EU EMIR Requirement To Clear OTC Derivative Contracts Through A CCP

EU EMIR: requirement to clear OTC derivative contracts..., Practical Law UK...
EU EMIR: requirement to clear OTC derivative

contracts through a CCP
by Practical Law Financial Services
Maintained • European Union
EU EMIR (the Regulation on OTC derivatives, central counterparties and trade

repositories) (648/2012) requires certain classes of over-the-counter (OTC) derivatives
contracts to be cleared through a central counterparty (CCP). This note considers the
scope and implications of the EMIR clearing requirements.
For an overview of EMIR see Practice note, EU EMIR: overview.
Scope of this note

EMIR 3: Commission legislative proposals
Amendments to EMIR: EMIR Refit and EMIR 2.2
EMIR Refit Regulation
EMIR 2.2
What is central counterparty clearing?

What is clearing?
How does a CCP reduce counterpart risk?

Multilateral netting
EMIR clearing requirement

Temporary suspension of the clearing requirement
To whom does the clearing requirement apply?

Financial counterparties
Non-financial counterparties
Combinations of counterparties triggering the requirement to clear
Third-country counterparties
Exempted persons
© 2023 Thomson Reuters. No claim to original U.S. Government Works. 1

What types of trades are within scope of the clearing requirement?

Is the trade a derivative contract?
Is the trade executed OTC?
Has the derivative contract been declared subject to the clearing requirement?
At what point will the clearing obligation apply?
Exemption for intra-group transactions
RTS on intragroup transactions

Transitional provisions for pension schemes
Exemptions relating to securitisations and covered bonds
Procedure for determining the types of trades subject to the clearing requirement
Bottom-up approach
Top-down approach
Amendments to RTS on clearing obligations in light of benchmark transition

Indirect clearing
Public register
ESMA guidance
Q&As on EMIR implementation
Guidance on clearing obligation
Scope of this note

This note provides an overview of the requirement under EU EMIR (the Regulation on OTC derivative
transactions, central counterparties and trade repositories) (648/2012) (EMIR) for standardised trades in over-
the-counter (OTC) derivative contracts to be cleared by a central counterparty (CCP). It explains the scope of
the EMIR clearing requirement and the procedures involved, and discusses some implications arising from the
requirement. For a general overview of the main requirements under EMIR, see Practice note, EMIR: Overview.
The note summarises the EMIR clearing obligation under the level 1 text of the Regulation. For details of EMIR
level 2 technical standards, see Practice note, EMIR: delegated acts, implementing acts, technical standards
and guidelines.
The UK onshored EMIR in connection with its departure from the EU. For information on the retained EU law
version, the UK EMIR, see Practice note, Brexit: UK EMIR.
EMIR 3: Commission legislative proposals

The Commission has adopted two legislative proposals (widely referred to as EMIR 3) to amend a number
of aspects of the regulatory framework relating to EMIR. They include a number of changes to the clearing
obligation and clearing thresholds. The proposals comprise of:

• Proposal for a Regulation amending EMIR, the Capital Requirements Regulation (575/2013) (CRR)
and the Regulation on Money Market Funds ((EU) 2017/1131) (MMF Regulation) as regards measures
to mitigate excessive exposures to third-country CCPs and improve the efficiency of Union clearing
markets (COM(2022) 697). The interinstitutional reference number for the legislative proposal is
2022/0403(COD).
• Proposal for a Directive amending the UCITS Directive (2009/65/EC) the CRD IV Directive (2013/36/
EU) and the Investment Firms Directive ((EU) 2019/2034) (IFD) as regards the treatment of
concentration risk towards central counterparties and the counterparty risk on centrally cleared
derivative transactions (COM(2022) 698). The interinstitutional reference number for the legislative
proposal is 2022/0404(COD).
The proposed changes aim in particular to improve the competitiveness of CCPs in the EU and to reduce the
concentration of exposure to systemically important third-country CCPs (in particular, UK CCPs). They also
contain provisions to address issues raised during excessive volatility in energy derivatives markets, and a
number of other concerns that have come to light in the operation of EMIR.
For an overview of the legislative proposals and their progress from the initial drafts through to their final
adoption and publication in the Official Journal of the European Union, see Practice note, Hot topics: EMIR 3.
Amendments to EMIR: EMIR Refit and EMIR 2.2
EMIR Refit Regulation
A number of provisions of EMIR have been amended by the EU EMIR Refit Regulation ((EU) 2019/834).
The amendments were made primarily to simplify certain requirements and reduce disproportionate costs for
smaller counterparties to OTC derivatives trades.
Changes made to EMIR by the EMIR Refit Regulation include the definition of financial counterparty and
application of the clearing obligation to certain counterparties. Where relevant, this note highlights these
amendments. The provisions in EMIR affected by this Regulation include: Article 2, Article 4, Article 6, Articles
9-11, Article 38, Article 39, Article 56, Articles 62-65, Article 67, Article 72, Article 76, Article 78, Article 80,
Article 81, Article 85, Article 89, and Annex I.
For more information on the EMIR Refit Regulation, see Practice note, EU EMIR Refit Regulation.
EMIR 2.2
Changes to the authorisation and supervision of EU and third-country CCP are proposed under a Regulation
known as EMIR 2.2. For more information, see Practice note, Regulation to amend EU EMIR supervisory
regime for EU and third-country CCPs (EMIR 2.2).

