Top 10 things you need to know about EMIR 3.0 regulations

EMIR 3.0 proposals

The European Commission published its proposals for a package of amendments – known as EMIR 3.0 - relating to the European Market Infrastructure Regulation (EMIR) (Regulation (EU) No 648/2012) in December 2022. The proposals entered the EU’s ordinary legislative procedure and, in December 2023, the Council of the EU and the European Parliament each published texts setting out their negotiating positions.

On 7 February 2024, the Council and the Parliament announced that provisional political agreement had been reached and their respective press releases provided insights as to where the final EMIR 3.0 text will land on the active account requirement.

This article explores 10 key questions:

1. Why is EMIR being amended again?
2. What is the current status of the EMIR 3.0 proposals?
3. What is the active account requirement?
4. Who would the active account requirement apply to and could it apply to non-EU entities?
5. What products would the active account requirement apply to?
6. What steps should buy-side market participants consider taking in advance of the introduction of an active account requirement?
7. What would be the consequences of non-compliance with the active account requirement?
8. What are the views of industry associations on the active account requirement proposals?
9. Is EMIR 3.0 exclusively about clearing and active accounts, or does it propose other changes?
10. Are any similar changes being proposed to UK EMIR?

1. Why is EMIR being amended again?

The aim of EMIR 3.0 is to increase the safety and efficiency of EU central counterparties (CCPs) by improving their attractiveness, encouraging clearing in the EU and enhancing the cross-border consideration of risks. This is with a view to addressing excessive reliance on systemically important third country CCPs (Tier 2 CCPs), currently LCH Limited and ICE Clear Europe Limited (see ESMA’s latest list).

Consequently, a large part of the proposed reforms relate to the processes for authorisation and supervision of CCPs.

However, EMIR 3.0 does not stop there – a number of amendments to EMIR have been proposed which would directly impact derivatives counterparties. Chief among them is the proposed introduction of an active account requirement.

2. What is the current status of the EMIR 3.0 proposals?

The EMIR 3.0 proposals are currently going through the EU’s ordinary legislative procedure. The European Commission published its EMIR 3.0 proposals in December 2022, they comprised a proposal for a regulation and a proposal for a directive. In December 2023, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) published its report on the proposal for a regulation and its report on the proposal for a directive (both dated 5 December 2023) – this article refers to these as the ‘Parliament text’. Also in December 2023, the Council of the EU published its mandate for negotiations with the European Parliament on the proposal for a regulation and on the proposal for a directive (both dated 1 December 2023) – this article refers to these as the ‘Council text’. Most recently, the Council and the Parliament announced on 7 February 2024 that provisional political agreement had been reached (Council press release; Parliament press release).

When a final text is agreed and published in the Official Journal, a number of provisions will likely require further detailed work in Level 2. The Commission’s original proposals suggested a mid-2025 timeline for the changes to be fully absorbed by the market. This may seem like the distant future, but counterparties that may become subject to new and potentially onerous requirements would do well to start familiarising themselves with the issues sooner rather than later. We will be closely following developments on the active account requirement and other aspects of the EMIR 3.0 proposals in the coming months.

3. What is the active account requirement?

One of the key proposals in EMIR 3.0 is the introduction of an active account requirement. At a high level, this is a requirement for financial counterparties and non-financial counterparties that are subject to the clearing obligation under EU EMIR to have an active account open at an EU authorised CCP for certain types of Euro and Polish Zloty denominated OTC derivatives transactions. The impact of any active account requirement depends heavily on the detail. Will the requirement be ‘qualitative’ or ‘quantitative’? The key difference being that a ‘quantitative’ active account requirement would mandate that a minimum proportion or percentage of in-scope trades must be cleared at an EU authorised CCP – removing, in relation to that proportion, the choice that is currently available to derivatives counterparties.

In the Council text, the proposal is for a qualitative active account requirement with a representativeness requirement. In the Parliament text, the proposal is for a day one qualitative active account requirement with the potential for a quantitative requirement to be introduced in future by delegated act (which means it could be introduced more quickly than would be the case if an amendment to the Level 1 EMIR text was required). The Commission’s proposal included a quantitative active account requirement.

