Update on EMIR 3 developments

The European Securities and Markets Authority (“ESMA”) has launched a public consultation to change the clearing thresholds established in Regulation (EU) 648/2012 (“EMIR”) in relation to over-the-counter (“OTC”) derivatives.

It is important to remember that if these thresholds are exceeded, the regulatory clearing obligation is activated. Under this mechanism, the counterparties designate a central clearing house to facilitate the exchange of guarantees; this often involves the net clearing of many transactions to minimize the number and amount of payments and deliveries required between the participants, thus mitigating the counterparty credit risk.

The changes proposed under ESMA come under the framework of recent Regulation (EU) 2024/2987 (“EMIR 3”), which came into force on December 24, 2024. Among other things, EMIR 3 introduces changes in the clearing system consisting of new thresholds and a new calculation method. However, the specific adjustments in this area require the adoption of regulatory technical standards (“RTSs”). These RTSs could be modified, based on the results of the public consultation carried out.

Classification of counterparties: double calculation for financial counterparties (“FCs”)

Counterparty classification under EMIR establishes the applicable obligations and the corresponding level of intensity. In general terms (and leaving aside the exemptions), EMIR classifies the counterparties as follows:

• FCs: credit institutions, investment firms, insurance and reinsurance companies, pension plans, certain funds and central securities depositories.
• Non-financial counterparties or NFCs: most other types of institutions, including companies and investment vehicles.
• Non-European equivalents.

FCs and NFCs are also sub-classified into those that exceed the clearing threshold (designated with a + suffix) and those that do not exceed the threshold (designated with a - suffix). The difference between (+) and (-) is fundamental, as it determines several regulatory parameters, including the clearing obligation and the active account requirement, which ensures that the institutions of systemic importance for the EU clear one percentage of their derivatives through an EU central counterparty (“CCP”).

 In its proposal, ESMA introduces adjustments in the classification of FCs, requiring a double calculation method to establish whether they exceed the clearing thresholds. This calculation distinguishes between positions not cleared in a recognized EU CCP and aggregate positions (both cleared and uncleared). To classify as an FC-, the institution must be below both thresholds. 

New thresholds for FCs and NFCs

The proposal also includes the modification of quantitative thresholds. In the following table, we indicate the current thresholds under Commission Delegated Regulation(EU) No. 149/2013 and the new thresholds proposed.

 Changes in asset classes

ESMA has also proposed a series of adjustments in the scope of some of the categories protected under the thresholds mentioned earlier. For example, the last class would be modified to include “commodity derivatives and emission allowances.”

The possibility to establish a sixth category for other asset classes continues to be remote. As examples, the public consultation mentions cryptoassets and carbon emission allowances as possible active candidates for a potential additional group.

Possible change in the hedging exemption for financial PPAs

Although ESMA has not proposed any changes to the hedging exemption regime for NFCs, it has identified an industry concern regarding application of that exemption in the signing of financial power purchase agreements (“PPAs”), also known as virtual PPAs. These agreements, unlike physical PPAs, do not involve the sale or physical delivery of electricity; they involve a settlement of differences between the fixed price agreed for electricity and a market price.

In this field, ESMA requests the interested parties’ opinion on how the hedging exemption could be modified to address the complications related to financial PPAs. This hedging exemption is key for entities classified as NFCs, because derivatives using that exemption are not recorded in the books for the purpose of the clearing thresholds.