EMIR 3: Key Developments

On 7 December 2022, the European Commission (the “Commission”) published a proposal, known as “EMIR 3”, to amend Regulation (EU) No 648/2012 (as amended to date, “EMIR”). EMIR 3 consists of a draft Regulation (here) and a draft Directive amending the UCITS Directive, the Capital Requirements Directive and the Investment Firms Directive1(here).

The Commission states that the aim of EMIR 3 is to improve the central clearing system in the EU, make EU central counterparties (“CCPs”) more efficient and attractive and ensure that the EU has a competitive and efficient clearing system that is safe and resilient. The Commission has also produced a Questions and Answers on EMIR 3 (here).


The Commission had previously expressed concerns about the possible financial stability risks associated with the reliance of EU financial markets on UK CCPs. Commissioner McGuinness noted that Brexit was a “fragmenting event, with consequences in terms of financial stability. UK-based CCPs now operate outside of the Single Market and the EU's regulatory framework and over-reliance on these CCPs implies financial stability risks, notably in the event of stress”.  In addition, the Commission has highlighted the difficulties posed by the energy crisis and, in particular, the need to address challenges certain energy firms face in order to meet CCP margin calls. EMIR 3 is intended to address both of these concerns by enhancing the attractiveness of EU CCPs and increasing transparency of margin models and collateral requirements. 

The Proposals

We have summarised EMIR 3’s key proposals below.


Key Proposals

Active Account Requirement

One of the most controversial EMIR 3 proposals is the introduction of a new Article 7a requiring financial counterparties (“FC”) and non-financial counterparties (“NFC”) that are subject to the EMIR clearing obligation (“NFC+”), to hold, directly or indirectly, active accounts at EU CCPs and clear at least a specified proportion of their derivative contracts identified as being of substantial systemic importance through those accounts (the “Active Account Requirement”). 

Derivative contracts identified as being of substantial systemic importance are: 

  • interest rate derivatives denominated in euro and Polish zloty;
  • credit default swaps denominated in euro; and 
  • short-term interest rate derivatives denominated in euro, 
  • with the Commission empowered to amend that list to reflect conclusions reached by the European Securities and Markets Authority (“ESMA”) regarding the substantial systemic importance of certain CCP activities for the EU or Member State(s).

EMIR 3 provides that ESMA, in cooperation with other supervisory authorities (together, the “ESAs”), and after consulting the European System of Central Banks, will produce draft regulatory technical standards (“RTS”) for adoption by the Commission prescribing, amongst other matters, the proportion of derivative contracts to be maintained in these active accounts.  

The Commission acknowledges that firms subject to the Active Account Requirement will need to bear some costs, due to the loss of some netting benefits, reduced collateral optimisation and additional operational costs due to maintaining several accounts in the EU and in third-country CCPs. However, the Commission noted that several EU market participants will already have accounts at EU CCPs and suggests that the additional costs for those firms would be negligible.

A number of industry associations have expressed concern2 that the Active Account Requirement together with certain related changes to capital rules, as proposed, would be harmful to EU capital markets and have called on the Commission to substantiate the risk of clearing through third country CCPs and provide a robust cost-benefit analysis of the proposed Active Account Requirement.

The European Systemic Risk Board (the “ESRB”), in letters to Members of the European Parliament and the Chair of the Council Working Party3 (the “ESRB Letters”), confirmed its support for a properly framed, calibrated and implemented quantitative active account requirement but identified certain issues that required consideration and recommended:

  • that, in determining the proportion of derivative contracts required by its draft RTS to be maintained in active accounts, ESMA should undertake a thorough cost-benefit analysis; and 
  • a phase in period of the active account requirement, allowing for gradual implementation in order to avoid market distortion. 

Intragroup Transactions

It is proposed to amend the Article 3 intragroup transaction exemption from the EMIR clearing and margining obligations by replacing the current requirement that the party that is not subject to EMIR is established in a third country in respect of which the Commission has issued an equivalence decision with a requirement that it is not established in an excluded jurisdiction. 

