Pim Rank: EMIR 3.0, the EU finally strikes back!
This column was originally written in Dutch. This is an English translation.
EMIR 3.0 came into force on 24 December 2024. This regulation aims to promote the clearing of derivative transactions by EU CCPs and discourage clearing by UK CCPs. The EU is rightly showing its teeth here.
By Prof W.A.K. Rank, lawyer at NautaDutilh in Amsterdam and professor of financial law at Leiden University
Standardised OTC derivative transactions have been required to be centrally cleared for a number of years under the European Markets Infrastructure Regulation (EMIR). In these transactions, the derivative contracts are actually entered into by the transaction parties involved, but they are legally established through financially strong intermediaries engaged by these transaction parties: the clearing members. The mutual obligations of the clearing members are assumed by a central counterparty, the Central Counter Party (CCP). The CCP acts as an intermediary between the contracting clearing members. As a result, they no longer run a counterparty risk to each other, but to the CCP, and the CCP runs a counterparty risk to the clearing members.
A CCP established in a third country may only provide clearing services for clearing members established in the EU if this CCP has been recognised by ESMA. Recognition is only possible if the regulatory framework of the third country guarantees that the CCP in question complies with binding requirements that are equivalent to the requirements of EMIR and if the CCP is not systemically important for the EU. Despite these strict conditions, a large number of third-country CCPs have been recognised by ESMA and are active in the EU. Since the introduction of central clearing, most euro-denominated derivative transactions have been cleared by UK CCPs such as LCH, ICE Clear and LME Clear. Before Brexit, these parties qualified as EU CCPs. Brexit has transformed them into third-country CCPs. What's more, these are CCPs that should be considered systemically important. Nevertheless, these UK CCPs have been recognised by ESMA for practical reasons. However, this is a temporary recognition, until 30 June 2028.
The EU considers it undesirable that a substantial part of the derivative transactions covered by EMIR is cleared by UK CCPs that are systemically important for the EU. After all, these UK CCPs fall outside the EU supervisory framework and may pose a risk to financial stability in the EU. To reduce its dependence on UK CCPs in particular, the EU has therefore adopted a package of measures designed to stimulate the clearing of derivatives in euros by EU CCPs and to counteract exposure to CCPs from third countries. This package, known as EMIR 3.0, consists of a regulation to amend EMIR and the CRR and a directive to amend the CRD and the IFD.
The measures include streamlining the authorisation process in the EU and making the supervision of EU CCPs more robust. The most far-reaching measure is that EU market parties will be required to open an active account with an EU CCP through which they must clear a representative number of transactions: the Active Account Requirement (AAR). The regulation will largely apply from 24 December 2024. However, the AAR will not apply until 25 June 2026. The directive must be implemented in the member states by that date.
EU market parties are certainly not happy with the AAR. They fear a loss of netting options, higher costs and a loss of clients. However understandable these concerns may be, they also show that they will not readily voluntarily clear a significant portion of their derivatives transactions in the EU. From a risk management perspective, the AAR seems to me to be an unavoidable measure to transfer a representative portion of derivatives clearing to the EU.