What is central counterparty clearing?
What is clearing?
Clearing is a concept that is well established in the context of exchange-traded derivatives and relates to the
management of the counterparty risk (sometimes referred to as credit risk) inherent in open derivative trades.
Counterparty risk is the risk that one of the counterparties to a trade fails to meet its payment or delivery
obligations (that is, defaults on the trade).
Clearing is defined in Article 2(3) of EMIR as:
"the process of establishing positions, including the calculation of net obligations, and ensuring that financial
instruments, cash or both are available to secure the exposures arising from those positions".
Clearing follows the execution of a trade. It entails making sure that the requisite financial instruments and/or
cash are available to enable the transaction to be settled. As stated in the EMIR definition above, this includes
the calculation of net positions, which is discussed in Multilateral netting below.
The main purposes of clearing trades through a CCP are to:
• Reduce counterparty risk (described above).
• Reduce systemic risk (that is, the risk to the financial system as a whole resulting from the potential
knock-on effects of a counterparty to a trade defaulting on its obligations).
• Improve trade transparency.
There are two models of clearing, depending on the status of the counterparties:
• "Direct", where the counterparties to the trade are members of the CCP through which the trade is
cleared.
• "Indirect", where one or both of the counterparties to the trade is not a member of the CCP, but clears
the trade through an entity that is a member of the CCP. Indirect clearing is described in more detail in
Indirect clearing below.
How does a CCP reduce counterpart risk?

A CCP is defined in Article 2(1) of EMIR as:

"a legal person that interposes itself between the counterparties to the contracts traded on one or more financial
markets, becoming the buyer to every seller and the seller to every buyer".
A CCP is a regulated financial institution that will act as counterparty to each of the parties to a trade. The
process of clearing a trade through a CCP involves both sides of the trade being novated, so that the CCP
will, under new contracts, buy from the seller and sell to the buyer. The key point is that the buyer and seller
no longer have counterparty risk on each other, but each will instead face the CCP as its counterparty. Since
CCPs have strict prudential and risk management requirements under EMIR (including capital requirements,
margin requirements, liquidity risk controls and default fund requirements (Articles 14 to 54, EMIR), it can be
assumed that swapping your original counterparty with a CCP will present significantly lower counterparty risk.
However, interposing a CCP between each counterparty does not eradicate counterparty risk. Although
counterparty risk is reduced for the parties to the trade, the process effectively shifts risk to the CCP, which
remains liable to perform its obligations under each trade irrespective of whether the buyer or seller perform
their obligations to it. This potentially creates another systemic issue, as it concentrates risk in a relatively
small number of entities (the CCPs themselves). This is one of the reasons why the prudential requirements
for CCPs are so stringent and why it is necessary for there to be mechanisms to avoid, or at least manage,
the possibility of CCP failure (see Practice note, EU EMIR: overview: Regulation of central counterparties).
Multilateral netting
An important benefit of CCP clearing is that a CCP can provide a multilateral netting service to the
counterparties clearing trades through it. Multilateral netting allows a counterparty to set off all amounts owed
by it against all amounts owed to it under all of the trades it clears through the same CCP (irrespective of the
identity of the original counterparties to those trades), and to pay or receive one single sum depending on
whether it is owed more or less than it is due under all of the trades in question. Multilateral netting effectively,
therefore, allows a counterparty to net its exposures to two or more other counterparties. If trades are not
cleared through a CCP, a counterparty is only able to net its exposures on a bilateral basis with each of its
counterparties separately. Although beneficial, this does not provide the same level of potential benefit as
multilateral netting.
As well as reducing a counterparty’s exposure under the trades it enters into, multilateral netting can have
a beneficial effect on a counterparty’s regulatory capital burden (by enabling the counterparty to calculate its
exposures for regulatory capital purposes on a net rather than gross basis).
An example of multilateral netting compared with bilateral netting
• A owes 10 to B.
• B owes 10 to C.
• C owes 5 to A.
How much should each party pay? If all the trades were centrally cleared through a CCP and subject to
multilateral netting, each party only has to pay the overall net amount owing to all other participants (or, as

the case may be, receive the overall net amount due). In the above example, A pays 5 to the CCP, B pays
nothing, C receives 5.
If these trades were not centrally cleared through a CCP, neither A, B nor C would be able to net its exposures
as bilateral netting only allows them to net amounts they owe against amounts owing from the same
counterparty.
EMIR clearing requirement

Article 4 of EMIR requires counterparties to clear all OTC derivative contracts relating to a class of derivatives
that has been declared subject to the clearing requirement through a CCP based in the EEA and authorised
under Article 14, or based outside the EEA and recognised under Article 25, to clear that class of OTC
derivatives.
In determining whether a particular transaction must be cleared, it is necessary to consider whether:
• Either or both of the counterparties falls within the scope of the clearing requirement (see To whom
does the clearing requirement apply?).
• The transaction is in a class of derivative contract that has been declared subject to the clearing
requirement under the procedure set out in Article 5(2) of EMIR (see What types of trades are within
scope of the clearing requirement? And Procedure for determining the types of trades subject to the
clearing requirement).
Information on the classes of OTC derivative contracts that are subject to the clearing requirement, as well
as lists of the CCPs that are authorised or recognised under EMIR to clear those contracts is available in the
public register that ESMA is required to maintain under Article 6 of EMIR.
If a transaction is not centrally cleared, either because the class of derivative is not subject to the clearing
requirement or the counterparties to the trade do not fall within the scope of the clearing requirement, then the
alternative risk mitigation rules under Article 11 of EMIR will apply (see Practice note, EU EMIR: risk mitigation
requirements for uncleared OTC derivatives).
OTC derivative contracts falling within the scope of the clearing requirement must be cleared either through an
EEA CCP authorised under Article 14 of EMIR, or a third-country CCP recognised under Article 25 of EMIR,
to clear that particular class of OTC derivative (Article 4(3), EMIR).
Articles 4(4) and 4(6) of EMIR have been amended by a number of level 2 provisions, see Practice note, EU
EMIR: delegated acts, implementing acts, technical standards and guidelines for more information.
Temporary suspension of the clearing requirement
The EMIR Refit Regulation introduces Article 6a into EMIR giving ESMA power to request that the Commission
suspends the clearing obligation for specific classes of OTC derivatives or for a specific type of counterparty
when certain conditions are met. Any suspension would be for an initial period of no more than three months.

The Commission can extend the suspension for additional periods of not more than three months, although
the total suspension period must not exceed 12 months. For more information, see Practice note, EU EMIR
Refit Regulation.
To whom does the clearing requirement apply?

