A&O Shearman | FinReg

ESMA consults on draft RTS for margin transparency requirements and clearing costs

24 June 2025

The European Securities and Markets Authority (ESMA) has published two consultation papers (CP) proposing draft regulatory technical standards (RTS) mandated under the review of European Market Infrastructure Regulation (EMIR 3).

Draft RTS on EMIR 3 margin transparency requirements (under article 38 EMIR), regarding the information to be provided by central counterparties (CCPs) on their margin simulation tools and by clearing service providers (CSPs) on their margin simulation requirements; and by both on their margin models. The aim is to improve transparency for clearing participants and enable them to better predict margin calls.
Draft RTS on clearing fees and associated costs (under article 7c(4) EMIR), specifying further details of the information to be disclosed by CSPs regarding clearing fees and associated costs, with the aim of increasing costs transparency.

The deadline for responses is 8 September. ESMA will submit the final draft technical standards to the European Commission by 25 December.

Topics : Derivatives, Financial Market Infrastructure

Final draft RTS on EU active account requirement published

19 June 2025

Following its consultation, the European Securities and Markets Authority (ESMA) has published a final report, including final draft regulatory technical standards (RTS), on the conditions of the Active Account Requirement under the amended European Market Infrastructure Regulation (EMIR 3). The active account requirement requires EU counterparties active in certain derivatives to hold an operational and representative active account at an EU-authorised CCP. The final draft RTS sets out the operational conditions of the account, details of the representativeness obligation and the reporting requirements for in-scope entities as amended by ESMA following its consideration of feedback to the proposed RTS. ESMA's final report discusses the feedback received and explains its decision for either maintaining the original proposal or making changes. ESMA will now submit the final draft RTS to the European Commission for approval. The Active Account Requirement applies from 25 June. Until such time as the Active Account RTS enter into force, in-scope entities should discuss compliance with their national competent authority.

Topics : Derivatives, Financial Market Infrastructure

EC adopts amendments to Delegated Regulation No 876/2013 to align with EMIR 3 reforms

11 June 2025

The European Commission has adopted a Delegated Regulation amending Delegated Regulation (EU) No 876/2013, which supplements EMIR (Regulation (EU) No 648/2012) in relation to the functioning and management of colleges for central counterparties (CCPs). The amendments are limited in scope and aim to align the existing regulatory framework with recent changes made by Regulation (EU) 2024/2987—part of the broader EMIR 3 reform package. The amendments have specifically modified: (i) article 2, to reflect the changes introduced in article 18(1) of EMIR, specifying the deadline for establishing a college and clarifying the role of the co-chairs in the context of the establishment of such college; (ii) articles 3 and 4, to align with article 18 of EMIR, clarifying the roles of the co-chairs and the governance structure of colleges to ensure their effective and consistent functioning for all CCPs across the Union; and (iii) article 5, to specify the additional information that a CCP's competent authority must provide to college members, and to require the use of the central database established under article 17c of EMIR for information exchange. This Regulation will enter into force on the twentieth day following its publication in the Official Journal of the European Union.

Topics : Derivatives, Financial Market Infrastructure

Industry associations urge ESMA to issue a no-action letter on EMIR 3 AAR implementation

11 June 2025

Four industry associations—EFAMA, EACP, ISDA, and FIA—have published a letter addressed to the European Securities and Markets Authority (ESMA) and the European Commission (EC), raising concerns about the implementation of the active account requirement (AAR) under EMIR 3, set to take effect on 24 June. The associations emphasised the importance for the final level 2 regulatory technical standards (RTS) on the conditions of the AAR to be published in the Official Journal of the European Union before the AAR becomes applicable. Without the RTS, EU financial market participants would not be able to understand the requirements that need to be complied with on day 1.

Read more.

Topic : Derivatives

UK permanently exempts UK and EEA pension schemes from the derivatives clearing obligation

10 June 2025

The Pension Fund Clearing Obligation Exemption (Amendment) Regulations 2025 (SI 2025/670) have been published, alongside an explanatory memorandum. The regulations amend the UK version of Regulation 2012/648 (UK EMIR) and remove the current expiry date of the exemption for UK and EEA pension schemes from the UK EMIR clearing obligation. This follows the publication of the draft version of the regulations in March and mirrors the EU's introduction of a permanent exemption for non-EU pension schemes–further details can be found in our article EMIR 3 – Impact on cleared OTC derivatives markets. The intention of the change, as explained in the explanatory memorandum, is to ensure pension funds remain able to invest in productive assets, as removing the exemption would require them to increase cash holdings and potentially increase pressure on the liquidity management of pension funds, particularly in stressed market conditions. The regulations came into force on 11 June.

