR1 (see our original briefing here).

    The overarching purpose of the amendments is to enhance clearing in the EU, in particular by modernising the EU's central clearing counterparty (CCP) framework and increasing liquidity at EU CCPs. However, by far the most controversial change is the introduction of the "active account requirement", or AAR - a new requirement for certain EU market participants to annually clear a minimum number of in-scope derivative transactions through an EU CCP.

    Market participants won't know the full scope of the new rules until technical standards – of which there will be many – provide the detail. However, general consensus is that, while the AAR is not as onerous as it might have been based on earlier proposals, it is nevertheless an unwelcome additional regulatory burden for EU market participants.

    The amending regulation still needs to be translated and published in the Official Journal of the EU, so it will likely enter into force in the final quarter of this year. Thereafter, further technical standards will be needed to complete the new rules, which will enter into force throughout 2025 and possibly 2026.

    Significant amendments include:

    • introduction of the AAR;
    • changes to the clearing threshold calculation methodology to exclude transactions that are cleared through an EU-authorised or recognised CCP;
    • change to the NFC threshold calculation so that transactions entered into by group members need not be included;
    • possible future changes to the clearing thresholds and the NFC hedging exemption;
    • exemptions from mandatory clearing for transactions resulting from post-trade risk reduction services and transactions with third-country pension scheme arrangements that are exempted under their domestic laws;
    • a four-month grace period for NFC entities coming into scope of the risk mitigation requirements for the first time;
    • a permanent exemption from margining for single-stock equity options and index options;
    • new rules on initial margin model validation;
    • retention of the intragroup reporting exemption, but with a new requirement for EU parents to report on behalf of subsidiaries;
    • replacement of the "equivalence" regime for intragroup exemptions with a "blacklist" of jurisdictions; and
    • narrower substituted compliance, available only for risk mitigation.

    Changes to the EU Clearing Framework

    New active account requirement


    A key element of EMIR 3 is the AAR, a new requirement for in-scope EU market participants to clear through an EU CCP a minimum number of in-scope transactions per year.

    In-scope transactions are:

    (i) euro-denominated interest rate derivatives;

    (ii) Polish zloty-denominated interest rate derivatives;

    (iii) euro-denominated short-term interest rate derivatives;

    (iv) any additional transaction types deemed by ESMA to be of substantial systemic importance and specified as such in technical standards.

    An earlier proposal to extend the AAR to euro-denominated credit default swaps has been dropped from the final version.

    The stated aim of the new rule is to reduce financial instability by limiting EU entities' exposure to systemically important non-EU CCPs (also known as Tier 2 CCPs2). However, it is considered by many to be a thinly veiled attempt to break the UK CCPs’ hold on the clearing market. At present, the vast majority of euro-denominated derivatives are cleared through LCH Limited or ICE Clear Europe Limited (the Tier 2 UK CCPs). By introducing this requirement, and by simultaneously making it easier for EU CCPs to expand their clearing offering (see "Expansion of EU CCPs' services" below), the EU hopes to seize a share of this lucrative business.

    Scope and timing

    The AAR will only apply to entities (i) that are subject to the EU EMIR clearing obligation (i.e. FC+ and NFC+ entities) and (ii) whose trading of in-scope transactions exceeds the clearing threshold for such transactions, on an individual or aggregate basis (also see "Review of clearing thresholds and hedging exemption" below).

    The AAR comprises two elements:

    1. The operational requirement, under which in-scope entities will need to hold, directly or indirectly, at least one "active account" with an EU CCP. The account will need to be capable of clearing all of the entity's new in-scope transactions and be able to accept multiple in-scope transactions from Tier 2 UK CCPs at short notice.

    In-scope entities will need to establish suitable accounts within six months of becoming subject to the AAR. For many firms, this will mean within six months of the AAR entering into force, which could be early in 2025. The timeline for ESMA to delineate the parameters for such accounts is also six months after the regulation's entry into force, so these technical standards will need to be expedited if market participants are to have the detail that they need to open their accounts in time.

    2. The representativeness requirement, under which in-scope entities will need to clear a minimum (or "representative") number of in-scope transactions through their active EU accounts, on an annual average basis.

    The minimum number will be established by ESMA. For each type of in-scope transaction, ESMA will specify up to five sub-categories, based on a combination of asset class, maturity and trade size. In-scope entities will need to clear at least five transactions per class of derivative per "reference period" in each of the most relevant sub-categories. As the requirement is considered on an annual average basis, when determining whether the requirement has been fulfilled competent authorities will look at the total number of trades over a year.