To work our whether the EMIR clearing requirement applies to a particular market participant it is necessary
to distinguish between:
• Financial counterparties.
• Non-financial counterparties (NFC).
Financial counterparties
A financial counterparty is defined in Article 2(8) of EMIR. The definition was subsequently updated and added
to by the EMIR Refit Regulation. It is, basically, a financial institution or fund that has been authorised under
an EU directive. More specifically, the definition covers:
• An investment firm authorised in accordance with the MiFID II Directive.
• A credit institution authorised in accordance with the CRD IV Directive (2013/36/EU).
• An insurance undertaking or reinsurance undertaking authorised in accordance with the Solvency II

Directive (2009/138/EC).
• A UCITS fund and, where relevant, its management company, authorised in accordance with the
UCITS IV Directive, unless that UCITS is set up exclusively for the purpose of serving one or more
employee share purchase plans.
• An institution for occupational retirement provision (IORPS), as defined in the IORP II Directive
(2016/2341/EU).
• An AIF, as defined in Article 4(1)(a) of the Alternative Investment Fund Managers Directive (2011/61/
EU) (AIFMD), which is either established in the EU or managed by an alternative investment manager
(AIFM) authorised or registered under the AIFMD. However, EMIR will not apply to an AIF that
is set up exclusively to serve one or more employee share purchase plans, or an AIF that is a
securitisation special purpose entity (as referred to in Article 2(3)(g) of the AIFMD), and, where
relevant, its AIFM is established in the EU.
• A central securities depository (CSD) authorised under the Central Securities Depositories Regulation
(909/2014) (CSDR).

Clearing threshold
The EMIR Refit Regulation introduced a clearing threshold for financial counterparties. Originally under EMIR,
the clearing requirement applied to all financial counterparties, irrespective of the volume of their trading in
OTC derivatives. However, recital 7 to the EMIR Refit Regulation explains that certain financial counterparties
have a volume of activity in OTC derivatives markets that is too low to pose an important systemic risk for
the financial system and is too low for central clearing to be economically viable. Therefore, those "small
financial counterparties" (SFCs) should be exempted from the clearing obligation while remaining subject to
the requirement to exchange collateral to mitigate any systemic risk.
Article 1(3) of the EMIR Refit Regulation therefore inserted a new Article 4a into EMIR so that SFCs will not
automatically have to comply with the clearing obligation. Clearing thresholds are applied based on a financial
counterparty's trading volume in a similar way as that applied to NFCs (see The clearing threshold) to determine
whether or not the clearing obligation will apply. The clearing thresholds for financial counterparties are the
same as for NFCs.
Under Article 4a of EMIR, every 12 months, a financial counterparty may calculate its aggregate month-end
average position in OTC derivatives contracts for the previous 12 months. Where the financial counterparty
does not calculate its positions or where the result of the calculation exceeds any of the clearing thresholds
specified under Article 10(4)(b) of EMIR, the counterparty will be subject to the clearing obligation.
If it does exceed any of the thresholds, the financial counterparty must:
• Immediately notify ESMA and its NCA
• Establish clearing arrangements within four months of the above notification.
• Become subject to the clearing obligation for all OTC derivative contracts entered into or novated more
than four months following the above notification.
A financial counterparty that is subject to the clearing obligation on 17 June 2019 or subsequently becomes
subject to that obligation by exceeding the clearing threshold will remain subject to that obligation until it
demonstrates to the relevant NCA that its aggregate month-end average position for the previous 12 months
does not exceed the clearing threshold.
It is worth noting that, where the position taken by the financial counterparty exceeds the clearing threshold for
at least one class of OTC derivatives, the clearing obligation applies to all classes of OTC derivatives entered
into by the counterparty that are within scope of the clearing requirement. This requirement has been relaxed
under the amended provisions relating to NFCs that exceed the clearing threshold.
Also, unlike with NFCs, any hedging transactions that a financial counterparty enters into seem to be counted
towards calculation of the clearing threshold.
Non-financial counterparties

An NFC is defined in Article 2(9) of EMIR as an undertaking established in the EEA, other than a CCP (as
defined in EMIR) or a financial counterparty.
The clearing threshold

The clearing requirement only applies to an NFC if it exceeds the clearing threshold, which is set out in Article
10 of EMIR (and subsequently amended by Article 1(8) of the EMIR Refit Regulation, see Practice note, EU
EMIR Refit Regulation).
Every 12 months, an NFC may calculate its aggregate month-end positions in OTC derivatives contracts it has
entered into for the previous 12 months. If the NFC does not calculate its positions or the calculation shows
that in respect of one or more classes of OTC derivatives it exceeds the specified clearing thresholds, the
NFC must:
• Immediately notify ESMA and its NCA
• Establish clearing arrangements within four months of the above notification.
• Become subject to the clearing obligation for the OTC derivative contracts entered into or novated
more than four months following the above notification that relate to those asset classes in respect of
which it exceeds the clearing thresholds or, where the non-financial counterparty has not calculated its
position, that relate to any class of OTC derivatives that are subject to the clearing obligation.
An NFC that was subject to the clearing obligation on 17 June 2019 or subsequently becomes subject to that
obligation by exceeding the clearing threshold will remain subject to that obligation until it demonstrates to
the relevant NCA that its aggregate month-end average position for the previous 12 months does not exceed
the clearing threshold.
For the purposes of this note, a NFC that is subject to the clearing requirement is referred to as a qualifying
NFC. A qualifying NFC is often also referred to by market participants as a NFC+.
When calculating whether or not it exceeds the clearing threshold, an NFC must include all the OTC derivative
contracts entered into by it and by other non-financial entities within its group. Transactions by a non-financial
entity that is based outside the EEA, but which would be an NFC if it were established in the EEA must be
included. However, transactions entered into for hedging purposes, or more specifically, transactions that are
"objectively measurable as reducing risks directly related to the commercial activity or treasury financing activity
of the non-financial counterparty or of that group" are excluded from the calculation (Article 10(3), EMIR).
Binding technical standards (BTS) have been made supplementing the provisions of Article 10 of EMIR
(see Practice note, EU EMIR: delegated acts, implementing acts, technical standards and guidelines: Title II:
Clearing, reporting and risk mitigation of OTC derivatives (Articles 4 to 13)).
ESMA is required under Article 10(4) of EMIR (as amended by the EMIR Refit Regulation) to periodically review
the clearing thresholds and, where necessary taking into account, in particular, the interconnectedness of
financial counterparties, propose to amend the relevant RTS. ESMA must accompany any review with a report.