On 7 February 2024, the Council and the Parliament announced that provisional political agreement had been reached and their respective press releases provide some insights into where the active account requirement will land. Qualitative requirements (such as the account being operationally able to handle the counterparty’s trades at short notice) will need to be satisfied, and a representativeness requirement (a requirement to clear at least 5 trades in the most relevant sub-categories of in-scope trades, in terms of class, size and maturity) will apply to certain counterparties.

Extract from the Council press release: “The provisional agreement sets a solid active account requirement (AAR) that will require certain financial and non-financial counterparties to have an account at an EU CCP, which includes operational elements such as the ability to handle the counterparty’s transactions at short notice if need be and activity elements so that the account is effectively used.
This is ensured by a number of requirements, which have to be fulfilled by these accounts, including requirements for counterparties above a certain threshold to clear trades in the most relevant sub-categories of derivatives of substantial systemic importance defined in terms of class of derivative, size and maturity. Furthermore, a Joint Monitoring Mechanism is created to keep track of this new requirement.”

Extract from the Parliament press release: “Negotiators agreed that financial counterparties or non-financial counterparties that are subject to the clearing obligation should hold at least one active account at a CCP established in the EU and regularly clear through it at least five trades in each of the most relevant subcategories per class of derivative contract, defined by ESMA.

An account is considered active if it posts initial and daily variation margins, has in place the necessary IT connectivity, internal processes, legal documentation, stress tests, and can demonstrate its functioning would not be affected in the event of a significant and sudden increase in clearing activity.

Finally, the Commission secured a clear mandate to adopt further measures if necessary in several years to address EU reliance on third country CCPs.”

This provisional political agreement is subject to approval by the Council and the Parliament before going through the formal adoption procedure and we will be closely following further developments. It seems very clear now, however, that EMIR 3.0 will contain an active account requirement.

4. Who would the active account requirement apply to and could it apply to non-EU entities?

Broadly, the active account requirement would apply to financial counterparties and non-financial counterparties that are subject to the clearing obligation under EU EMIR (FC+ and NFC+). There are some differences between the proposals in the Council text and the Parliament text as to the details - for example, the Council text scopes in FC+ and NFC+ that exceed the clearing threshold in any of the in-scope categories of derivatives contracts (see Question 5 below for more detail on that). We will need to see the final text of EMIR 3.0 to get the complete picture.

In relation to non-EU entities, it is wise to remember that the application of EU EMIR is nuanced in the case of alternative investment funds (AIFs). Non-EU AIFs can fall within the definition of financial counterparty under EU EMIR if they are managed by an EU AIFM. EU AIFs will still be financial counterparties even if they are managed by a non-EU AIFMs. Also worth a mention is that even funds with an investor base 100% outside the EU could be caught here, if the fund is an EU AIF or is a non-EU AIF with an EU AIFM. So a Cayman fund with an EU AIFM would potentially by caught by the active account requirement. Likewise, an EU fund in e.g. Luxembourg or Ireland but with a UK/US manager and potentially no EU investors might also be caught. This sort of territorial application does not seem to have been considered.

It is also worth noting for managers who have funds in different jurisdictions with similar investment objectives/strategies that those funds may no longer be able to be managed together in the same way, as the EU fund may be subject to the active account requirement. This may affect pricing in the EU firms and create basis between equivalent strategies.

5. What products would the active account requirement apply to?

Based on the proposals so far, the active account requirement would apply to the following categories:

• Euro or Polish zloty denominated interest rate derivatives; and
• Euro denominated short-term interest rate derivatives.

Additionally, the Commission would be able to add or remove categories following assessments by ESMA of the substantial systemic importance of services or activities provided by Tier 2 CCPs. The Council text proposed a further requirement – that ESMA submit a thorough and comprehensive cost benefit analysis and an opinion, which may provide some reassurance to market participants that the potential implications of additions will be considered.

6. What steps should buy-side market participants consider taking in advance of the introduction of an active account requirement?

EMIR 3.0 is yet to be finalised and a large amount of detail will also need to be established in Level 2, so it is too early to produce a definitive checklist. However, given the potential significance of the introduction of an active account requirement, firms would be wise to start familiarising themselves with the proposals as they currently stand (and consider whether to engage with their trade associations, if they are not already doing so).