Topic : Derivatives

FCA Quarterly Consultation No 48

6 June 2025

The UK Financial Conduct Authority (FCA) has published quarterly consultation paper No 48, accompanied by a press release, inviting feedback on proposed amendments to its Handbook. Key proposals include:

Amending guidance in SUP 6.4 to reflect legislative changes introduced in section 415AA of the Financial Services and Markets Act 2000 (FSMA); the deadline for comments is 14 July.
Streamlining data reporting by decommissioning certain requirements, including changes to REP009 (consumer buy-to-let mortgage aggregated data) reporting frequency and removing nil return requirements for REP008 (notification of disciplinary actions relating to conduct rules staff other than SMF managers); the deadline for comments is 30 June.

Topic : Derivatives

FCA Handbook Notice 129

2 May 2025

The UK Financial Conduct Authority (FCA) has published Handbook Notice 129 which sets out changes to the classes of derivatives subject to the derivatives trading obligation (DTO), following policy statement PS25/2 published in April (please see our update). The DTO requires certain financial and non-financial counterparties to trade specific standardised and liquid over-the-counter (OTC) derivatives on regulated trading venues or equivalent third-country venues. The FCA determines the classes of derivatives that are subject to the DTO. The FCA has decided to expand the classes of secured overnight financing rate overnight index swaps (SOFR OIS) to increase the benefits of on-venue trading. It also establishes a new framework to provide exemptions from the DTO for transactions arising from the use of post-trade risk reduction (PTRR) services. The PTRR services now expand beyond portfolio compression and exemptions have been extended so they are also not subject to best execution and trading venue authorisation obligations, in addition to the current DTO exemption. The changes are set out in the following draft instruments:

Technical Standards (Markets in Financial Instruments Regulation) (Derivatives Trading Obligation and Transparency) (Amendment) Instrument 2025, amending Commission Delegated Regulation (EU) 2017/2417 with regards to regulatory technical standards on the trading obligation for certain derivatives.
Markets in Financial Instruments Regulation (Post-trade Risk Reduction Services Rules) (Amendment) Instrument 2025, amending the glossary and GEN Sch 4 in the Handbook. It also introduces a new chapter MAR 12 containing the relevant rules.

Both instruments come into force on 30 June.

Topic : Derivatives

ECB survey on euro-denominated securities financing and OTC derivatives

2 May 2025

The European Central Bank (ECB) has published the results of its latest survey on credit terms and conditions in euro-denominated securities financing and over-the-counter (OTC) derivatives, with a press release. The survey is a qualitative survey conducted every three months among large banks and dealers active in the relevant euro-denominated markets. The results are from the March 2025 survey, which covered changes in credit terms between December 2024 and February 2025. Key findings include: (i) overall credit terms remained largely unchanged during the relevant period; (ii) financing rates/spreads and haircuts in securities financing transactions decreased across most asset classes; and (iii) demand for funding secured against domestic government bonds decreased for the first time since 2021. The survey also highlights there were no net changes to price terms, with only minor net changes to non-price terms, as well as a slight increase found in hedge funds with regards to the use of financial leverage. For the various types of non-centrally cleared OTC derivatives, few changes were recorded for initial margin requirements, credit limits and liquidity. However, respondents pointed out a change with regard to the duration and persistence of valuations disputes, which decreased across all types of derivatives.

Topic : Derivatives

FMSB Spotlight Review on Uncleared Margin for OTC Derivatives

1 May 2025

The Financial Markets Standards Board (FMSB) has published a spotlight review on ways to improve uncleared margin for over-the-counter (OTC) derivatives, along with a press release. It builds on findings from the Bank of England's Post-Trade Task Force, which highlighted multiple inefficiencies in its report 'Charting the Future of Post-Trade' published in April 2022. This review specifically focused on uncleared margin practices for bilaterally negotiated OTC traded derivatives, where clearing and settlement is also carried out noncentrally between the two parties. The working group generally agreed on the drivers of inefficiencies, but there were differences of opinion on the scale of these problems, and their potential solutions and viability. It conducted a survey to draw out the extent of agreement on a range of problems and their potential solutions to emphasise the specific topics which the industry may have the most success in taking forward in the future.

Read more.

Topic : Derivatives

ESMA report on the quality and use of data

30 April 2025

The European Securities and Markets Authority (ESMA) has published its 2024 report, along with a press release, on the quality and use of data, showcasing significant increase in data use by authorities. The report covers datasets from the European Market Infrastructure Regulation (648/2012) (EMIR), the Securities Financing Transactions Regulation ((EU) 2015/2365) (SFTR), the Markets in Financial Instruments Regulation (600/2014) (MiFIR), the Securitisation Regulation (2017/2402/EU), the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) and the Money Market Funds Regulation ((EU) 2017/1131) (MMF Regulation). This edition also expands the scope to include the European Single Electronic Format (ESEF) data and short-selling data. The report is divided into different sections.

Read more.