In June 2022, ESMA published a final report (ESMA70-451-114) following a review of the commodity derivative
clearing thresholds proposing that the clearing threshold for commodity derivatives should be increased from
EUR3 billion to EUR4 billion. In November 2022, Commission Delegated Regulation (EU) 2022/2310 was
published in the Official Journal of the European Union amending the RTS laid down in Delegated Regulation
(EU) No 149/2013 to reflect ESMA's recommendation.
ESMA followed its June 2022 final report with an additional feedback report (ESMA70-451-502) in September
2022. The feedback report covered areas not addressed in the June 2022 report and considered the "other"
consultation feedback received from market participants from ESMA's November 2021 discussion paper
(ESMA70-156-5010) on a review of EMIR clearing thresholds. The feedback report also includes updated
statistics on the coverage of the clearing thresholds to include 2021 data and outlines the different initiatives
undertaken by ESMA and NCAs in relation to the application of the thresholds.
Hedging contracts
The BTS supplementing the provisions of Article 10 of EMIR provide further detail on the types of hedging
contract which do not need to be included in the calculation when determining whether or not a NFC has
exceeded the clearing threshold. In order to establish whether an OTC derivatives contract falls within the
hedging definition, counterparties can apply one of three definitions of hedging set out in the relevant BTS
(see Practice note, EU EMIR: delegated acts, implementing acts, technical standards and guidelines: Article
10(4) (Non-financial counterparties) RTS.).
Among other things, the BTS confirm that portfolio hedging and OTC derivative contracts offsetting hedging
contracts would qualify as hedging for these purposes.
Some considerations arising from the clearing threshold
• Scope of clearing requirement. If an NFC exceeds the clearing threshold for one class of derivative
contract, it will not automatically be required to centrally clear other classes of derivative contract in
respect of which it did not exceed the threshold. The clearing obligation only applies to those contracts
in respect of which it has exceeded the threshold. This concession was introduced by the EMIR Refit
Regulation, see Practice note, EU EMIR Refit Regulation.
• Application of risk management techniques. Whether or not a counterparty exceeds the clearing
threshold is not just relevant to whether the clearing requirement applies to qualifying trades. It also
dictates the level of risk mitigation requirements that will apply to the counterparty under Article 11 of
EMIR if it enters into a derivatives trade that is not eligible for clearing (see Practice note, EU EMIR:
risk mitigation requirements for uncleared OTC derivatives).
Combinations of counterparties triggering the requirement to clear

For an OTC derivative contract to be cleared, both parties to the contract must be subject to a clearing
requirement or must consent (Recital 22, EMIR). Bearing this in mind, EMIR takes a scenario-based approach
to determining when the clearing requirement is triggered in relation to a particular OTC derivative trade.
Further to this, Article 4(1)(a) of EMIR provides that the Article 4 clearing requirement applies to trades between:
• Two financial counterparties that have exceeded the clearing threshold.
• A financial counterparty that has exceeded the clearing threshold and a qualifying NFC.
• Two qualifying NFCs.
• A financial counterparty that exceeds the clearing threshold or a qualifying NFC on the one side,
and on the other side, an entity established outside the EEA that would be subject to the clearing
requirement if it were established in the EEA (referred to in this note as an EMIR third-country
counterparty).
• Two EMIR third-country counterparties if the contract has a "direct, substantial and foreseeable effect"
within the EEA or where necessary to prevent evasion of any EMIR provision (see Third-country
counterparties).
Third-country counterparties
As explained above, under Article 4(1)(a)(iv) and (v) of EMIR, a counterparty established outside the EEA
that would be subject to the clearing obligation if it were established in the EEA (that is, would be a financial
counterparty that exceeds the clearing threshold or a qualifying NFC) may be subject to the EMIR clearing
requirement.
To minimise potential duplication or conflict between EMIR and similar third-country legislation (in particular the
Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (Dodd-Frank Act) in the US, which contains
the US response to the G20 commitment regarding the clearing of standardised OTC derivatives), BTS have
been produced providing further details on the contracts that have a direct, substantial and foreseeable
effect within the EEA and the prevention of evasion of EMIR (see Practice note, EU EMIR: delegated acts,
implementing acts, technical standards and guidelines: Article 4(4) (Clearing obligation)). For more information
on the regulation of derivatives under the Dodd-Frank Act, see Practice note, Summary of the Dodd-Frank
Act: Swaps and Derivatives.
When at least one counterparty to the transaction is located in a third country declared to have rules equivalent
to EMIR (in accordance with Article 13 of EMIR), both counterparties will be deemed to have fulfilled their EMIR
obligations, including those relating to the clearing requirement and risk mitigation techniques, by applying the
rules of the equivalent third country.
Where both counterparties are located in non-equivalent non-EEA countries the relevant BTS set out the
circumstances under which any OTC derivative contracts between them will be deemed to have a direct,
substantial and foreseeable effect in the EU (and thus potentially subject to the EMIR clearing requirement).