For firms that may be in scope for the active account requirement, or manage funds that may be in scope, we would encourage you to check whether you/they currently trade any in-scope products or have plans to do so in future (see Question 5 above). If so, it would be sensible as a first step to review your/their existing clearing arrangements and whether they already connect to an EU CCP like Eurex – if not, then start to think about what would be required in order to do so.

For firms (or funds they manage) that currently clear exclusively at US CCPs using the US agency clearing model, this could require a bigger lift. The European principal to principal clearing model is a different legal arrangement with different documentation - so we suggest building in more lead time for this.

It will also be important to engage with the associated calculation and reporting requirements and start to think about what processes may be needed for these. Note also the penalties proposed for non-compliance with the active account requirement (see Question 7 below).

7. What would be the consequences of non-compliance with the active account requirement?

This will depend on the final EMIR 3.0 text. The Council text proposes that competent authorities use their supervisory powers or the penalties referred to in Article 12 of EMIR where necessary. However, the Parliament text proposes a specific penalty regime whereby ESMA would be able to impose, by decision, periodic penalty payments which must be effective and proportionate, not exceeding a maximum three per cent of the average daily turnover in the preceding business year. Wherever the final text lands on this, it is clear that penalties are expected to play their part in ensuring compliance with the active account requirement.

8. What are the views of industry associations on the active account requirement proposals?

In September 2023, eleven trade associations (including EFAMA, FIA and ISDA) co-signed a Joint Trade Association Statement on Active Accounts. They expressed their support for many of the measures proposed in the Commission’s EMIR 3.0 text (including the simplification of procedures for CCPs to launch products and change models). However, they strongly recommended the deletion of the proposed active account requirement for a number of reasons, including that it would:

• introduce fragmentation and loss of netting benefits and make the EU less resilient to market stresses;
• create a competitive disadvantage for EU firms compared to third-country firms, which would remain able to transact in global markets without restriction. They note that the introduction of quantitative thresholds in the active account requirement would be especially damaging and could lead to a large, volatile and unpredictable price difference between CCPs (called a basis), which would significantly increase the cost and risk of hedging for EU clients;
• make the EU one of the only advanced capital markets with such a policy. They draw a comparison with the US, where clearing participants are significantly exposed to Tier 2 CCPs, since the majority of US-dollar-denominated IRS are cleared outside the US; and
• severely challenge the principle of best execution toward the end client, as EU clients required to clear on an EU CCP to comply with the active account requirement threshold would be forced to accept an uncompetitive price wherever the price available at an EU CCP is higher than the price available at a Tier 2 CCP – while their third-country competitors would be able to trade at the best available price.

We do note, however, that the joint statement pre-dated the publication of the Council text and Parliament text on EMIR 3.0 in December 2023 and that the Commission’s December 2022 EMIR 3.0 proposal was for a quantitative active account requirement – see Question 3 above for more discussion on qualitative versus quantitative active account requirements.

9. Is EMIR 3.0 exclusively about clearing and active accounts, or does it propose other changes?

The EMIR 3.0 proposals include a suite of other proposed amendments. Let’s take a look at some of the proposals that may be particularly interesting from a buy-side perspective.

• Additional transparency from CCPs and clearing members
  The EMIR 3.0 proposals would require additional transparency from CCPs and their clearing members on a range of matters (including prices and fees and, in the case of clearing members, the possibility of clearing any given product at an EU CCP).

  In relation to margin, of particular interest is the proposed requirement for clearing members to inform their clients of the way the margin models of the CCP work, including in stress situations, and provide clients with access to a simulation of the margin requirements that they might be subject to under different scenarios. The simulation would need to include both the margins required by the CCP and any additional margins required by the clearing members themselves. If included in the final text, we would expect further detail to be set out in Level 2 measures and this detail will be determinative of how helpful these simulations will be in practice for clients looking to estimate their margin requirements and prepare themselves for margin calls.

  We would also point to the recent BCBS-CPMI-IOSCO consultative report on transparency and responsiveness of initial margin in centrally cleared markets (January 2024). This report sets out a range of policy proposals, including that margin simulation tools should be made available by all CCPs to all clearing members and their clients and that the tools should include a specified minimum functionality. We think it is likely, therefore, that we will see more global developments in this area, not just in the EU.

