On 4 December, the European Market Infrastructure Regulation (EMIR) Level 1 review texts comprising of the Regulation and Directive were published in the Official Journal of the EU. By way of background, on 7 December 2022, the European Commission released its proposal to amend the EMIR Regulation. The intention of the proposal is to encourage the movement of clearing activity for euro-denominated derivatives away from systemically important central counterparties (CCPs) based outside the EU and towards those clearing houses based in the EU. The Commission explains that it is necessary to address the financial stability risks associated with excessive exposures of Union clearing members and clients to systemically important third country CCPs (Tier 2 CCPs) that provide clearing services that have been identified by ESMA as clearing services of substantial systemic importance.

According to the proposal, all financial and non-financial counterparties clearing certain products will be required to hold an active account in an EU-based, approved CCP. This would apply to interest rate derivatives denominated in euro and Polish zloty, Credit Default Swaps (CDS) denominated in euro and Short-Term Interest Rate Derivatives (STIR) denominated in euro. The question of what constitutes an “active account” would be determined by ESMA (and the other ESAs) with the objective of reducing clearing at Tier 2 CCPs to a level where they do not represent “substantial systemic importance.”

The changes introduced in the accompanying Omnibus Directive proposal are as follows:

• UCITS: the Directive amends Articles 52 to eliminate counterparty risk for all derivatives centrally cleared by authorised CCPs.
• CRD: Articles 74 and 76 are amended to require institutions to include concentration risk arising from exposures towards CCPs and develop plans to address it. The revised Article 81 requires competent authorities to assess and monitor related practices while Article 104 empowers them to address the risk. The changes in Article 100 require the EBA to draft guidelines on the uniform inclusion of said concentration risk. 
• Investment Firms Directive: Articles 26 and 29 are amended to require institutions to include concentration risk arising from exposures towards CCPs and develop plans to address it. The revised Article 36 requires competent authorities to assess and monitor related practices while the new Article 39 empowers them to address the risk. 

The European Parliament adopted its position in November 2023 (Directive and Regulation) while the Council adopted its position in December (Regulation and Directive). Amid great haste, trialogue negotiations reached a political agreement in early February 2024. As explained by the Council, the “provisional agreement sets a solid active account requirement (AAR) ... 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 ... 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.” The latter requirement is the “representativeness” point which was pushed by the Council in negotiations.

Counterparties would be required to clear in an EU CCP at least 5 trades per each of the 5 relevant subcategories of derivatives identified by ESMA, for each of the 3 classes of derivatives (and on the basis of size and maturity of those transactions). As a result, counterparties exceeding EUR 100 billion in notional clearing volume would be required to clear at least 900 trades per year while those with less than EUR 100 billion would have to clear 150 trades through their active account.

ESMA is due to provide a report to the European Commission within 18 months of adoption of the Regulation with an analysis and recommendations for potential formal quantitative thresholds for counterparties to clear trades in the EU. Upon receipt of this report, the Commission will have 6 months to propose a legislative act.

As regards supervision, the agreement also strengthens the role of ESMA providing it with a coordination role in emergency situations, while providing clarity that ultimate decision making powers are the responsibility of the national competent authorities.

The current UK equivalence decision granted by European Commission is due to expire on 30 June 2025.

Please contact Adam Jacobs-Dean or Danny O'Connell with any questions regarding these proposals.

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  Adam Jacobs-Dean

  Managing Director, Global Head of Markets, Governance and Innovation

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  Danny O'Connell

  Director, EU and International Regulatory and Tax Policy