Topics : Derivatives, Financial Market Infrastructure, FinTech, Fund Regulation, MiFID II, Other Developments, Securities

FMSB Statement of good practice on the governance of sustainability-linked products

30 April 2025

The Financial Markets Standards Board (FMSB) has issued a Statement of Good Practice (SoGP) on the governance of sustainability-linked products (SLPs), along with a press release. SLPs are products where the financial and/or structural characteristics can vary depending on whether the user (i.e., borrower or issuer of, or counterparty to, SLPs) achieves specific sustainability or ESG objectives. They can be used for general corporate purposes, which allows many users (e.g., borrowers, issuers or counterparties to SLPs) to access the sustainable finance market in a more flexible way. With the growth of SLP issuances and accompanying concerns around the credibility of such instruments, the SoGP is intended to: (i) codify good practices for the governance of SLPs and (ii) support the adoption of consistent governance approaches across asset classes and jurisdictions. This is aimed to enhance the quality and integrity of SLPs; boost market confidence; help mitigate greenwashing risk; and support the development of a deeper, more robust sustainability-linked product market. The SoGP will apply to service providers (e.g., firms acting as sustainability-linked loan lenders, bookrunners or lead arrangers on a sustainability-linked bond issuance or counterparties to a sustainability-linked derivative) or users of SLPs in wholesale financial markets and to support, and be read in conjunction with, existing asset-class specific guidance (notably ICMA, LMA and ISDA principles).

Topics : Derivatives, Securities, Sustainable Finance

ESMA calls for clarity on the qualification of fractional shares

9 April 2025

The European Securities and Markets Authority (ESMA) has published a letter to the European Commission on the inconsistent regulation of trading of fractional shares across the EU. There has been an increase in the significance of fractional shares, which accounted for more than 10% of the total number of transactions reported in 2023-2024. However, shares and fractional shares are not uniformly defined under the Markets in Financial Instruments Directive (MiFID II) or the Markets in Financial Instruments Regulation (MiFIR), resulting in regulatory inconsistencies across the EU. ESMA states that while it has already taken action through its 2023 public statement to protect retail investors, uncertainty continues. The inconsistent treatment of fractional shares has the following key effects: (i) it impacts transparency and reporting requirements, (ii) it affects compliance with the MiFID systematic internaliser and share trading obligation rules; and (iii) it impacts the calculation of thresholds for data reporting services providers derogation criteria. ESMA believes consistent classification would help create a level playing field for firms and support retail participation in this market segment. ESMA suggests it would be beneficial to clarify that fractional shares, which replicate the key characteristics and trading environment of shares, should remain subject to the MiFIR rules for shares.

Topics : Derivatives, MiFID II

EMIR 3: ESMA proposes clearing thresholds

8 April 2025

The European Securities and Markets Authority (ESMA) has published a consultation paper setting out draft regulatory technical standards (RTS) amending the RTS on the clearing thresholds (CTs) under the European Markets Infrastructure Regulation (EMIR). Under the latest revisions to EMIR, known as EMIR 3, the calculation of CTs will be amended (once these RTS enter into force), shifting away from distinguishing between exchange-traded derivatives (ETD) and over-the-counter (OTC) derivatives (where only OTC derivatives counted towards the threshold) to a framework based on the level of OTC-uncleared transactions. Financial counterparties (FCs) will need to calculate their uncleared positions and their aggregate OTC exposure (both cleared and uncleared) to determine if they exceed the CTs. Non-financial counterparties (NFCs) will be required to count only their uncleared positions towards the CTs.

Read more.

Topic : Derivatives

ESMA MiFIR review consultation package on derivatives transparency, package orders and CTP data

3 April 2025

The European Securities and Markets Authority (ESMA) has launched its consultation in relation to derivatives transparency, package orders, and input and output data for consolidated tape providers (CTPs). This is the fourth ESMA consultation package under the EU's MiFIR review workstream, and proposes a new standalone set of regulatory technical standards (RTS) for derivative transparency ahead of a future comprehensive recast of the current RTS on non-equity transparency (RTS 2). It also includes draft amends to the respective RTS for package orders and data for CTPs. ESMA proposes a new derivatives transparency regime as per the new scope defined by MiFIR, which was amended so that the regime applies to derivatives based on certain characteristics rather than simply delineating between those traded on- and off-venue. The consultation sets out detailed calibrations as to liquidity determination (relevant for both pre-trade transparency waivers and post-trade deferrals), and the size thresholds, and duration periods to be used for the new deferral regime. The deadline for comments is 3 July. ESMA will then publish its final report, and submit the technical standards to the European Commission in Q4.

Topics : Derivatives, MiFID II

ESMA 2024 CCP peer review report

2 April 2025

The European Securities and Markets Authority (ESMA) has published its 2024 peer review report in respect of central counterparties (CCPs), as required by Regulation (EU) No 648/2012 (EMIR). The focus of the report is supervisory activities related to the EMIR requirements for outsourcing and intragroup governance arrangements. The report covered supervisory activities of all competent authorities of authorised CCPs conducted in 2022 and 2023 and found that for the most part, competent authorities managed CCP colleges compliantly. In terms of the three supervisory expectations specified in the mandate for this peer review, the report concluded the following:

Regarding the notification process for new outsourcing arrangements, most competent authorities met (fully or largely) this expectation with the exception of three authorities which did not require CCPs to have complete written outsourcing agreements in place.
Regarding the compliance of CCP outsourcing arrangements with EMIR requirements, all competent authorities met this expectation.
Regarding the compliance with EMIR of CCP governance arrangements in relation to outsourcing, all competent authorities met (fully or largely) this expectation.