    The applicable "reference period" will be at least one month for counterparties with an outstanding notional in-scope clearing volume of over €100 billion, and at least six months for counterparties with an outstanding notional in-scope clearing volume of under €100 billion, with actual timeframes still to be determined by ESMA.

    Again, the technical standards establishing these details need to be drafted by ESMA within six months of the amending regulation entering into force, giving affected firms little time to establish the necessary operational arrangements.

    Further guidance needed

    The full scope of the AAR is not clear from the amending regulation, and even when all the technical standards are in place market participants will almost certainly need additional guidance to fully understand the regime. For example, it is unclear from the amending regulation whether in-scope entities are to assess their trading activity against the existing clearing thresholds or the amended, future, thresholds (see "Review of clearing thresholds and hedging exemption" below). Presumably this must be the former, as the new thresholds are unlikely to be known until after the AAR starts to apply. If this is the case, affected entities will need further guidance around whether they will also need to re-calculate and re-assess when the new thresholds are known.

    EU-headquartered groups

    The AAR applies at entity, rather than group, level, and will only apply to entities within the EU. However, the AAR calculations of an entity belonging to a group subject to consolidated supervision in the EU will need to include in-scope transactions entered into by all group entities (whether EU- or non-EU-based), although it can exclude intragroup transactions.

    AAR reporting

    Entities that are subject to the AAR will need to report to their competent authorities their exposure to in-scope transactions every six months, so that the competent authority can assess whether the entity is AAR-compliant. They will also need to demonstrate that their active accounts are functional and that all the necessary legal documentation is in place. In-scope entities that also clear in-scope transactions through Tier 2 UK CCPs will need to show that their EU accounts can receive large volumes of in-scope transactions from those CCPs at short notice.

    EU clearing members and clients that clear through Tier 2 UK CCPs, whether or not in scope of the AAR, will also need to report details of their UK clearing, including the types of instruments cleared, average annual values cleared per currency and asset class, and the amount of margin collected. ESMA will develop technical standards on this in due course. For entities that are part of EU-consolidated groups, the EU parent will need to report on behalf of its subsidiaries. This information will assist ESMA in its ongoing comparison of UK and EU clearing levels and its determination as to whether additional rules are needed to increase the volume of clearing through EU CCPs (see "Possible quantitative requirement" below).

    To reduce the reporting burden on affected entities, when developing technical standards, ESMA is required to take into account the information and reporting channels that are already used to report under EU EMIR.

    Clearing disclosure

    Firms that provide clearing services to EU entities through both EU and non-EU CCPs will need to inform their clients of the option to clear through an EU CCP, and disclose the fees and other costs associated with each separate CCP. Technical standards will build on this requirement in due course.

    AAR exemptions and deviations

    A number of exemptions and deviations apply in certain circumstances:

    • the representativeness requirement is subject to a de minimis threshold of €6 billion, so will not apply to entities with a notional outstanding clearing volume under this amount (although the operational requirement will still apply);
    • if the applicable minimum number of trades to be cleared exceeds half a counterparty's total trades over the preceding twelve months, the representativeness requirement will be met by clearing at least one trade in each of the sub-categories per reference period. It is not clear whether "total trades" refers to the total number of trades or the aggregate notional amount of those trades;
    • entities that clear at least 85% of their in-scope transactions through an EU CCP are exempted from the operational requirement; and
    • the representativeness requirement will not apply to the provision of client clearing services.

    Possible future quantitative requirement

    EU CCPs will need to report monthly to ESMA on clearing levels, per currency and asset class. Within 18 months of the amending regulation's entry into force, ESMA will use this information to assess the effect of the new rules on UK and EU clearing levels and determine whether additional measures are necessary to further reduce non-EU clearing. These could include the implementation of a so-called quantitative requirement, which was mooted earlier in the legislative process and would be more onerous for market participants.

    This is an aggressive timeframe: by the time of the review, the new rules may only have been fully implemented for a few months. Some consider this to be a warning from the co-legislators that, if market participants do not move sufficiently fast to reduce non-EU clearing, they will find themselves subject to even more onerous requirements.


    The amending regulation requires competent authorities to impose administrative penalties or "periodic penalty payments" for non-compliance with the AAR. The periodic penalty payments can be up to three per cent. of the entity's average daily turnover in the previous business year, for each day of non-compliance, for a maximum of six months.

    Individual member states are also able to implement criminal penalties.