The excluded jurisdictions will comprise those identified as high-risk third countries with strategic deficiencies in their anti-money laundering and counter terrorist financing regime or non-cooperative jurisdictions for tax purposes. It is proposed that the Commission may identify additional countries to add to this list.

It is also proposed that Article 13 (Mechanism to avoid duplicative or conflicting rules) of EMIR be deleted. 

ISDA has in comments made by it on the EMIR 3 package in February 20234 (the “ISDA EMIR 3 Commentary”) noted that “removing equivalence as a pre-condition to the availability of the intragroup transaction exemption will avoid market fragmentation and have a positive impact on how the EU is perceived in terms of market openness and attractiveness” however ISDA noted that the deletion of Article 13 may lead to an unintended consequence; the removal of “the only means EU firms have to prevent their clients from having to comply with two sets of rules with respect to risk management requirements”.

Third-country PSAs 

Article 4 of EMIR is proposed to be amended to introduce an exemption from the clearing obligation where an FC or NFC+ enters into a transaction with a third country pension scheme arrangement that is exempted from the clearing obligation under that third country’s national law.

Intragroup Reporting Requirements

It is proposed to remove the Article 9(1) intragroup transaction exemption from the EMIR reporting obligation, to ensure visibility on intragroup transactions.  Introduced by EMIR Refit5, this exemption currently applies where at least one of the parties to the intragroup transaction is a NFC or third country equivalent and certain other criteria are met. 

Whereas the ESRB Letters welcomes the proposed termination of this exemption in order to gain more insight into intragroup transactions, specifically in energy markets, it also acknowledges the potential cost to many reporting entities under EMIR and notes that carrying out a cost-benefit analysis is vital to determine the proportionality of the measure.

Clearing Thresholds and Hedging Exemption

The Articles 4a(3) and 10(3) clearing threshold calculation methodology is proposed to be amended so that only those OTC derivative contracts that are not cleared through an EU CCP or a recognised third country CCP should be included in the calculation. 

Amendments are proposed to Article 10 requiring ESMA, in consultation with the European Systemic Risk Board (the “ESRB”): 

  • to review and, where appropriate, propose changes to the RTS relating to the criteria for establishing which OTC derivative contracts are objectively measurable as reducing risks directly relating to commercial activity or treasury financing activity (the “hedging exemption”), to ensure they remain appropriate; 
  • to draft RTS specifying mechanisms triggering a review of the values of the clearing thresholds following significant price fluctuations in the underlying class of OTC derivatives; and
  • to review the applicable clearing thresholds at least every two years to consider whether the classes of OTC derivatives for which they are set remain the relevant classes or if new classes should be introduced.

Importantly, the hedging exemption is proposed to be amended so that the transactions that may be excluded from the clearing threshold calculation pursuant thereto are limited to those entered into by the NFC in question (currently those entered into by other non-financial entities within the NFC’s group may also be excluded) that reduce risks directly relating to the commercial activity or treasury financing activity of the NFC (as opposed to the NFC or the NFC’s group, as is currently the case). The purpose of this proposed amendment is unclear and it is likely to be of concern to certain NFCs; we can therefore expect advocacy supporting its removal.  However, the ESRB Letters express support for the recalibration of this hedging exemption.

Collateral Requirements and Margin Validation

It is proposed to amend Article 11 of EMIR to provide non-financial counterparties that become subject for the first time to the obligation to undertake daily marking-to-market (and report changes in mark-to-market values) and exchange collateral for OTC derivative contracts not cleared by a CCP with a 4 month implementation period, to facilitate establishment of the arrangements required to achieve compliance.