The report includes recommendations directed at specific competent authorities in respect of areas identified for improvement. Authorities are expected to address these recommendations within a year from the publication of the report.

Topics : Derivatives, Financial Market Infrastructure

UK regulators consult on changes to margin requirements for non-centrally cleared derivatives

27 March 2025

The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have opened a consultation on margin requirements for non-centrally cleared derivatives. The proposals are to:

Make permanent the current temporary exemption, which is due to expire 4 January 2026, for single-stock equity options and index options from the UK bilateral margining requirements. The EU had the same temporary exemption until 24 December 2024 when the latest revisions to the European Market Infrastructure Regulation, known as EMIR 3, made the exemption permanent. We discuss this change and others in our client bulletin, "EMIR 3 - Impact on uncleared OTC derivatives markets". Both the UK and EU allow provision for the exemptions to change, if in future other jurisdictions implement margin requirements for these derivatives.

Topic : Derivatives

UK moves to permanently exempt UK and EEA pension schemes from the derivatives clearing obligation

18 March 2025

A draft of the Pension Fund Clearing Obligation Exemption (Amendment) Regulations 2025 has been published alongside an explanatory memorandum. The draft Regulations will amend the UK European Market Infrastructure Regulation (EMIR) to make permanent the temporary exemption from the derivatives clearing obligation for UK and EEA pension scheme arrangements. The temporary exemption is due to expire on 18 June. The draft Regulations will come into force on the day after they are made. The EU EMIR was recently amended by EMIR 3 to provide a permanent exemption from the clearing obligation where a counterparty trades with a non-EU pension scheme arrangement, subject to certain conditions being met.

Topic : Derivatives

EU recognition of UK CCPs extended

17 March 2025

Following the extension of EU equivalence for UK CCPs to 30 June 2028 under the EU European Market Infrastructure Regulation (EMIR), on 17 March, the European Securities and Markets Authority (ESMA) announced the extension of the tiering and recognition of the three UK CCPs: ICE Clear Europe, LCH Ltd and LME Clear. The Bank of England published a press release on the same day welcoming ESMA's decision to ensure that EU market participants can continue to access the clearing services of the UK CCPs. In addition, ESMA and the Bank have agreed an amended Memorandum of Understanding governing cooperation and information sharing regarding UK CCPs, which take account of the changes brought in by EMIR 3.

Topics : Derivatives, Financial Market Infrastructure

ESMA notifies EC of delay of certain deliverables

6 March 2025

The European Securities and Markets Authority (ESMA) has published a letter (dated 3 March) addressed to the European Commission on the prioritisation of ESMA's 2025 deliverables. ESMA's letter sets out specific items which ESMA intends to delay or which have been cancelled. In some instances the delays are made with the purpose of aligning ESMA's work with other initiatives. For example, the technical standards on buy-in under the Central Securities Depository Regulation Review are delayed until T+1 implementation is complete. The EU has committed to moving to T+1 by 11 October 2027. ESMA identifies the following as being included in its highest priority workstreams: (i) implementation of the latest amendments to the European Market Infrastructure Regulation, known as EMIR 3; (ii) the Markets in Financial Instruments Directive and Regulation Review; (iii) the Listing Act; (iv) the Central Securities Depository Regulation Review; (v) the T+1 project; and (vi) the review of the Alternative Investment Fund Managers Directive. ESMA is also prioritising new supervisory responsibilities relating to Consolidated Tape Providers, Green Bond verifiers, ESG Rating providers and oversight powers under the Digital Operational Resilience Act.

Topics : Derivatives, Financial Market Infrastructure, Fund Regulation, Sustainable Finance

EBA publishes discussion paper on EMIR fees for pro forma margin model validation

5 March 2025

The European Banking Authority (EBA) has published a discussion paper on fees to validate pro forma models under the revised European Market Infrastructure Regulation (known as EMIR 3). EMIR 3 requires that counterparties apply for authorisation to their competent authorities before using, or adopting a change to, a model for initial margin calculation used as a risk-mitigation technique for OTC derivative contracts not cleared by a CCP. The EBA is charged with establishing a central validation function for the elements and general aspects of pro forma models, and changes to those, and must charge an annual fee, per pro forma model, to counterparties using the pro forma models it validates. The EBA's discussion paper is intended to assist it in responding to a request from the European Commission for technical advice for preparing the delegated act setting out the method for the determination of the amount of the fees and the modalities of the payment of the fees.

In the discussion paper, the EBA outlines its approach to budgeting, the expected costs it will incur in carrying out this new role, expected fees per counterparty including the calculation methods and the modalities of payment. The EBA is seeking feedback on the (i) scope of the new tasks and corresponding costs; (ii) calculation of the monthly average outstanding notional amount of non-centrally cleared OTC derivatives over the past 12 months; (iii) fee calculation methods; and (iv) payment modalities. Responses to the discussion paper may be provided until 7 April. The EBA intends to provide its technical advice by 30 June.