Exempted persons
Certain entities are exempted either wholly or partially from the EMIR obligations, including the clearing
requirement.
Under Article 1(4) of EMIR, none of the provisions of EMIR apply to the following entities:
• Members of the European System of Central Banks (ESCB) and other member states' bodies
performing similar functions and other EU public bodies charged with or intervening in the
management of the public debt.
• The Bank for International Settlements (BIS).
Under Article 1(5), the following entities are also exempted from EMIR, with the exception of the requirement
in Article 9 to report derivative transactions to trade repositories:
• Multilateral development banks listed under Section 4.2 of Part 1 of Annex VI to the BCD.
• Public sector entities within the meaning of Article 4(18) of the BCD where they are owned by central
governments and have explicit guarantee arrangements provided by central governments.
• The European Financial Stability Facility (EFSF) and the European Stability Mechanism.
A number central banks and public bodies in various jurisdictions (including the United States of America,
Australia, Canada, Hong Kong, Mexico, Singapore and Switzerland) that are charged with or intervening
in the management of public debt have been exempted from EMIR under BTS (see Practice note, EU
EMIR: delegated acts, implementing acts, technical standards and guidelines: Article 1(6) (Subject matter and
scope)).
What types of trades are within scope of the clearing requirement?
Is the trade a derivative contract?
The clearing requirement applies to OTC derivative contracts. A derivative contract is defined in Article 2(5)
of EMIR as a financial instrument set out in points (4) to (10) of Section C of Annex I to MiFID (which is now
a reference to the MiFID II Directive)). This includes options, swaps and forward rate agreements relating to
underlyings such as securities, currencies, interest rates, commodities, emissions allowances, and weather
derivatives.

Foreign exchange contracts

The treatment of foreign exchange (FX) contracts has been an issue of much debate. Spot FX transactions
will not be subject to EMIR as they do not fall within the relevant MiFID definition to which EMIR cross-refers.
However, this does not address the treatment of FX swaps and forwards, which are included in the MiFID
definition referred to above. Recital 19 to EMIR acknowledges that the clearing requirement may not be suitable
for FX derivatives as their main risk is settlement, rather than counterparty, risk. However, EMIR does not
exclude them.
The European Commission addressed this issue to an extent in November 2012 in a response to one of its
Frequently Asked Questions (FAQs) on EMIR. It confirmed that FX derivatives are within the scope of EMIR
since they fall within the MiFID definition of derivative contracts to which EMIR cross-refers. The Commission
went on to say that the applicability of the clearing obligation to FX derivatives would be assessed by ESMA
in accordance with the clearing requirement procedure (see Procedure for determining the types of trades
subject to the clearing requirement below), taking into account the specificities of FX derivatives.
ESMA indicated in a July 2013 discussion paper on the clearing requirement under EMIR that since some
CCPs already clear OTC FX derivatives and other CCPs are planning to do this in the future, this tends to
support the idea that the mitigation of counterparty credit risk through CCP clearing is appropriate for some
OTC FX derivatives.
In February 2015, following a consultation on whether non-deliverable FX forwards should be subject to the
clearing requirement, ESMA concluded that, based on the feedback it received, it would not impose a clearing
requirement for such contracts at that stage.
By way of comparison, the Dodd-Frank Act (which imposes similar clearing requirements on US dealers)
exempts FX swaps and forwards from its clearing requirements (see Practice note, Summary of the Dodd-
Frank Act: Swaps and Derivatives).
Commodity derivatives
ESMA has published guidelines on the application of the definition of commodity derivatives under C6 and C7
in Section C of Annex 1 to the MiFID II Directive.
Is the trade executed OTC?
"OTC derivative" is defined in Article 2(7) of EMIR. The original definition has been amended by the Regulation
on reporting and transparency of securities financing transactions ((EU) 2015/2365) (SFT Regulation) and now
defines an "OTC derivative" as a derivative contract, the execution of which does not take place on a regulated
market within the meaning of Article 4(1)(14) of MiFID (now the MiFID II Directive) or on a third-country market
considered to be equivalent to a regulated market in accordance with Article 2a of EMIR". The SFT Regulation
gives the Commission a more flexible tool for recognising equivalent third-country markets by introducing a
new Article 2a into EMIR that enables the Commission to adopt implementing decisions designating non-EU
markets as equivalent for these purposes in certain specified circumstances. The Commission has designated
a number of third-country markets as equivalent (see Practice note, EU EMIR: delegated acts, implementing

acts, technical standards and guidelines: Article 2a(2) (Equivalence decisions for the purposes of the definition
of OTC derivatives)).
ESMA maintains a searchable database of EU regulated markets.
OTC contracts are therefore contracts traded in either of the following ways:
• Between two counterparties away from any trading venue.
• On a multilateral trading facility (MTF) (as defined in the MiFID II Directive).
Contracts traded on organised trading facilities (OTFs) are also be treated as OTC contracts.
Although EMIR excludes from the clearing obligation trades executed on regulated markets, these trades are
subject to a clearing requirement under Article 25 of MiFIR. This provision requires the operator of a regulated
market to ensure that all transactions in derivatives pertaining to a class of derivatives declared subject to the
clearing requirement under EMIR that are concluded on the regulated market are cleared by a CCP.
Has the derivative contract been declared subject to the clearing

requirement?
The EMIR clearing requirement has been introduced progressively on a class by class basis for different types
of OTC derivatives. In order for a class of OTC derivative contract to be subject to the clearing requirement:
• a CCP must be authorised by the relevant national regulator (if established in the EEA) or recognised
by ESMA (if established outside the EEA) to clear the class of OTC derivative in question; and
• BTS must have been adopted by the EU Commission in accordance with the procedure set out
in Article 5 of EMIR (see Procedure for determining the types of trades subject to the clearing
requirement below). These BTS will specify the class of OTC derivative subject to the clearing
requirement (including details of the phase-in arrangements and the categories of counterparty to
which the requirement relates).
For information on BTS adopted by the Commission under Article 5 of EMIR, see Practice note, EU EMIR:
delegated acts, implementing acts, technical standards and guidelines: Article 5(1) (Clearing obligation
procedure)).
Details of the contracts in question and the minimum remaining maturity for each one can also be found in the
public register , which ESMA is required to maintain under Article 6 of EMIR.
Given that the clearing requirement depends on there being a CCP authorised to clear the class of derivative
in question, Article 5(6) of EMIR provides that if a class of OTC derivative contract no longer has a CCP that is
authorised or recognised to clear it under EMIR, that class of derivative will cease to be subject to the clearing
obligation.