    The amending regulation is expected to be published in the Official Journal of the EU in Q4 2024, and will enter into force 20 days later. This means that the AAR will likely take effect during the first half of 2025, giving affected firms little time to establish their active accounts. This issue is particularly acute given that the account parameters may not be known until the AAR application date.

    As discussed at "Scope and timing" above, the fact that many of the technical standards are unlikely to be finalised until after the AAR takes effect may cause difficulties for market participants when determining whether they are subject to the AAR, what transactions they will need to clear through their active account(s), and what thresholds to use when making these determinations.

    NFC clearing calculation methodology changes

    In a move that will be widely welcomed by the market, the way in which NFCs determine whether they have exceeded the clearing threshold is being changed so that:

    • transactions that are cleared through an EU-registered or recognised CCP are excluded from the calculation; and
    • NFCs will no longer need to count OTC derivative contracts entered into by other NFCs in their group.

    These changes will significantly reduce the number of NFC+ entities, meaning that fewer non-financial market participants will be subject to mandatory clearing, and, consequently, the AAR. The hedging exemption will still apply, further reducing the number of transactions counted, but this is subject to review and may be amended in due course.

    Furthermore, new clearing thresholds are to be set by ESMA, with technical standards to be drafted within one year of the amending regulation's entry into force and a mandatory review at least every two years.

    In light of this, it will be some time before the full picture as regards NFC threshold calculations is clear.

    FC clearing calculation methodology changes

    FCs will also need to calculate their non-cleared positions and measure these against new clearing thresholds. However, they may also be required to calculate their aggregate positions, including both cleared and non-cleared transactions. It is not clear from the text of EMIR 3 whether this will apply in all cases, as it refers to the establishment of clearing thresholds for aggregate positions "where necessary to ensure a prudent coverage of financial counterparties under the clearing obligation". Given that the aggregate position will always be higher than the uncleared position, it seems unlikely that EMIR 3 would require all FCs to calculate both levels in all circumstances, so it is possible that the requirement to calculate the aggregate position as well as the non-cleared position will only apply to certain entity types, or entities with a particularly high level of clearing activity. Without further guidance, this may not become clear until ESMA produces technical standards.

    As with NFCs, new clearing thresholds are to be set by ESMA, with technical standards to be drafted within one year of the amending regulation's entry into force and a mandatory review at least every two years.

    As was the case pre EMIR 3, FCs will need to calculate their aggregate derivative positions on a group-wide basis, without the benefit of a hedging exemption.

    Review of clearing thresholds and hedging exemption

    As discussed above, the amending regulation mandates ESMA to review and clarify the hedging exemption and the clearing thresholds. In particular, ESMA is encouraged in the Recitals to consider introducing more granularity around the threshold for commodity derivatives, so changes to the current €4 billion threshold are possible.

    The Recitals to the amending regulation suggest separating the thresholds by sector and type, for example by differentiating between agriculture, energy or metal related commodities, or by differentiating commodities based on environmental, social and governance criteria.

    Expansion of EU CCPs' services

    Based on recommendations made by the European Parliament (discussed here), the amending regulation introduces changes to the EU CCP model designed to increase the attractiveness of EU clearing. The changes:

    • streamline the approval process for EU CCPs to expand their services;
    • introduce a new category of "business as usual" changes to a CCP's services, which would not need regulatory approval; and
    • introduce greater transparency around EU CCPs' margin models and related cost considerations.

    Exemption for transactions resulting from post-trade risk reduction services

    Acknowledging that post-trade risk reduction (PTRR) services such as portfolio compression reduce risk, EMIR 3 exempts from clearing the resultant transactions. The exemption is subject to conditions, including that the service (i) reduces risk, (ii) is market risk neutral, and (iii) does not contribute to price formation. Some of the conditions require further detail, which ESMA will provide through technical standards.

    Some market participants have historically been reluctant to use PTRR services, to avoid increasing their clearing burden. This exemption should remove this obstacle to their use and, in doing so, help to reduce risk.

    Exemption for transactions with third-country pension schemes

    A further amendment to the clearing obligation permanently exempts transactions between an EU FC+ or NFC+ and a non-EU pension scheme that is exempted under its domestic rules. This will align EU EMIR with similar regimes in other jurisdictions and avoid regulatory arbitrage by market participants.

    Changes to the EU Margining Framework

    Implementation period for newly in-scope NFCs

    Under the current EU EMIR, there is no grace period for entities when they first become subject to the margin rules, so they must comply from day one. This can be problematic, as it can take a significant amount of time and resource to put in place the required documentation and establish the necessary operational arrangements.