Topic : Derivatives

UK FCA reminds derivatives market participants of impending end of reporting transitional period

4 March 2025

The UK Financial Conduct Authority (FCA) has published a reminder for derivative market participants to update their outstanding derivative reports to comply with the amended reporting requirements introduced in February 2023. The UK amended its reporting requirements under the UK European Market Infrastructure Regulation. The changes took effect on 30 September 2024, subject to a transitional period which ends on 31 March. The FCA states that firms should review their reporting arrangements to ensure that they have taken the required steps to amend their outstanding derivative reports ahead of 31 March. The FCA encourages firms that do not believe that they will be able to comply to proactively engage with the regulator regarding their circumstances.

Topic : Derivatives

EC consultation on commodity derivatives market

26 February 2025

The European Commission has published a targeted consultation document on a review of the functioning of commodity derivatives markets (including for these purposes emissions allowances) and certain aspects relating to spot energy markets. The outcome of this consultation will feed into the Markets in Financial Instruments Directive report with a view to making the EU commodity derivatives markets more efficient and resilient.

The consultation seeks stakeholders' feedback on a broad range of issues, including: (i) data aspects relating to commodity derivatives; (ii) the ancillary activity exemption; (iii) position management and position reporting; (iv) position limits; (v) circuit breakers; and (vi) other elements stemming from the Draghi report on EU competitiveness. Responses must be submitted by 9 April.

Topics : Derivatives, MiFID II

UK Financial Conduct Authority policy statement on reforming commodity derivatives regulatory framework

5 February 2025

The Financial Conduct Authority (FCA) has published a policy statement (PS25/1) on reforming the commodity derivatives regulatory framework. The policy statement sets out the FCA's response to feedback on its consultation paper on the subject (CP23/27) and includes its final rules and guidance to be included in the FCA Handbook. Key changes made in response to the consultation feedback include: Scope of the position limits regime: the regime will be limited to the 14 critical contacts consulted on, including LME Aluminium and LME Tin. However, the approach to contracts that are closely related to these critical contracts but outside the scope of position limits will be less prescriptive than consulted on, allowing trading venues more discretion to calibrate scope. Exemptions: the FCA's proposed requirement for trading venues to only grant the hedging exemption where they are satisfied that the exempt positions can reasonably be managed—the so-called risk management condition—is being amended to be less prescriptive. Non-financial entities will no longer be required to submit a detailed stress test.

Read more.

Topics : Derivatives, MiFID II

European Central Bank publishes FAQs on initial margin models under EMIR 3

31 January 2025

The European Central Bank(ECB) has published FAQs on initial margin (IM) model approvals under EMIR 3. EMIR 3 requires, for the first time in the EU, counterparties to apply for authorisation before using, or adopting a change to, their IM calculation model. Applying validation and authorisation requirements for IM models was expected to cause difficulties for national competent authorities (NCAs) and counterparties immediately upon entry into force of EMIR 3. In 2024, the European Banking Authority (EBA) therefore published a no action letter confirming NCAs should not prioritise supervisory or enforcement action in relation to processing IM model authorisation applications.

The ECB's FAQs provide further information on the application of the new EMIR IM model authorisation regime, including: (i) which banks are affected by the EBA's no action letter on the application of EMIR; (ii) the ECB's interim approach to processing IM model applications, until the EBA's technical standards/guidelines become applicable; (iii) the approach significant institutions should take to obtaining authorisations for IM models in light of EMIR 3; (iv) the approach to be taken when more than one legal entity within a banking group is using an IM model; and (v) the length of time an approval process is expected to take.

Topic : Derivatives

Commission Implementing Decision extends temporary equivalence of UK CCPs

31 January 2025

Commission Implementing Decision (EU) 2025/215 has been published in the Official Journal of the European Union, extending EU equivalence for UK CCPs under the European Market Infrastructure Regulation (EMIR). The Decision will apply from 1 July 2025 (the day after the EU's current equivalence decision expires, on 30 June 2025) and will expire on 30 June 2028. The European Commission published a press release on the same date, noting that the extension is designed to provide time for the implementation of EMIR 3.

Topics : Derivatives, Financial Market Infrastructure

International bodies report on effective practices for streamlining variation margin in centrally cleared markets

January 15, 2025

The Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions published a final report on examples of effective practices for streamlining variation margin in centrally cleared markets. The report sets out eight effective practices which aim to provide examples of how standards set out in the CPMI-IOSCO Principles for Financial Market Infrastructures, as supplemented by the relevant guidance, can be met.

Read more.

Topics : Derivatives, Financial Market Infrastructure

International bodies report on streamlining variation margin processes and initial margin responsiveness of margin models in non-centrally cleared markets

January 15, 2025

The Basel Committee on Banking Standards and International Organization of Securities Commissions published a final report on streamlining variation margin processes and initial margin responsiveness of margin models in non-centrally cleared markets. The report follows on from the BCBS-CPMI-IOSCO September 2022 review of margining practices.