EMIR 3 proposes to empower the European Banking Authority (“EBA”) to develop, in cooperation with the other ESAs, and issue guidelines or recommendations to ensure a uniform application of the risk management procedures for the exchange of collateral. It also proposes deleting the current Article 11(15)(aa) requirement that the ESAs develop RTS specifying the supervisory procedures to ensure initial and ongoing validation of risk-management procedures relating to the methodology for the validation of the initial margin models.  

The EBA had consulted on draft Article 11(15)(aa) RTS in November 2021 (here) and, in February 2022, notified the Commission that the delivery of these RTS would be delayed until 31 December 2022 (here).  They have not yet been published and the EBA has not issued any update as to its intentions in this regard but it may be that, in light of this aspect of the EMIR 3 proposal, publication of RTS will not now proceed.  

The ISDA EMIR 3 Commentary welcomes this aspect of the EMIR 3 proposal, noting that guidelines would provide a more dynamic and efficient method to implement and maintain appropriate, practicable procedures. It has, however, also requested that procedures which have already been established for initial model governance be deemed validated by the relevant competent authority, reflecting concerns expressed regarding the implications of the original draft RTS for existing, well established initial margin models that are already subject to effective regulatory oversight.

Collateral requirements

Article 46 of EMIR is proposed to be amended to treat bank guarantees and public guarantees as highly liquid collateral provided that they are unconditionally available upon request within the liquidation period and a CCP takes them into account when calculating its overall exposure to a bank.

The ESRB Letters note that acceptance of bank guarantees could lead to significantly increased interdependency between banks and CCPs and indicated a preference for either: 

  • maintaining the temporary nature of the current extension; or
  • applying on a permanent basis the same strict cumulative conditions regarding the acceptance of uncollateralised bank guarantees as apply pursuant to the current temporary extension6.

CCP Procedures

EMIR 3 includes provisions intended by the Commission to simplify and accelerate EU CCP new product launches and risk model changes, where that does not increase CCP risk. 

It also includes provisions intended to provide better visibility and predictability of margin calls, for example, it is proposed to amend:

  • Article 38 of EMIR to require clearing members and clients providing clearing services to provide clients and indirect clients with clear and transparent information of the way margin models work; and 
  • Article 41 to require CCPs to consider the potential impact of intraday margin collections and payments on the liquidity position of participants.

More detailed amendments are proposed to the supervisory framework for EU CCPs and the recognition of third country CCPs.

The ESRB Letters have made various proposals to these proposed amendments.

Next Steps

The Commission’s proposal will now progress through the European legislative procedure and will likely be subject to further amendment. The next step in this procedure is for negotiations to begin between the European Parliament and the Council of the EU (the “Council”). These negotiations have not yet begun; as of 28 March 2023, discussions within the Council/its preparatory bodies were ongoing. The progress of EMIR 3 can be tracked on the EU’s Eur-Lex website (here).

It should be noted that, whereas pursuant to Article 85 of EMIR the Commission is due to assess the application of EMIR by 18 June 2024, the entry into force of EMIR 3 as drafted would result in the deferral of that assessment to five years after its entry into force.

  1. Directives 2009/65/EU, 2013/36/EU and (EU) 2019/2034.
  2. ISDA, AIMA, EFAMA and FIA; see https://www.isda.org/2023/02/02/isda-aima-efama-fia-statement-on-ecs-proposed-amendments-to-emir/
  3. See https://www.esrb.europa.eu/pub/pdf/other/esrb.letter230320_on_emir_review_mep~058e272ec7.en.pdf?406179830229e8e1aa32068c52f22f7b and https://www.esrb.europa.eu/pub/pdf/other/esrb.letter230320_on_emir_review~f6a95f64c5.en.pdf
  4. https://www.isda.org/a/a6ygE/ISDA-commentary-EMIR-3.pdf
  5. Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories.
  6. See https://www.esma.europa.eu/sites/default/files/library/esma91-372-2466_report_amended_rts_emergency_measures_on_collateral_requirements_article_463_emir.pdf

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.