EMIR 3 – ESMA consults on new clearing thresholds regime

While EMIR 3 came into force on 24 December 2024, the provisions amending the methodology for both financial counterparties (FCs) and non-financial counterparties (NFCs) to determine whether they exceed clearing thresholds do not yet apply.  Those provisions will only start to apply once Level 2 technical standards relating to the clearing thresholds come into force.  In the meantime, the existing clearing thresholds and calculation methodologies apply. ESMA has now issued a Consultation Paper on those technical standards.

Clearing thresholds for NFCs

Currently, the thresholds for determining whether an entity is at or above the thresholds (NFC+) or below the thresholds (NFC-) are calculated annually, taking into account the annual average month end value over the preceding 12 months of all OTC derivatives, whether cleared or uncleared, of non-financial entities in the group (but excluding derivatives for hedging purposes). Exchange-traded derivatives (ETDs) that are traded on venues not determined as “equivalent” to EU venues (which includes UK venues) are categorised as OTC. Therefore, they need (unless for hedging purposes) to be included in the calculation, which is problematic. Another problem can be identifying which entities globally form part of the “group” so that their derivative positions are included in the calculation.  An NFC+ is only required to clear derivatives that are in-scope of the clearing obligation if it exceeds the threshold for that particular class of derivatives (for example, interest rate derivatives).

The following helpful changes to the calculation methodology are introduced by EMIR 3:

• Only uncleared OTC derivatives need to be included, thus excluding all ETDs, as well as OTC derivatives that have been voluntarily cleared, as long as they are cleared on a CCP authorised or recognised by ESMA.
• Only transactions entered into by the NFC itself are to be included (although it remains possible to exclude a transaction as “hedging” if it hedges risks relating to activities of the NFC’s group).

Clearing thresholds for FCs

As part of EMIR REFIT, an exemption from the clearing obligation was introduced for “small FCs”, whose OTC derivative positions (calculated annually at group level and with no exclusion for hedging contracts) did not exceed any of the clearing thresholds.  If any clearing threshold is exceeded, the FC must clear all derivatives that are in-scope of the clearing obligation.

The calculation methodology is being amended by EMIR 3 to introduce a two-limb test.

First, the FC will calculate (at group level) its positions in uncleared OTC derivatives to determine whether they exceed any of the clearing thresholds that apply to NFCs.

Second, the FC must also calculate its aggregate positions in OTC derivatives (including cleared OTC derivatives and ETDs traded on non-equivalent venues) against clearing thresholds to be set for this purpose by ESMA.

The exemption only applies if both limbs of the test are satisfied.

Funds and pension schemes are not normally part of a “group”, so will run the calculations based on their individual positions (and the specific provisions in EMIR allowing for EU UCITS and AIFs to calculate on a solo basis are retained).

ESMA proposals – hedging criteria (NFCs)

Criteria for establishing when a contract can be excluded from the calculations for NFCs as being for “hedging purposes”, are set out in Commission Delegated Regulation (EU) No 149/2013, article 10.  In its Consultation Paper, ESMA highlights a Q&A from the Commission on whether virtual power purchase agreements (PPAs) can be considered as hedging contracts.  ESMA welcomes input on whether the existing hedging criteria would benefit from further clarification, as regards virtual PPAs or otherwise, but does not propose any amendments to the existing text in the draft technical standards. 

ESMA proposals – asset classes and clearing thresholds for uncleared positions (FCs and NFCs)

Under Commission Delegated Regulation (EU) No 149/2013, separate clearing thresholds apply to OTC derivatives as follows:

For the calculation of uncleared derivative positions, ESMA broadly proposes to retain the existing classes, except that the class of “commodity and other derivatives” will be amended to relate to “commodity and emission allowances derivatives”. ESMA notes that the recitals to EMIR 3 invited it to consider more granular categories for commodity derivatives, but ESMA has decided not to introduce separate thresholds for different types of commodity derivatives at this stage. It has also decided not to introduce any further asset classes for derivatives (such as crypto derivatives) that may not fall within any of the above asset classes.  It should be noted that ESMA is required to review the clearing thresholds every 2 years, and an earlier review may also be triggered in the event of significant price volatility or changes to macro economic factors.

Having regard to the changes to the calculation methodology for NFCs (only including uncleared positions of an individual NFC that are not for hedging purposes), retaining the existing thresholds could lead to entities that are currently NFC+ ceasing to be subject to the clearing obligation and to the other provisions in EMIR applying to NFC+s, including regulatory margining and potentially the “active account requirement”.  With a view to ensuring that the current coverage of the clearing obligation is not substantially changed, and based on its data analysis as summarised in the Consultation Paper, ESMA proposes to reduce the clearing thresholds applying to calculation of uncleared positions as follows: 

The threshold for FX derivatives is unchanged because most of the volume in such derivatives is uncleared anyway, so only including uncleared positions in the calculations will not be a material change from the current situation.

ESMA proposals – asset classes and clearing thresholds for aggregate cleared and uncleared OTC positions (FCs)

As regards the second limb of the clearing threshold calculation for FCs, ESMA proposes to apply the test only to the asset classes where, currently, the clearing obligation applies to some of the products falling within those classes i.e. interest rate derivatives and credit derivatives.  Also, as the calculation includes both cleared and uncleared positions, at group level, the current thresholds are retained: 

Timing?

ESMA is required under EMIR 3 to finalise the technical standards by 24 December 2025.  They will then come into force 20 days after adopted by the European Commission and Council.

The consultation period on the Consultation Paper closes on 16 June 2025.

Practical considerations

The Consultation Paper does not address various practical questions arising from the changes to the clearing thresholds:

• will it be necessary for EU entities that are NFC- or “small FCs” to run the new calculations immediately the new methodology comes into force, or (assuming they had previously run the calculations as at a particular date ,say, 17 June 2025) can they continue to be treated as exempt from the clearing obligation (and active account requirement) until 12 months thereafter without re-running the calculation?
• Where EU entities have obtained representations from third-country counterparties as to how the latter would be categorised under EMIR if established in the EU, when will EU entities be expected to reach out to their counterparties to ask them to confirm their status in light of the new clearing thresholds and what would be a reasonable period to obtain responses?

As the calculations are carried out based on values for the preceding 12 months, both FCs and NFCs should ensure that they collect the data they will need to run the calculations on the new EMIR 3 basis.