EMIR 3.0 – Rule Changes For Derivatives Users – Commodities/Derivatives/Stock Exchanges

On 7 December 2022, the European Commission published a series
of proposed measures to further develop the EU’s Capital
Markets Union. These measures included proposed amendments to EMIR as part of a review known colloquially as
“EMIR 3.0”. On 14 February 2024, following negotiation
and political agreement with the European Parliament, the Council
of the EU released the provisionally agreed text of EMIR 3.0. At the time of writing, we are
awaiting formal approval by the European Parliament and the
publication of the final legislation in the Official Journal of the
EU in due course. EMIR 3.0 is currently expected to come into force
in the second half of this year (although in many cases the
obligations will not apply until details as to how counterparties
should comply have been published by the European Securities and
Markets Authority (“ESMA”) and
finalised). Derivatives users should therefore now be reviewing
their compliance arrangements, and considering whether and how EMIR
3.0 will require these arrangements to be amended and enhanced.

Transaction Reporting

There is an existing and continuing requirement in EMIR on
transaction parties to report the details of all OTC and
exchange-traded derivative contracts that they conclude, modify or
terminate to a trade repository by the end of the next working day.
From 29 April 2024 and separately to EMIR 3.0, significant changes
will be made to the transaction reporting rules applicable to
derivatives users. You can read more about this here.

EMIR 3.0 contains new requirements in relation to data quality
and penalties for transaction reporting. Derivatives users will be
required to put in place appropriate procedures and arrangements to
ensure the quality of data reported. ESMA will be mandated to draft
guidelines to specify these procedures and arrangements. In
addition to existing penalties requirements under EMIR, national
competent authorities (such as the Central Bank of Ireland (the
“CBI”)) will be obliged
to impose administrative or periodic penalty payments on entities
whose reports repeatedly contain manifest errors. The periodic
penalties will be set at an amount up to 1% of average daily
turnover for the proceeding business year per day of breach. While
many national competent authorities (including the CBI) have
reserved the right to issue fines for EMIR transaction reporting
breaches, this is the first time a quantifiable financial penalty
for breach of transaction reporting requirements will be enshrined
in the primary legislation. ESMA will be mandated to draft
Regulatory Technical Standards specifying what constitutes specific
manifest errors for this purpose.

EMIR 3.0 will also introduce a new transaction reporting
requirement for non-financial counterparties
(“NFCs”) subject to the
clearing obligation
(“NFC+s”) whose
intragroup trades have until now been eligible for an exemption
from transaction reporting requirements. Such NFC+s may still
benefit from the existing transaction reporting exemption for all
NFCs with regard to intragroup transactions. However, where it has
an EU parent, the parent will have to report to its competent
authority the net aggregate positions of the NFC+ per class of
derivatives on a weekly basis.

Since the coming into force of EMIR in 2012, the CBI has issued
a number of guidance statements and recommendations in relation to
EMIR. For example, in its EMIR reporting letter of 20 February 2019, the
CBI recommends that compliance with the transaction reporting rules
under EMIR should be a standing agenda item at all board meetings
for Irish entities trading derivatives. Moreover, in its third Securities and Markets Risk Outlook Report
published on 2 March 2023 the CBI stressed that it expects
derivatives users to “have appropriate oversight of data
reporting from Board level down (including where data reporting is
outsourced)“. In particular, the CBI expects formalised
policies and procedures to be in place to ensure compliance. On 28
November 2023, the CBI issued a fine against a fund for breaches of
the transaction reporting rules under EMIR following an enforcement
action pursuant to the European Union (European Markets Infrastructure)
Regulations 2014, as amended – you can read more about this here.

Given this background, the new transaction reporting rules which
will apply from 29 April 2024 and now the forthcoming new
requirements in relation to transaction reporting in EMIR 3.0, we
have seen a number of our clients putting in place formal EMIR
compliance policies which are approved at board level. These
policies cover compliance with the EMIR transaction reporting
rules, as well as compliance with EMIR more generally.