Read more.

Topics : Derivatives, Financial Market Infrastructure

International bodies issue final report on transparency and responsiveness of initial margin in centrally cleared markets

January 15, 2025

The Basel Committee on Banking Standards, Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions has published a final report on transparency and responsiveness of initial margin in centrally cleared markets. The report sets out ten final policy proposals, with the aim of increasing the resilience of the centrally cleared market ecosystem in times of market stress. The proposals are also designed to improve market participants' understanding of centrally cleared initial margin calculations and potential future margin requirements.

Read more.

Topics : Derivatives, Financial Market Infrastructure

European Banking Authority publishes no action letter on application of European Market Infrastructure Regulation 3 with respect to initial margin model authorization

December 17, 2024

The European Banking Authority has published a no action letter stating that competent authorities should not prioritize any supervisory or enforcement action in relation to the processing of applications for initial margin (IM) model authorization received as a result of the entry into force of EMIR 3.

EMIR 3 requires that counterparties apply for authorization to their competent authorities before using, or adopting a change to, a model for initial margin calculation. Compliance with this requirement immediately after EMIR 3 enters into force may cause difficulties for competent authorities and counterparties until the EBA has established its central validation function and the draft regulatory technical standards and guidelines setting out key requirements have been published.

The no action letter sets a registration process for counterparties in scope of IM model authorization for any first application submitted after EMIR 3 enters into force and for subsequent changes to such IM models. As per the no action letter, however, competent authorities should not prioritize the processing of such applications, until the draft RTS on Initial Margin Model Validation and the guidelines on application and authorization process mandated under EMIR 3 come into application.

Topics : Derivatives, Financial Market Infrastructure

UK Financial Markets Standards Board transparency draft statement of good practice on the governance of sustainability-linked products

December 17, 2024

The Financial Markets Standards Board has published a consultation on its transparency draft of its statement of good practice on the governance of sustainability-linked products. SLPs are products whose financial and/or structural characteristics can vary depending on whether the user (i.e., borrower or issuer of, or counterparty to, SLPs) achieves specific sustainability or ESG objectives. They can be used for general corporate purposes, which allows many users (e.g., borrowers, issuers, or counterparties to sustainability-linked products) to access the sustainable finance market in a more flexible way. The FMSB's statement is intended to codify good practice for the governance of SLPs and support consistent approaches across asset classes and jurisdictions. It is hoped this will enhance the quality and integrity of SLPs; boost market confidence; help mitigate greenwashing risk; and support the development of a deeper, more robust sustainability-linked product market. The statement of good practice is intended to apply to service providers (e.g., firms acting as sustainability-linked loan lenders, bookrunners, or lead arrangers on a sustainability-linked bond issuance or counterparties to a sustainability-linked derivative) or users of SLPs in wholesale financial markets and to support, and be read in conjunction with, existing asset-class specific guidance (notably ICMA, LMA, and ISDA principles). The deadline for comments is February 21, 2025.

Topics : Derivatives, Securities, Sustainable Finance

Financial Stability Board publishes final report on liquidity preparedness for margin and collateral calls

December 10, 2024

The Financial Stability Board has published a final report on liquidity preparedness for margin and collateral calls. The report sets out policy recommendations to enhance the liquidity preparedness of non-bank market participants for margin and collateral calls in centrally and non-centrally cleared derivatives and securities markets (including securities financing such as repo). The FSB has analyzed recent incidents of liquidity stress, as well as completed a survey of financial authorities and feedback from industry stakeholder outreach events. Together, the FSB has found there is need for policy adjustments to deal with liquidity strains in the NBFI sector arising from spikes in margin and collateral calls during times of market stress. The findings suggest that while margin and collateral calls are a necessary protection against counterparty risk, they can also amplify the demand for liquidity by market participants if they are unexpected in times of stress and affect a large enough part of the market. The increase in such calls can impact market participants differently depending on the size of positions and level of liquidity preparedness. The FSB also identified liquidity risk management and governance weaknesses of some market participants as key causes of their inadequate liquidity preparedness for margin and collateral calls.

The FSB's eight policy recommendations in this report cover: (i) liquidity risk management and governance; (ii) stress testing and scenario design; and (iii) collateral management practices of non-bank market participants, focusing on liquidity risks arising from spikes in margin and collateral calls, including under extreme but plausible stressed conditions. The FSB explains that the recommendations should be applied proportionately to the underlying risks of different non-bank market participants.

Topics : Derivatives, Fund Regulation, Non-Bank Financial Intermediation, Securities

EMIR 3 Published in the Official Journal of the European Union

December 4, 2024

The EMIR 3 Regulation and Directive have been published in the Official Journal of the European Union and will enter into force on December 24, 2024. The EMIR 3 Regulation amends the European Market Infrastructure Regulation and applies from December 24, 2024, except for the amendments to the calculation of the clearing thresholds for financial counterparties and non-financial counterparties which will only apply once the related technical standards enter into force. The EMIR 3 Directive amends the Directive on Undertakings for the Collective Investment in Transferable Securities, the Capital Requirements Directive and Investment Firm Directive. Member States must transpose the EMIR 3 Directive into national laws and bring those into force by June 25, 2026. This aligns with the implementation date for CRD VI.

