EMIR 3: The Three Pillars Revolutionizing Derivatives Clearing in the EU

The New Era of Centralized Clearing in Europe

The entry into force of EMIR 3 on December 25, 2024, marks a turning point in the regulation of centralized clearing in the European Union. As a continuation of the reforms initiated with EMIR 2, this new regulation represents a decisive step towards building a more resilient, competitive, and independent European clearing ecosystem.

The Three Strategic Pillars of EMIR 3

1. Strengthening the Supervisory Framework for European CCPs

The harmonization of supervision is presented as a fundamental regulatory imperative to ensure market integrity and competitive fairness. EMIR 3 introduces significant innovations in this area:

• Standardization of supervisory practices: Through new ESMA Opinions on the annual reviews by National Competent Authorities (NCAs) and compliance assessments under EMIR.
• ESMA’s co-chairmanship in supervisory colleges: This measure aims to strengthen the coherence and effectiveness of supervision across all EU CCPs.
• “Comply or explain” mechanism: A new system requiring NCAs to justify to the ESMA Council any disagreement with decisions made by the CCP Supervisory Committee.

2. Boosting Competitiveness and Resilience of the European Ecosystem

EMIR 3 not only seeks to enhance market security but also to improve the attractiveness and competitiveness of European clearing infrastructures:

• Acceleration in the approval of new products and models: Significant reduction in authorization timelines, limiting the maximum time for new CCP authorization to 137 business days and for service extensions to 87 business days.
• Digitalization and centralization of processes: Implementation of a centralized data platform to manage CCP applications and reports.
• Enhanced resilience: Refinement of regulatory requirements on margin transparency and guarantee policies, along with systemic monitoring mechanisms and more robust crisis management frameworks.

3. Mitigation of Risks Associated with Third-Country CCPs

Despite the progress achieved with EMIR 2, the excessive dependence of European counterparties on clearing services located outside the EU remains a systemic risk that EMIR 3 addresses head-on:

• Active Account Requirement (AAR): Perhaps the most innovative measure with the greatest transformative potential. This requirement will mandate the most active clearing participants in the EU to maintain operational and representative accounts in European CCPs for key derivative contracts, such as EUR OTC IRD, PLN OTC IRD, and EUR STIR.
• Enhanced supervision of Tier 2 CCPs: Continuation and improvement of direct supervision by ESMA of third-country CCPs that are systemically important to the EU.
• Improved international cooperation: Establishment of reinforced cooperation agreements with third-country supervisors, particularly for CCPs deemed systemically important.

Implications for the Sector

The implementation of EMIR 3 will have profound consequences for all participants in the derivatives market:

• For European CCPs: Significant growth opportunities due to the likely migration of clearing volumes from third countries, although they will need to adapt to a more demanding and harmonized supervisory framework.
• For EU financial entities: The most active market participants will need to make operational and strategic adjustments to comply with the Active Account Requirement, which could impact their cost structures and risk management strategies.
• For third-country CCPs: Particularly those in the UK, they may face a potential loss of European business volume, although the three-year extension of equivalence provides a transitional period for adaptation.

Conclusion: Towards a More Autonomous European Clearing Ecosystem

EMIR 3 represents a decisive step towards building a more resilient, competitive, and independent European clearing ecosystem. The success of this ambitious reform will depend not only on the effectiveness of its implementation by ESMA and national authorities but also on the adaptability of market infrastructures and participants.

Reducing dependence on third-country CCPs, especially for euro-denominated interest rate derivatives, is a strategic objective for the financial stability of the Union and its autonomy in global financial markets. With EMIR 3, Europe takes another step towards consolidating its Capital Markets Union and strengthening its role in the international financial system.

If you liked this article, you may also find it interesting to read the following one:

EMIR: A Regulatory Framework for OTC Derivatives

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