EMIR as a set of rules contains many provisions, including but not limited to conduct rules for Central Clearing Counterparties, provisions mandating the clearing of certain OTC derivatives, treatment of derivatives traded on EEA and third country venues, risk mitigation techniques for OTC derivatives uncleared by a CCP, and a reporting obligation.

In December 2024 regulation EU 2024/2987 came into effect. The aforesaid regulation amends EMIR in significant ways and has been colloquially dubbed “EMIR 3”. The new rules touch mostly upon the issues of clearing and risk mitigation techniques. It is already widely known that EMIR 3 introduced a requirement for EEA based counterparties to reduce their exposure to non-EEA Clearing Houses by mandating FCs and NFCs+ to open, maintain and actively use accounts with EEA Clearing Houses.

One of the least discussed requirements of EMIR 3 however is the requirement placed on NFC+ and FCs with respect to initial margin models for OTC derivatives uncleared by CCPs.

Margin RTS vs EMIR 3 : What’s the difference

With the so called Margin RTS the EU set requirements regarding the eligibility, management and segregation, the terms for the exchange of margin (mostly initial margin) with respect to OTC derivatives uncleared by a CCP, as well as thresholds/conditions below/under which the Margin RTS can be disapplied.

EMIR 3 does not undo the requirements under the Margin RTS, which remain unaffected.

EMIR 3 Initial Margin Model – Approval by NCAs

Under EMIR 3 FCs as well as NFCs + before implementing a new model for the exchange of initial margin between themselves and their counterparties they will need to apply for authorisation by their home competent authority. If FCs and/or NFCs+ intend to amend a previously authorised model, that triggers a new request for approval by their home NCA.

As per EMIR 3 NCAs will have 6 months to approve/reject a new initial margin model, or 3 months to approve/reject a modification to an already approved model.

Pro-forma models

Many counterparties implement pro-forma initial margin models such as the ISDA Standard Initial Margin Model (ISDA-SIMM), said counterparties will still be required to submit a request for approval from their NCAs, however the process is expected to be expedited by the European Banking Authority which will set-up, maintain and update a centralised database which will validate the said pro-forma models submitted by interested parties. Counterparties that seek approval of their initial margin models based on a pro-forma model will need to include in the application for approval the appropriate references to the EBA’s database.

Enhanced supervision of large Investment Firms/Credit institutions

EMIR 3 also envisages enhanced supervisory procedures for Investment Firms/Credit Institutions which have a monthly average outstanding notional amount of non-centrally cleared OTC derivatives of at least EUR 750 billion. The supervisory procedures will be co-developed by the European Supervisory Authorities (EBA, ESMA, EIOPA).

Exemptions: Single Equity, Index OTC options

EMIR 3 ushered a welcomed exception; the new regime allows parties trading Single Equity or Equity Index options to exempt themselves from the requirement of exchanging collateral. MAP FinTech notes that this applies to OTC options uncleared by a CCP. Furthermore, our own subjective view is that considering how plain vanilla option contracts operate and taking into account that collateral is exchanged to hedge against counterparty default risk, we welcome the approach.

Opinion by the EBA

The EBA has identified early on, that the new ruleset creates a number of issues given that the pro-forma database has yet to be completed, the ESAs have yet to determine the appropriate supervisory mechanisms for NCA’s to scrutinise large investment firms/credit institutions, as well the status of initial margin models already in place prior to EMIR coming into effect. As such the EBA has published an opinion with which it clarifies a few important issues

1. Firms that implemented initial margin models before the entry into force of EMIR 3 are not required to seek approval from their NCA’s to continue using said models. Nevertheless, if firms modify the said models after EMIR 3 came into force they should seek the appropriate approval from their regulators.
2. The format and content of the application that firms need to submit to their NCA’s for approving new IM models or modifying previously approved models.
3. An instruction to the NCAs to deprioritise their supervisory or enforcement actions with respect to large investment firms/credit institutions till after the ESAs finalise their work on the supervisory processes (and they come into effect).
4. An instruction to the NCAs to deprioritise their supervisory or enforcement actions with respect to the applications they receive pursuant to EMIR till the ESAs finalise their guidance or recommendations.

Sectoral Impact – EEA based CFD providers

Considering that many EEA CFD providers trade with retail clients by and large the initial margin model CFD providers follow is set out in the restrictive measures set by the NCA’s across the EEA(the list is not exhaustive):

• 3.33% initial margin of the notional value where the underlying is a currency pair comprised of any 2 of the following currencies USD, EUR, JPY, GBP, CAD or CHF.
• 5% initial margin of the notional value where the underlying is any one of a selected list of Equity Indices (e.g. S&P500, CAC40, DJIA, etc.).
• 5% initial margin of the notional where the underlying is gold.
• 5% initial margin of the notional where the underlying is a currency pair comprised of 1 of the currencies referred to in the first bullet point.
• 10% initial margin of the notional where the underlying is a Commodity Index or an Equity Index not referred to in the second bullet point.
• 50% initial margin of the notional where the underlying is a crypto asset.
• 20% initial margin of the notional where the underlying is a single stock.

The above restrictive measures on face value are an initial margin model within the meaning of EMIR 3. Considering that the said initial margin model existed before the application of EMIR 3, there is no need for CFD providers to seek approval from their NCAs, regarding the specific case of trading with their retail clients.

Nevertheless, in case where CFD providers trade with Professional Clients (either Elective or Per-Se professional clients) and post the application of EMIR intend to deviate from their existing IM models, they need to consider whether an application to their NCA should be submitted (with the content specified by the EBA).

Disclaimer: The above blog was written by MAP FinTech’s internal teams and under no circumstance does it replace advice or guidance by Firms’ compliance and/or risk management functions. Firms affected by EMIR 3 should consult with their compliance/risk management personnel and or consultants for specific guidance and must not rely on the information contained herein.

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