Read more.

Topics : Derivatives, Financial Market Infrastructure, Prudential Regulation

The Markets in Financial Instruments (Equivalence) (Singapore) Regulations 2024

December 3, 2024

The Markets in Financial Instruments (Equivalence) (Singapore) Regulations 2024 have been published, together with an explanatory memorandum and de minimis assessment. The Regulations set out HM Treasury's determination that Singapore's regulatory and supervisory regime for trading in derivatives continues to be equivalent to the U.K.'s under U.K. MiFIR and allows U.K. counterparties to fulfil their derivatives trading obligation when they trade derivatives instruments on trading venues in Singapore.

Commission Implementing Decision (EU) 2019/541, granting equivalence to Singaporean trading venues became part of assimilated law in the U.K. under the EU Withdrawal Act. However, equivalence applies only to those authorized trading venues listed in the Decision's Annex. Since assimilation, seven additional trading venues have been authorized and therefore the Decision, at the request of the Monetary Authority of Singapore, needs to be re-enacted and updated.

The Regulations come into force on December 31, 2024 and will replace the assimilated implementing decision, which will be revoked at the same time.

Topics : Derivatives, MiFID II

New UK Financial Conduct Authority Direction for the Derivatives Trading Obligation

November 29, 2024

The U.K. Financial Conduct Authority has published a new direction for the U.K. derivatives trading obligation, together with an explanatory memorandum. The FCA's existing direction modifying the U.K. DTO using its Temporary Transitional Power expires on December 31, 2024. This allows firms subject to the U.K. DTO, trading with, or on behalf of, EU clients subject to the corresponding obligation under EU MiFIR, namely the EU DTO to be able to transact or conclude those trades on EU trading venues, providing that certain conditions are met. The purpose of this new direction is to provide continuity in the outcomes achieved through the TTP. In the continuing absence of mutual equivalence between the U.K. and the EU for the purposes of the U.K. DTO and EU DTO, certain market participants would be caught by a conflict of law between the U.K. DTO and EU DTO—in particular branches of EU firms in the U.K.—unless a new direction is issued. The new direction set out the same conditions as the existing direction, however the new direction only applies to derivatives subject to the DTO in both the U.K. and the EU. The new direction takes effect on the expiry of the previous one.

Topics : Derivatives, MiFID II

International Organization of Securities Commissions Report on Principles for the Regulation and Supervision of Commodity Derivatives Markets

November 25, 2024

The International Organization of Securities Commissions has published a report on a targeted implementation review on principles for the regulation and supervision of commodity derivatives markets. In October, IOSCO conducted a targeted implementation review of five selected principles: Principles 9, 12, 14, 15, and 16 that aim to address excessive commodity market volatility, OTC derivatives transparency, and orderly functioning of the commodity derivatives markets. IOSCO believes that an appropriate implementation of the selected principles would help mitigate the impact of external factors which may disrupt commodity markets, as recently experienced. As such the report sets out IOSCO's recommendations to its members for improving the implementation of specific elements of the selected principles, as well as the intention to conduct further work in the OTC markets area.

Overall, the survey results show that the majority of respondents were broadly compliant with the selected principles. However, both regulators and exchanges identified significant challenges in implementing certain elements of the selected principles within OTC markets. Based on the results of the review, IOSCO anticipates additional work related to the issues with the ability of exchanges and certain regulators to collect and aggregate, on both an ad hoc and regular basis, information about OTC positions. The specifics of this work are still being determined, but IOSCO is committed to ensuring that any future developments align with IOSCO's strategic goals.

Topics : Derivatives, MiFID II

International Organization of Securities Commissions' Final Report on Post Trade Risk Reduction Services

November 25, 2024

The International Organization of Securities Commissions has published its final report on post trade risk reduction services. The report highlights potential policy considerations and risks associated with the using and offering of PTRRS and presents seven sound practices in this area as guidance to IOSCO members and regulated users of PTRRS. The seven sound practices cover the following areas: (i) transparency, governance, comprehensibility, and fairness of the algorithm; (ii) operational risk; (iii) data integrity and security and regulatory data; (iv) legal certainty; (v) considerations of potential counterparty risk by IOSCO members and PTRRS users; (vi) market concentration and competition; and (vii) standardization and predictability of runs and file formats. The sound practices are designed to improve and complement existing market practices. The report reflects the results of the public consultation launched in January.

Topics : Derivatives, MiFID II

European Securities and Markets Authority Consults on EMIR 3 Active Account Requirement

November 20, 2024

The European Securities and Markets Authority has published a consultation on the conditions of the Active Account Requirement under the amended European Market Infrastructure Regulation (EMIR 3). The active account requirement requires EU counterparties active in certain derivatives to hold an operational and representative active account at a Central Counterparty authorized to offer services and activities in the EU.