    The amending regulation will introduce a four-month grace period for NFCs that cross the clearing threshold and become NFC+ entities, starting on the date of the NFC's notification of its "+" status. During the four-month period, a newly categorised NFC+ will be exempt from the margin requirement. Unhelpfully, the exemption applies specifically to the newly-categorised NFC+ entity, rather than the transactions into which it enters. This means that financial counterparties and other (existing) NFC+s will have to form a view as to whether the exemption also applies (as must be intended) to their own obligation to exchange collateral when dealing with the newly-categorised NFC+.

    Possible future guidance

    The amending regulation also empowers ESMA and the European Banking Authority (EBA) to issue guidance to ensure a uniform application of the EU EMIR risk-management rules. At present, it is unclear how certain rules around AANA calculation should be interpreted, and in particular whether newly in-scope firms should calculate based on the most recent March, April and May or based on the forthcoming March, April and May. Official guidance in this area would be welcome, particularly if it confirmed that the latter approach should be adopted.

    Permanent exemption for single-stock equity options and index options

    To align EU EMIR with similar international regimes, the current rolling temporary margin exemption for single-stock equity options and index options will be made permanent, subject to ongoing review of their treatment in other jurisdictions and a full report to the Commission at least every three years.

    Pre-approval of initial margin models

    Under the new rules, FCs and NFC+s will need to obtain authorisation from their competent authorities before adopting or changing an initial margin model. The EBA is mandated to act as a "central validator" for pro-forma IM models, such as the ISDA Standard Initial Margin Model, to streamline the approval process.

    Changes to the EU Reporting Framework

    Intragroup exemptions

    The intragroup reporting exemption for NFCs has been retained. However, for EU groups containing one or more NFC+s or third-country equivalent NFC+s that benefit from the exemption, the EU parent must report their net aggregate positions on a weekly basis, per entity and broken down by transaction type. This additional reporting requirement balances the Commission's concerns around the systemic importance of intragroup transactions and market concerns that removing the exemption would increase the reporting burden on corporates, and related costs.


    Competent authorities will be able to impose "periodic penalty payments" for repeated "manifest errors". The maximum penalty payments are lower than for AAR non-compliance, at one per cent. of average daily turnover in the previous "business year", for each day of non-compliance, for a maximum of six months.

    Changes to Exemptions and Equivalence

    Intragroup exemptions – equivalence replaced by blacklist

    As expected, the requirement for an equivalence determination to be in place for an intragroup exemption to be available is being replaced with a "blacklist" regime, under which transactions involving a counterparty established in a blacklisted jurisdiction will not be eligible for the exemption. Blacklisted jurisdictions will include (i) non-cooperative tax jurisdictions, (ii) jurisdictions with deficient anti-money laundering and counter-terrorist financing regimes, and (iii) additional jurisdictions specified by the European Commission from time to time. Blacklisted jurisdictions currently include the UAE and the Virgin Islands.

    The amending regulation is silent on whether existing exemptions will be grandfathered under the new regime.

    Substituted compliance for margining only

    In its original proposal, the European Commission suggested removing the substituted compliance regime. In response to market feedback, and in recognition of widespread market reliance on the regime, especially in the context of margining, the final text has been re-drafted so that the provision is retained, but with a narrower scope. Substituted compliance is therefore now only available in respect of the risk mitigation requirements, and does not extend to the clearing or reporting regimes.

    The wording of the provision has also been amended to replace the requirement for one of the counterparties to be "established" in the equivalent jurisdiction with a requirement for one of the counterparties to be subject to the equivalent requirements in the relevant jurisdiction. Market participants have long argued that this is a more appropriate formulation, as certain regimes (notably the US) apply to entities which are not established in that jurisdiction. The new formulation more accurately reflects the application of these regimes in practice.

    EU EMIR review postponed

    EU EMIR currently requires the Commission to report on the regulation's application by 18 June 2024. The amending regulation postpones the 2024 review until five years after the amending regulation enters into force, as well as introducing further reviews, including consideration of whether PTRR services should be considered systemically important and whether their use in the EU has increased risk.

    Position under UK EMIR

    Although future changes are expected to UK EMIR3 as part of the UK government's review of the UK's regulatory framework, there is no suggestion currently that the UK will follow the EU's approach, on the AAR or otherwise.

    We will continue to follow developments and provide updates as both the EU and the UK positions evolve

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


    1. EU Regulation 648/2012.

    2. Being, at the time of writing, LCH Limited and ICE Clear Europe Limited.

    3. EU EMIR as onshored into UK law.

    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.


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