• Equity options exemption from bilateral margining requirement
  Both the Council text and the Parliament text propose an exemption from the bilateral margining requirements for single-stock options and equity index options, with a process for ESMA (or ESMA in cooperation with EBA and EIOPA) to monitor regulatory developments in other jurisdictions and report to the Commission (at least every two years under the Parliament text and at least every three years under the Council text) and the Commission empowered to adopt a delegated act specifying that the exemption shall be removed (following an adaption period of no longer than two years).

  We note that the existing temporary exemption technically expired on 4 January 2024 but a further extension was proposed by the European Supervisory Authorities and a no-action Opinion issued in the meantime, which you can read more about in our article here.

  The industry has long been advocating for a permanent exemption for these products instead of the uncertainty that can be created by cliff edge expiry dates of temporary exemptions. This would better align with the US where equity options are not in scope for the SEC or CFTC margin regimes. The EMIR 3.0 proposals go some way towards this.

• Clearing thresholds
  The EMIR 3.0 proposals would amend the clearing threshold calculations for FCs and NFCs so that only those derivative contracts that are not cleared at an authorised or recognised CCP are included in the calculation.

  The proposals would also make provision for ESMA to develop draft regulatory technical standards relating to the criteria for establishing which OTC derivative contracts are objectively measurable as reducing risks (known as the hedging exemption) and the designation of thresholds. We note that the existing criteria has caused difficulties for certain NFCs in practice, particularly for NFCs whose core activity is financial in nature (e.g. certain SPVs). Clear, actionable guidance which takes into account feedback from the market and resolves existing areas of uncertainty would likely be a welcome development. However the devil will be in the detail – further technical standards could create additional interpretative questions.

• Reporting obligation
  The Parliament text proposes the introduction of a specific reporting penalty regime whereby ESMA could, by decision, impose periodic penalty payments (not exceeding a maximum 1% of the average daily turnover in the preceding business year) where the data reported in accordance with Article 9 of EU EMIR contains manifest errors or the FCs or NFCs have not exercised due diligence when checking and reporting the data. ESMA would be tasked with drafting guidelines to specify the due diligence checks and procedures that are expected. Data quality clearly remains an area of focus, and we note that the Central Bank of Ireland recently reprimanded and fined an authorised UCITS ICAV for a reporting breach – see our article here.

  Changes have also been proposed in relation to intragroup exemptions and potential expansion of scope to non-EU entities if they belong to a group subject to consolidated supervision in the EU. Reporting obligations associated with clearing at EU and non-EU CCPs and compliance with the active account requirement have also been proposed.

• Initial margin model validation (IMMV)
  Both the Council text and the Parliament text acknowledge that many counterparties use industry-wide initial margin models (notably ISDA SIMM) to comply with initial margin requirements for non-cleared OTC derivatives and, therefore, a co-ordinated approach to validation makes sense. They propose a key role for the European Banking Authority (EBA) setting up a central validation function and assisting competent authorities in their approval processes (and a fee would be charged to counterparties using industry-wide models to cover the EBA’s costs). However, responsibility for validating the implementation of those models by counterparties would remain with the competent authorities.

  Helpfully for the buy-side, both texts envisage a more limited scope of application for the detailed supervisory procedures required to ensure validation (being set forth in technical standards) – to credit institutions and investment firms of a certain size. The Parliament text does, however, include a notification obligation (to the EBA and relevant competent authorities) so there may still be buy-side impact here. It will, of course, be important to see the full details in the final text of EMIR 3.0 on all of this once agreed.

• Four month implementation period for NFCs becoming subject to margin obligations for the first time

  The proposals include the introduction of a four month implementation period for NFCs when they become subject for the first time to the obligation to exchange collateral for uncleared derivatives. This change would be welcomed by NFCs, allowing more time for negotiation and testing of their collateral arrangements.