At what point will the clearing obligation apply?
Article 4(1)(b) of EMIR provides that the clearing requirement will apply to contracts in clearing-eligible
derivatives that are entered into or novated on or after the date on which the clearing obligation takes effect.
Article 4(1)(b) of EMIR originally required counterparties to also clear OTC derivative contracts that had been
entered into on or after an NCA has notified ESMA that it has authorised a CCP to clear that class of derivatives
but before the date from which the clearing obligation takes effect if the contracts have a remaining maturity
higher than the minimum remaining maturity determined by the Commission. This is known as the frontloading
requirement. However, this requirement was disapplied under the EMIR Refit Regulation.
Exemption for intra-group transactions
EMIR recognises that intra-group transactions may be necessary for aggregating risks within a group
structure (Recital 38, EMIR). Article 4(2) therefore excludes certain intra-group transactions from the clearing
requirement. Article 3 of EMIR sets out what constitutes an intra-group transaction for these purposes.
Although qualifying intra-group transactions will not be subject to the clearing requirement, they will be subject
to the transaction reporting obligation in Article 9 of EMIR. The transaction will also be subject to the margin
obligations under the risk mitigation requirements for uncleared trades under Article 11, unless it also falls
within a separate group exemption from those requirements. For more information on the Article 9 and 11
requirements, see Practice notes, EU EMIR: requirement to report trades in derivatives and EU EMIR: risk
mitigation requirements for uncleared OTC derivatives.
Article 3 of EMIR sets out a number of intra-group transactions that may be exempted from the clearing
requirement. The exemptions potentially apply to qualifying NFCs and financial counterparties. There is
no exemption for trades between two EMIR third-country counterparties. The definitions of intra-group
transactions are complex. The following table summarises two of the definitions.
Intra-group transactions under Article 3 of EMIR
Non-financial counterparties (Article 3(1))
For an NFC, an OTC derivative contract will be an intra-group transaction where the following criteria are
satisfied:
• the parties are members of the same group;
• the parties are included in the same consolidation on a full basis;
• the parties are subject to appropriate centralised risk evaluation, measurement and control procedures;
and

• the other party is established in the EEA or, if established outside the EEA, the Commission has
adopted an implementing act (under Article 13(2) of EMIR) declaring (broadly) that the legal and
supervisory arrangements of the third country are equivalent to the requirements of EMIR.
Financial counterparties (Article 3(2))
Article 3(2) of EMIR contains four different definitions of intra-group transaction for financial counterparties. If
the other party to the trade is a NFC, the exemption in Article 3(1) set out above is most likely to be of use as
its criteria will probably be more easily met than the criteria under Article 3(2). If the other party is not a NFC
(for example, it is another financial counterparty or an EMIR third-country counterparty), the following may be
the most likely exemption.
An OTC derivative contract entered into by a financial counterparty with any type of counterparty will be an
intra-group transaction where:
• the parties are members of the same group;
• the financial counterparty is established in the EEA or, if established outside the EEA, the Commission
has adopted an implementing act (under Article 13(2)) declaring (broadly) that the legal and supervisory
arrangements of the third country are equivalent to the requirements of EMIR;
• the other party is a financial counterparty, a financial holding company, a financial institution or an
ancillary services undertaking (each defined in Article 2 of EMIR), subject to appropriate prudential
requirements;
• both parties are included in the same consolidation on a full basis; and
• both parties are subject to appropriate centralised risk evaluation, measurement and control procedures.
Article 3(3) of EMIR provides some guidance as to when counterparties will be considered to be included in
the same consolidation.
Meaning of "group"
For the purposes of the intra-group exemption, "group" is defined in Article 2(16) of EMIR by reference to the
Seventh Company Law Directive (83/349/EEC ) or the BCD (2006/48/EC). There has been some technical
debate over how these definitions will be applied to a third-country group entity, given that these Directives
are drafted in the context of EU entities so some of the references do not directly apply to counterparties
established in a third country. Presumably a purposive approach should be applied when considering whether
a third-country entity falls within the EMIR group definition.
Regulatory notification

Under Article 4(2) of EMIR, meeting the criteria for an intra-group transaction set out in Article 3(1) or (2)
does not automatically mean that the transaction is exempted from the clearing requirement. An intra-group
transaction will only be exempted in the following situations.
• In the case of two EEA counterparties, both have notified their respective national regulator(s) in
writing that they intend to make use of the exemption for the OTC derivative contracts entered into
between them. The notification must be made at least 30 days before the use of the exemption. A
regulator can object to the notification if the requirements under Article 3 of EMIR are not met (or
cease to be met).
• Where one group counterparty is established in the EEA and the other is established outside the EEA,
the EEA entity must have been authorised by its national regulator to apply the exemption within 30
days of being notified of the EEA entity’s intention to rely on it and the conditions in Article 3 must in
fact be met.
In summary the following points are particularly noteworthy.
• The exemption does not automatically apply and the relevant regulator(s) must be notified in advance
of it being used.
• In the case of transactions between two EEA counterparties it is sufficient for the national regulators
not to object to the use of the exemption.
• In the case of transactions between an EEA counterparty and a non-EEA counterparty, it is necessary
for the national regulator of the EEA counterparty to grant authorisation for the exemption to be used.
• One regulatory notification does not cover transactions with multiple group entities. A party trading with
two or more group entities must notify the regulator in respect of each counterparty.
RTS on intragroup transactions
Commission Delegated Regulation (EU) 2021/237 amended RTS laid down in Commission Delegated
Regulations (EU) 2015/2205, (EU) 2016/592 and (EU) 2016/1178 relating to the date at which the clearing
obligation takes effect for certain types of contracts.
Under Article 4(2) of EMIR, intragroup transactions may be exempted from the clearing obligation. Intragroup
transactions with a third-country group entity may also be exempted if the Commission has adopted an
equivalence decision under Article 13(2) for the third country where the group entity is established.
The three Commission Delegated Regulations referred to above (which relate to the clearing of interest rate
derivatives and credit derivatives) included a deferred date for the application of the clearing obligation for
intragroup transactions with a third-country group entity of up to three years, in the absence of relevant
equivalence decisions.

