EMIR: New Clearing Thresholds Regime set to apply in the EU

EMIR 3* modifies the clearing thresholds regime.  Earlier in the year, the European Securities and Markets Authority (ESMA) published the clearing thresholds that it proposes will apply under the new framework. Here are the key changes, taking into account the clearing thresholds proposed by ESMA in its final report.

EMIR 3 moves away from the current distinction between exchanged-traded derivatives and OTC derivatives (where all OTC derivatives count towards the threshold, whether they are cleared or uncleared) and changes the calculation methodology for financial counterparties (FCs) and non-financial counterparties (NFCs).

Both FCs and NFCs will have to calculate their uncleared OTC positions to assess whether they are above the clearing thresholds and thus subject to mandatory clearing. 

FCs have to separately calculate their aggregate position in both cleared and uncleared OTC derivatives to establish whether they exceed the clearing thresholds and are subject to mandatory clearing.  It remains a group calculation for FCs, with the exception that funds generally have to calculate their positions at entity level.

For NFCs, the calculation moves to entity level.  NFCs continue to benefit from the hedging exemption, whether the transactions are entered into by the NFC for its hedging needs or for the hedging needs of another group entity.

For the aggregate position calculation (which applies to FCs only), ESMA considered it necessary to establish thresholds only for the OTC derivatives asset classes that are in scope of the clearing obligation, i.e., interest rate and credit derivatives.  The aggregate thresholds for these classes of derivatives are the same as those that currently apply, i.e.:

Aggregate thresholds (FCs only)

For the calculation of positions in uncleared OTC derivatives (applicable to both FCs and NFCs), ESMA has set out thresholds that are on the whole lower than the current thresholds, e.g., 

Uncleared thresholds (FCs and NFCs)

The clearing thresholds set out by ESMA are subject to review and adoption by the European Commission and a scrutiny period by the European Union co-legislators.  The new EMIR clearing thresholds regime is scheduled to apply 20 days after the changes to the clearing thresholds are published.  ESMA’s view is that parties should be given the flexibility to recalculate their OTC positions using the new thresholds when the new rules come into force, or to wait until the end of their current annual calculation period before applying the new rules.  For many market participants, this will mean the period comprising the months from June to May in each year, in line with the entry into force of EMIR Refit*** in June 2019. 

These changes do not apply in the UK, which for the time being generally maintains the current EMIR clearing thresholds and calculation methodology****.

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