Understanding EMIR 3.0: A New Chapter in Derivatives Framework
- Antonis Hadjicostas
- May 26, 2024
- 4 min read
Updated: Mar 9
Introduction
The European Market Infrastructure Regulation (EMIR) has been a cornerstone of financial stability in the derivatives market since its inception. As the financial landscape evolves, so too does the regulatory framework.
The European Commission published its proposals for a package of amendments at both EMIR Regulation [1] and the Directive [2] – 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, where on 7 February 2024, the Council and the Parliament announced that provisional political agreement had been reached.
What is EMIR 3
EMIR 3 represents the third phase of the EMIR regulatory framework, building upon the foundations laid by EMIR 1 (2012) and EMIR 2 (2019). The primary goal of EMIR has always been to increase transparency, reduce systemic risk, and ensure the stability of the over-the-counter (OTC) derivatives market. EMIR 3.0 continues this mission but introduces several new elements to address emerging challenges and inefficiencies identified in previous iterations.
Key Changes and Enhancements
EMIR 3.0 introduces a new concept of an active account requirement, aiming to reduce reliance on Tier 2 CCPs and increase clearing of certain derivatives trades in the EU. The active account requirement would apply to (i) euro or polish zloty denominated interest rate derivatives; and (ii) euro denominated short-term interest rate derivatives.
FCs, as well as NFCs above the clearing thresholds (NFC+s), will need to have at least one operational active account open at an EU authorised CCP and, if they meet certain criteria, may need to clear at least a representative number of transactions at such CCP.
EMIR 3.0 removes the need for an equivalence decision and instead there is a simpler framework, namely that the third country must not be on a list of jurisdictions for which an exemption cannot be granted.
For NFC+s whose intragroup trades are exempt from the reporting obligation, their EU parent entities will assume the responsibility to report the net aggregate derivative positions of such NFC+s to their National Competent Authority (NCA) on a weekly basis.
Additional transparency requirements for CCPs, including the disclosure of fees charged to clients, the reporting on clearing activity at third country CCPs as well as the sharing of information to ESMA on the average clearing activity at EU CCPs will be introduced.
Permanent exemption from regulatory margin requirements for non-centrally cleared single-stock equity options and equity index options.
Amendment of the NFC clearing threshold methodology so that it is determined by reference only to trades that are centrally cleared with an EU authorised or recognised CCP, with the hedging exemption continuing to be determined by reference to risk reduction effects at group level.
Penalties
According to EMIR 3.0, NCAs can impose penalties of up to 3% of the average daily turnover in the prior year on counterparties that do not comply with the operational active account requirement.
In addition, NCAs can impose periodic penalties of up to 1% of the average daily turnover for the prior year on entities subject to the reporting obligation where the details reported repeatedly contain manifest errors.
Implications for Market Participants
The introduction of EMIR 3.0 will have significant implications for all market participants, including financial institutions, corporates, and service providers. Here are a few key areas to consider:
Compliance Costs: While the enhanced transparency and risk mitigation measures are beneficial for market stability, they may increase compliance costs, particularly for smaller entities.
Operational Adjustments: Firms will need to update their internal systems and processes to meet the new reporting standards and clearing obligations. This might involve investing in new technologies or enhancing existing ones.
Strategic Considerations: Market participants should reassess their derivatives strategies to align with the revised regulatory landscape. This could include re-evaluating which products to trade, optimizing collateral management, and enhancing risk management frameworks.
Preparing for EMIR 3.0
Even it may be considered as too early, in order to effectively navigate the transition to EMIR 3.0, market participants should:
Stay Informed: Regularly monitor updates from regulatory bodies such as ESMA and engage with industry forums to stay abreast of the latest developments and interpretive guidance.
Conduct Impact Assessments: Proactively evaluate how the changes will affect your business, from compliance requirements to operational workflows. Identify any gaps and develop a plan to address them.
Timeline
Based on the current progress and estimates, it is anticipated that EMIR 3.0 will come into effect some time in Q4 of 2024.
EMIR 3.0 will enter into force on the twentieth day following its publication in the Official Journal of the European Union, with most provisions expressed to apply from its entry into force.
However, several provisions, including the active account requirement and the new clearing thresholds, require the European Securities and Markets Authority (ESMA) to put in place regulatory technical standards so the precise detail in relation to those provisions will not be known until the relevant ESMA technical standards are in force, which may be sometime later in 2025.
Conclusion
EMIR 3.0 marks a significant evolution in the regulatory framework governing the derivatives market.
By enhancing transparency, refining risk mitigation, and simplifying procedures for smaller entities, EMIR 3.0 aims to foster a more resilient financial system. Market participants must proactively adapt to these changes to ensure compliance and capitalise on the opportunities presented by a more robust regulatory environment.
As the implementation of EMIR 3.0 progresses, staying informed and prepared will be crucial for navigating this new regulatory landscape. Embrace the change, invest in the necessary resources, and position your organization for success in the evolving derivatives market.