• Clearing exemption for third country pension scheme arrangements

  The proposals would introduce an exemption from the clearing obligation where a FC+ or NFC+ enters into a transaction with a pension scheme arrangement established in a third country and operating on a national basis, provided that such entity or arrangement is authorised, supervised and recognised under national law and where its primary purpose is to provide retirement benefits and it is exempted from the clearing obligation under its national law. Under UK EMIR, the clearing obligation exemption for pension schemes was recently extended to 18 June 2025. The EMIR 3.0 proposal would therefore enable UK pension schemes to trade otherwise mandatorily clearable OTC derivatives with EU dealers on an uncleared basis (in contrast with EU pension schemes facing EU dealers, which would be subject to the EU EMIR mandatory clearing obligations).

• Clearing exemption for post-trade risk reduction services

  One of the EMIR 3.0 proposals is to add a specific clearing exemption for transactions resulting from qualifying post-trade risk reduction services (PTRR). The PTRR service provider must be independent from the counterparties and authorised under MiFID and a large number of additional requirements would need to be satisfied – this would require much careful review when finalised if counterparties are considering using the exemption.

• Intragroup transactions and equivalence decisions

  The current position is that to be an ‘intragroup transaction’ (which may give rise to certain exemptions) the transaction must be between two EU entities within a group, or between an EU entity and a third country entity within a group where the Commission has made an equivalence decision in respect of the relevant third country under Article 13(2) EMIR. The EMIR 3.0 proposals would replace the need for an equivalence decision with a simpler requirement that the third country must not be on a list of jurisdictions for which an exemption cannot be granted (includes: high-risk third countries that have strategic deficiencies in their regimes on anti-money laundering and counter terrorist financing, jurisdictions which are non-cooperative for tax purposes; and any others identified by the Commission).

• UCITS and MMF counterparty exposure limits

  Included within the package of EMIR 3.0 proposals are amendments to the UCITS Directive (2009/65/EU) and the Money Market Funds Regulation (Regulation (EU) 2017/1131). One of the key changes in both proposals is the lifting of existing counterparty limits in relation to OTC derivatives (and, in the case of the Parliament text in relation to money market funds, repo and reverse repo) that are cleared at an authorised or recognised CCP under EU EMIR. However, we note that the proposal also expands the scope of the current limits applicable to ‘OTC derivatives’ to the broader ‘derivatives’. This could bring exchange-traded derivatives (ETD) into scope of the derivatives counterparty exposure limits to the extent that they are not cleared at an authorised or recognised CCP under EU EMIR (the current treatment of ETD exposure in UCITS is somewhat ambiguous, given earlier CESR guidance).

10. Are any similar changes being proposed to UK EMIR?

No active account proposals have been made in relation to UK EMIR. However, beyond active accounts, we would note the following:

• Equity options exemption – The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) recently decided to extend the temporary exemption from the UK EMIR bilateral margining requirements for single-stock equity and index options by a further two years. The exemption was set to expire on 4 January 2024 but will now be available until 4 January 2026. The regulators will, during this temporary exemption period, gather information on current market practices and risks in order to create a permanent UK regime. See our article here.
• Initial margin model validation (IMMV) - The PRA and the FCA recently decided not to implement a supervisory pre-approval requirement at this stage for using initial margin models. The PRA will continue to use the existing framework to ensure models and practices meet requirements. The FCA will continue to use existing supervisory powers to engage with firms on their models where necessary to ensure modelling requirements are met. See our article here.
• Pension scheme arrangements - HM Treasury recently published a call for evidence (now closed) on the pension fund clearing exemption under UK EMIR, seeking industry feedback on the long term future of the exemption. See our article here.
• Additional transparency from CCPs and Clearing Members – We would highlight the recent BCBS-CPMI-IOSCO consultative report on transparency and responsiveness of initial margin in centrally cleared markets (January 2024). This report sets out a range of policy proposals, including that margin simulation tools should be made available by all CCPs to all clearing members and their clients and that the tools should include a specified minimum functionality. We think it is likely, therefore, that we will see more global developments in this area.

Concluding remarks

It is expected that a final EMIR 3.0 text will be agreed during the coming months and we will be closely following developments. As we have discussed throughout this article, EMIR 3.0 is likely to create additional obligations for in-scope counterparties, as well as amending the existing position in some areas. There is still a lot of detail to be resolved (including in Level 2 technical standards), particularly on active accounts, but, bearing in mind the mid-2025 timeline proposed by the Commission, firms subject to EU EMIR are encouraged to start familiarising themselves with the proposals sooner rather than later.