The Delegated Regulation extended the exemption for intragroup transactions in order to allow more time to the
Commission to adopt the necessary equivalence decisions. It believes that it would be detrimental to EU firms
and economically unjustified to let the exemptions expire abruptly. The extension applied until 30 June 2022.
In February 2023, Commission Delegated Regulation (EU) 2023/315 further extended the application date of
the clearing obligation for intragroup transactions with a third-country group entity under all three Delegated
Regulations to 30 June 2025.
Transitional provisions for pension schemes
Article 89 of EMIR provided a temporary exemption from the clearing obligation for certain pension scheme
arrangements (PSAs) when they enter into OTC derivative contracts that are objectively measurable as
reducing investment risks directly relating to their financial solvency (basically, when used for hedging
purposes). These transitional provisions also apply to entities established for the purpose of providing
compensation to members of PSAs in case of default. The exemption expired on 16 August 2018.
Article 1(26) of the EMIR Refit Regulation amended Article 89(1) of EMIR to revive the exemption until 18 June
2021. Article 1(24)(c) of the EMIR Refit Regulation replaces Article 85(2) of EMIR to provide a mechanism
for the Commission to extend the exemption twice by a further one year if it has concluded that there is no
viable solution to the issues relating to the provision by PSAs of cash and non-cash collateral as variation
margin and that imposing the clearing obligation on PSAs would still have an adverse effect on the retirement
benefits of future pensioners.
For more information on developments relating to the transitional provisions under the EMIR Refit Regulation,
see Practice note, EU EMIR Refit Regulation.
Exemptions relating to securitisations and covered bonds
Article 42 of the Securitisation Regulation ((EU) 2017/2402) amends Article 4 of EMIR to insert additional
sub paragraphs 5 and 6 to provide an exemption from the clearing obligation for covered bond entities and
securitisation special purpose entities in certain circumstances. It also requires the ESAs to develop draft RTS
specifying criteria for establishing which arrangements under covered bonds or securitisations adequately
mitigate counterparty credit risk to enable these entities to take advantage of the exemption. The Commission
is empowered to adopt the RTS.
On 16 April 2020, Commission Delegated Regulation (EU) 2020/447 supplementing EMIR with regard to
RTS on the specification of criteria for establishing the arrangements to adequately mitigate CCP credit risk
associated with covered bonds and securitisations and amending Delegated Regulation (EU) 2015/2205 and
Delegated Regulation (EU) 2016/1178 came into effect.
Articles 1 and 2 of the Delegated Regulation set out the clearing exemption conditions for OTC derivative
contracts that are concluded by covered bond entities in connection with a covered bond and by a
securitisation special purpose entities (SSPE) in connection with a securitisation.
Article 3 and 4 of the Delegated Regulation respectively amend Commission Delegated Regulation (EU)
2015/2205 and Commission Delegated Regulation (EU) 2016/1178 to take account of the new drafting of

Article 4 of EMIR, which includes two of the clearing exemption conditions for covered bonds included in these
Delegated Regulations.
Procedure for determining the types of trades subject to the

clearing requirement
EMIR sets out two approaches for determining the classes of derivatives that should be subject to the clearing
requirement. These are known as the "bottom-up approach" and the "top-down approach", and are set out
in Article 5.
For information on level 2 provisions relating to Article 5 of EMIR, see Practice note, EU EMIR: delegated acts,
implementing acts, technical standards and guidelines: Article 5(1) (Clearing obligation procedure)).
Bottom-up approach
The bottom-up approach, which is set out in Articles 5(1) and (2) of EMIR is triggered by a CCP being authorised
or recognised to clear certain types of derivative contracts.
For CCPs based in an EEA state, the home state regulator granting the authorisation must make an ESMA
notification once it grants the authorisation. Information on such notifications is included in the public register
that ESMA is required to maintain under Article 6 of EMIR.
On receipt of the ESMA notification, ESMA has six months to decide whether a clearing requirement should
apply to the derivative contracts which the CCP has been authorised to clear, during which time it will consult
publicly and with various other interested parties on the issue and prepare draft RTS for the Commission
to consider and approve. Once published in the Official Journal of the EU (OJ), the RTS come into force in
accordance with their terms, progressively introducing the clearing requirement for the class of derivative in
question.
For non-EEA CCPs the bottom-up approach will apply in a similar way when a CCP is recognised under Article
25 of EMIR. However, in this case, no ESMA notification is relevant since ESMA itself is the entity responsible
for recognising non-EEA CCPs. ESMA has six months from the date it completes the procedure for recognising
the CCP to decide whether a clearing requirement should apply to the derivative contracts which the CCP has
been recognised to clear and prepare the draft RTS for the Commission to consider and approve.
ESMA list of CCPs authorised or recognised under EMIR

ESMA maintains lists of EEA CCPs that have been authorised in their home member state and that have been
notified to it by the relevant member state, as well as of non-EEA CCPs that it has recognised.
Top-down approach

The second approach for determining classes of derivative contracts that should be subject to the clearing
requirement is known as the top-down approach and is set out in Article 5(3) of EMIR. Under this approach,
ESMA, on its own initiative, can notify to the Commission the classes of derivative contracts that it believes
should be subject to the clearing requirement, but for which no CCP has yet received authorisation or
recognition. Before doing this, ESMA must conduct a public consultation, consult with the European Systemic
Risk Board (ESRB) and, where appropriate, consult with third-country regulators. After it has notified the
Commission, ESMA must publish a call for a development of proposals for the clearing of those classes of
derivatives.
ESMA has clarified that the purpose of the top-down approach is to ensure the development of clearing
solutions for particular classes of OTC derivatives, and that no CCP will be forced to clear contracts that it is
not able to manage. ESMA has also clarified that the clearing obligation will actually enter into force following
the bottom-up approach.
Amendments to RTS on clearing obligations in light of benchmark

