The financial regulatory landscape in the European Union is undergoing significant changes with the introduction of EMIR 3, which took effect on 24 December 2024. Designed to enhance the EU's financial infrastructure, EMIR 3 and the changes set out therein, aim to improve market stability, reduce dependence on non-EU clearinghouses, and streamline the process for derivatives clearing. In light of these, the European Securities and Markets Authority ("ESMA") has launched a consultation paper ("CP") to gather feedback on the technical aspects of these new rules, inviting stakeholders to provide input before the final regulations are implemented.
Background:
The European Union has taken a significant step in modernizing its financial regulatory framework with the introduction of EMIR 3. The Regulation is aimed at enhancing the competitiveness of EU-based Central Counterparties ("CCPs") and strengthening market stability. It is worth noting that this piece of legislation focuses also on boosting clearing activity in the EU, by reducing the internal reliance on UK-based CCPs. EMIR 3, formally known as Regulation (EU) 2024/2987, represents a comprehensive overhaul of existing rules governing derivatives clearing and risk management within the EU.
The journey to EMIR 3 began on 7 December 2022, when the European Commission published its proposal to amend the EMIR. After months of negotiation, the European Parliament and the Council reached a political agreement on the text of EMIR 3 on 7 February 2024. This agreement marked a crucial step toward the regulation's implementation. The finalised text was formally endorsed by the Council and the European Parking on 4 March 2024 and 14 February 2024.
EMIR 3 introduces amendments to several key pieces of EU legislation, including Regulation (EU) No 648/2012, Regulation (EU) No 575/2013, and Regulation (EU) 2017/1131. These amendments were officially published in the Official Journal of the European Union on 4 December 2024. The Regulation was set to enter into force on 24 December 2024.
What are the amendments to Regulation (EU) No 575/2013?
Under EMIR 3, Article 2 introduces key amendments to Regulation (EU) 575/2013, referred to also as the Capital Requirements Regulation ("CRR"), which sets out the prudential requirements for credit institutions and investment firms in the EU. These changes are especially relevant for investment firms that engage in activities such as dealing on their own account, underwriting financial instruments, and placing financial instruments on a firm commitment basis. Investment firms that meet these criteria are subject to the CRR, along with Titles VII and VIII of the Capital Requirements Directive ("CRD"), particularly if they are classified as Class 1 firms or Class 1-minus firms. Their amendments are centered around Article 382 CRR which speaks about the calculation of own funds requirements for Credit Valuation Adjustment ("CVA") risk.
What changes have been made to Regulation (EU) No 648/2012?
As part of the ongoing updates under EMIR 3, significant amendments have been made to Regulation (EU) No 648/2012, which governs over-the-counter ("OTC") derivatives and central clearing. Amendments were brought under the regulation is the Active Account Requirement ("AAR"), which mandates that financial counterparties ("FCs") and non-financial counterparties ("NFCs") subject to the clearing obligation must open and maintain an 'active account' with a CCP established within the EU. This requirement applies specifically to those FCs and NFCs that exceed the clearing threshold in interest rate derivatives, either denominated in euro or Polish złoty, or in short-term interest rate derivatives denominated in euro.
As part of the ongoing updates under EMIR 3, significant amendments have been made to Regulation (EU) No 648/2012, which governs over-the-counter ("OTC") derivatives and central clearing. Amendments were brought under the regulation is the Active Account Requirement ("AAR"), which mandates that financial counterparties ("FCs") and non-financial counterparties ("NFCs") subject to the clearing obligation must open and maintain an 'active account' with a CCP established within the EU. This requirement applies specifically to those FCs and NFCs that exceed the clearing threshold in interest rate derivatives, either denominated in euro or Polish złoty, or in short-term interest rate derivatives denominated in euro.
These amendments also build on prior regulatory updates such as EMIR REFIT and EMIR 2.2, focusing on streamlining the framework for derivatives clearing and improving market resilience. A key change introduced by EMIR 3 is the simplification of the intragroup transaction framework. Under this new approach, the previous requirement for an equivalence decision is replaced with a list of third countries where exemptions for certain transactions will not be granted.
In addition to the above, several other clearing-related updates are included in EMIR 3. These include an exemption from the clearing obligation for transactions arising from post-trade risk-reduction ("PTRR") exercises and a clearing exemption for transactions with third-country pension schemes. The Regulation also revises the calculation methodology for clearing thresholds for NFCs, providing greater clarity on when these entities are required to clear derivatives through a CCP. Moreover, clearing members and clients that provide clearing services through both EU CCPs and recognized third-country CCPs will now be required to inform clients of the option to clear through an EU-based CCP. This is part of the broader aim to encourage the use of EU clearing infrastructure and enhance transparency on margin requirements.
For these changes to be fully implemented, Level 2 technical standards will be essential. In advance of EMIR 3's official publication, the ESMA launched a CP on 20 November 2024, providing further details on the technical standards related to the AAR. This consultation, being open until 27 January 2025, with a public hearing scheduled for 20th January 2025, seeks input from stakeholders on several key aspects of the AAR, including three operational conditions designed to ensure that clearing accounts remain active and functional, such as stress-testing. Additionally, ESMA is requesting feedback on three operational conditions to ensure that clearing accounts remain active and functional, also including stress testing, the representativeness obligation for the most active counterparties, and the reporting requirements to assess compliance with the AAR.
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