Clearing

One of the central objectives of EMIR 3.0 is to encourage
clearing in the EU and improve the attractiveness of EU authorised
CCPs. Furthermore, EMIR 3.0 aims to strengthen EU strategic
autonomy and safeguard financial stability by requiring clearing
members and clients to hold directly or indirectly an active
account at EU authorised CCPs. Financial counterparties
(“FCs”) subject to the clearing
obligation (“FC+s”) and NFC+s who exceed
a threshold of €3 billion when all OTC interest rate
derivatives denominated in euro and / or Polish zloty and short
term interest rate derivatives denominated in euro
(“SSI Derivatives”) are aggregated at
group level will be obliged to hold at least one active account for
SSI Derivatives in an EU authorised CCP. These entities must also
clear a ‘representative’ number of trades in such active
accounts if they exceed a threshold of a notional clearing volume
outstanding of €6 billion when all their SSI Derivatives are
aggregated. Further details of these requirements are to be
developed by ESMA. It is important to note that these obligations
will not directly impact most buy-side derivatives users as they
are not FC+s or NFC+s.

Intragroup Exemptions

EMIR allows exemptions from certain of the clearing and
mandatory margining requirements for OTC derivatives transactions
between counterparties in the same group. Where the group
counterparty is a third country entity, one of the conditions to
availing of the exemptions is that an “equivalence”
decision has been made by the European Commission to the effect
that the third country’s legal and supervisory regimes are
equivalent to the relevant requirements laid down in EMIR. To date,
no equivalence decisions have made in respect of clearing and only
a limited number of equivalence decisions have been made in respect
of mandatory margining. This means that where the group
counterparty is a third country entity, the parties typically need
to avail of the separate and temporary cross-border intragroup
derogations and comply with the conditions relating to same in
order to be exempt.

In EMIR 3.0, the requirement for an equivalence decision will be
removed for the purpose of the cross-border intragroup exemptions
from the clearing and mandatory margining requirements for OTC
derivatives transactions. It will be replaced by a requirement that
the counterparty is not in a “high risk” jurisdiction
which either has deficiencies in its anti-money-laundering or
counter-terrorist regime or is on the EU list of non-cooperative
tax jurisdictions. The European Commission may also on an ad hoc
basis identify other jurisdictions that should not benefit from the
intragroup exemptions. It is hoped that the removal of the
equivalence decision requirement for cross-border intragroup
exemptions from the clearing and mandatory margining requirements
will materially simplify the intragroup exemption framework and put
these exemptions on a more definite and permanent footing.

Other Changes to EMIR

EMIR 3.0 also contains a number of other amendments to the EMIR
framework. These include the following:

• EMIR 3.0 will amend the scope of the derivatives that must be
  included in the aggregate positions to be measured against the
  clearing thresholds for NFCs – these amendments will apply
  following the entry into force of Regulatory Technical Standards on
  clearing thresholds which ESMA will be mandated to prepare. These
  amendments will be beneficial from the perspective of NFCs by
  allowing them to exclude derivatives that are cleared through an EU
  authorised CCP or EU recognised CCP. Moreover, while EMIR currently
  requires NFCs to count all OTC derivatives entered into by any NFC
  entity within the group, EMIR 3.0 will restrict the count to
  uncleared OTC derivatives entered into by the NFC itself. NFCs will
  continue to be able to exclude derivatives which are objectively
  measurable as reducing risks directly relating to the commercial or
  treasury activity of the NFC itself or the group to which it
  belongs.




• EMIR requires counterparties to uncleared derivatives to post
  variation margin, and where their volumes of trading exceed set
  thresholds, to post initial margin. To date there has been a
  time-limited exemption / forbearance from mandatory margining in
  the case of certain equity derivatives. EMIR 3.0 will introduce a
  permanent exemption from mandatory exchange of initial and
  variation margin for uncleared single stock equity options and
  equity index options.




• EMIR 3.0 will give NFCs who become subject to mandatory margin
  requirements, including requirements to post variation margin and
  initial margin, a new 4-month implementation period to set up the
  relevant arrangements to meet these obligations. During this period
  any new derivatives entered into will be exempt from the mandatory
  margin requirements.




• EMIR 3.0 will introduce a permanent exemption from clearing for
  EU counterparties who are over the clearing thresholds where they
  enter into transactions with third country pension schemes where
  those schemes are authorised, supervised and recognised under
  national law and are within the scope of a clearing exemption in
  their home jurisdiction.




• EMIR 3.0 will require clearing members of CCPs to enable their
  clients to predict the likelihood of margin calls, particularly
  during stress events. Clearing members will be required to explain
  to clients how cleared margin models work, including simulations
  showing the implications for their clients during periods of market
  stress. Further details of these requirements are to be developed
  by ESMA.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.