transition
Delegated Regulation 2022/750 amended Delegated Regulation (EU) 2015/2205 as regards the transition to
new benchmarks referenced in certain OTC derivative contracts.
Delegated Regulation 2022/750 removed from the clearing obligation those classes of derivatives that
reference EONIA, GBP LIBOR or JPY LIBOR as they no longer meet the relevant conditions in EMIR. It also
brings within the clearing obligation classes of OTC interest rate derivatives referencing ESTR, SOFR, SONIA
or TONA that certain CCPs have been authorised to clear.
In February 2023, following a July 2022 consultation (ESMA70-446-369), ESMA published a final report
(ESMA70-446-772) on draft RTS to further amend Delegated Regulation (EU) 2015/2205 in view of the 2022
status of the benchmark transition. The draft RTS relate to the benchmark transition away from EONIA and
LIBOR and onto new Risk-Free Rates (RFR).
Indirect clearing
CCPs must maintain a very high level of financial soundness to meet the fundamental aim of reducing
counterparty risk through central counterparty clearing. One of the ways in which a CCP ensures its robustness
is to impose strict requirements on market participants wishing to use its clearing services. A CCP will only
deal directly with a participant that it has accepted as a clearing member. EMIR requires CCPs to establish
admission criteria for clearing members. Article 37(1) requires that CCPs' membership criteria must ensure that
clearing members have sufficient financial resources and operational capacity to meet the obligations arising
from participation in a CCP. Often counterparties to a trade will not be able (or willing) to meet these criteria.
Three ways a counterparty can access a CCP

To ensure that all types of market participant that are subject to the clearing requirement are able to access a
CCP, EMIR provides for indirect CCP access through the services of an existing member. Under Article 4(3)
of EMIR, a counterparty subject to the clearing requirement must become one of the following:
• A clearing member. This is defined in Article 2(14) as an undertaking that participates directly in a
CCP, and is responsible for discharging the financial obligations arising from that participation.
• A client. This is defined in Article 2(15) as an undertaking with a contractual relationship with a
clearing member of a CCP that enables it to clear its transactions with that CCP.
• An indirect client. This is described in Article 4(3) as a counterparty that has established indirect
clearing arrangements with a clearing member, provided that those arrangements do not increase
counterparty risk and ensure that the assets and positions of the counterparty benefit from equivalent
protection to that contained in Articles 39 and 48. BTS further specify the types of collateral
arrangements that meet these conditions (see Practice note, EU EMIR: delegated acts, implementing
acts, technical standards and guidelines: Article 4(4) (Clearing obligation)).
Public register
ESMA is required under Article 6 of EMIR to establish and maintain a register to identify the classes of
derivatives subject to the clearing obligation and provide the additional practical information market participants
need in that context. The register is publicly available on ESMA's website.
ESMA guidance
Q&As on EMIR implementation
ESMA has published a number of Q&As on the implementation of EMIR, which include useful guidance on a
number of issues relating to the clearing obligation.
Guidance on clearing obligation
ESMA has published guidance for financial counterparties and non-financial counterparties on the clearing
obligation under the EMIR Refit Regulation.

EU EMIR Requirement To Clear OTC Derivative Contracts Through A CCP

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EU EMIR: requirement to clear OTC derivative contracts..., Practical Law UK...

EU EMIR: requirement to clear OTC derivative

Maintained • European Union

EU EMIR (the Regulation on OTC derivatives, central counterparties and trade

For an overview of EMIR see Practice note, EU EMIR: overview.

Scope of this note

What is central counterparty clearing?

How does a CCP reduce counterpart risk?

EMIR clearing requirement

To whom does the clearing requirement apply?

Combinations of counterparties triggering the requirement to clear

© 2023 Thomson Reuters. No claim to original U.S. Government Works. 1

What types of trades are within scope of the clearing requirement?

Is the trade executed OTC?

At what point will the clearing obligation apply?

Exemption for intra-group transactions

RTS on intragroup transactions

Exemptions relating to securitisations and covered bonds

Amendments to RTS on clearing obligations in light of benchmark transition

Guidance on clearing obligation

Scope of this note

EMIR 3: Commission legislative proposals

© 2023 Thomson Reuters. No claim to original U.S. Government Works. 2

Amendments to EMIR: EMIR Refit and EMIR 2.2

EMIR Refit Regulation

© 2023 Thomson Reuters. No claim to original U.S. Government Works. 3

What is central counterparty clearing?

Clearing is defined in Article 2(3) of EMIR as:

The main purposes of clearing trades through a CCP are to:

• Reduce counterparty risk (described above).

• Improve trade transparency.

How does a CCP reduce counterpart risk?

© 2023 Thomson Reuters. No claim to original U.S. Government Works. 4

An example of multilateral netting compared with bilateral netting

© 2023 Thomson Reuters. No claim to original U.S. Government Works. 5

EMIR clearing requirement

In determining whether a particular transaction must be cleared, it is necessary to consider whether:

Temporary suspension of the clearing requirement

© 2023 Thomson Reuters. No claim to original U.S. Government Works. 6

To whom does the clearing requirement apply?

• Non-financial counterparties (NFC).

• An investment firm authorised in accordance with the MiFID II Directive.

• A credit institution authorised in accordance with the CRD IV Directive (2013/36/EU).

• An insurance undertaking or reinsurance undertaking authorised in accordance with the Solvency II

© 2023 Thomson Reuters. No claim to original U.S. Government Works. 7

If it does exceed any of the thresholds, the financial counterparty must:

• Immediately notify ESMA and its NCA

• Establish clearing arrangements within four months of the above notification.

© 2023 Thomson Reuters. No claim to original U.S. Government Works. 8

The clearing threshold

• Immediately notify ESMA and its NCA

• Establish clearing arrangements within four months of the above notification.

© 2023 Thomson Reuters. No claim to original U.S. Government Works. 9

Some considerations arising from the clearing threshold

Combinations of counterparties triggering the requirement to clear

© 2023 Thomson Reuters. No claim to original U.S. Government Works. 10

• Two financial counterparties that have exceeded the clearing threshold.

• Two qualifying NFCs.

© 2023 Thomson Reuters. No claim to original U.S. Government Works. 11

• The Bank for International Settlements (BIS).

What types of trades are within scope of the clearing requirement?

Is the trade a derivative contract?

© 2023 Thomson Reuters. No claim to original U.S. Government Works. 12