ESMA is seeking stakeholder input on several key aspects of the active account requirement, including the: (i) three operational conditions to ensure that the clearing account is effectively active and functional, including stress-testing; (ii) representativeness obligation for the most active counterparties; and (iii) reporting requirements to assess their compliance with the active account requirement. The deadline for comments is January 27, 2025. ESMA will then consider the feedback it receives to this consultation in Q1 2025 and expects to publish a final report and submission of the draft technical standards to the EC for endorsement as soon as possible.

Topics : Derivatives, Financial Market Infrastructure

UK Conduct Authority Consults on Changes to the Derivatives Trading Obligation

July 26, 224

The Financial Conduct Authority has launched a consultation on three proposed amendments to different aspects of the U.K. derivatives trading obligation. The consultation is part of the Wholesale Markets Review. The Markets in Financial Instruments Regulation imposes a "trading obligation," requiring mandatory on-venue trading for financial counterparties and non-financial counterparties where they engage in transactions in derivatives that: (i) have been declared subject to the clearing obligation under the U.K.'s European Market Infrastructure Regulation; (ii) are admitted to trading or traded on at least one U.K. trading venue (a regulated market, multilateral trading facility or organised trading facility) or a third-country equivalent trading venue; and (iii) are sufficiently liquid. Responses to the FCA's consultation may be submitted until September 30, 2024. The FCA intends to publish its direction on the modification of the DTO in Q4.

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Topics : Derivatives, MiFID II

European Securities and Markets Authority Issues Public Statement on Use of Collateral by Non-Financial Counterparties Acting as Clearing Members

July 10, 2024

The European Securities and Markets Authority has published a public statement on deprioritizing supervisory actions linked to the eligibility of uncollateralised public guarantees, public bank guarantees, and commercial bank guarantees for Non-Financial Counterparties acting as clearing members, pending the entry into force of the latest revisions to the European Market Infrastructure Regulation, known as EMIR 3. We discuss EMIR 3, which is anticipated to enter into force in Q4 2024, in our note "EMIR 3 and Clearing in the EU".

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Topic : Derivatives

European Commission Consults on Draft Delegated Regulation for OTC Derivatives Identifying Reference Data

June 12, 2024

The European Commission has published consultation for a draft Delegated Regulation supplementing the Markets in Financial Instruments Regulation as regards OTC derivatives identifying reference data to be used for the purposes of the transparency requirements laid down in Article 8a(2) and Articles 10 and 21 of MiFIR. Following the MiFIR Review, MiFIR now clarifies that the pre- and post-transparency requirements for non-equity instruments applies to both exchange-traded and OTC derivatives. The post-trade disclosure obligation for investment firms was also amended and that obligation no longer applies to derivatives "traded on a trading venue," but it does apply to OTC derivatives traded by an investment firm either on its own account or on behalf of clients. The transaction reporting obligation applies to both types of derivatives.

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Topics : Derivatives, MiFID II

EU Consultation on Amendments to Commodity Derivatives Technical Standards

May 23, 2024

The European Securities and Markets Authority has published a consultation paper on proposed changes to the rules for position management controls and position reporting. These proposals arise out of the MiFID Review, and the resulting changes to the Markets in Financial Instruments Regulation and Directive, which were published in March. MiFID II requires national regulators to establish and apply position limits on the size of a net position in commodity derivatives traded on trading venues and economically equivalent OTC contracts. The limits apply to the size of a position that a person can hold, including any other positions held on behalf of that person by group entities. Trading venues are required to apply position management controls, including monitoring of open interest and obtaining information about the size and purpose of a position entered into, beneficial or underlying owners, concert arrangements, and any related assets or liabilities. Trading venues also have powers to require termination or reduction of positions and to require a person to provide liquidity back into the market at an agreed price and volume to mitigate the effect of a large or dominant position. The position reporting regime is intended to support the application and enforcement of position limits.

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Topics : Derivatives, MiFID II

EU Eases EMIR 3 Clearing Mandate

02/19/2024

The Council of the European Union and European Parliament have reached provisional political agreement on the latest revisions to the European Market Infrastructure Regulation, publishing on February 14, 2024, the agreed text of the EMIR 3 Regulation and EMIR 3 Directive. The controversial mandate for EU counterparties to hold "active accounts" at EU CCPs for all products, and to use such accounts for some products, has been substantially watered down from the European Commission's December 2022 proposal (we discussed the Commission's proposals in our client note, "Clearing in the EU After EMIR 3").

According to the final draft text, in-scope counterparties for the new "active account" requirement will be required to open and maintain accounts with EU CCPs and clear some transactions through EU CCPs for in-scope products. However, the Commission's (and some member states') ambitious and misguided attempt to force market relocations into Europe seem to have faltered. Even the largest EU derivatives traders (with EUR 6 billion + of open positions) need only clear a minimum of five (5) trades per annum for sub-categories each of the in-scope categories of products. In-scope products are interest rate derivatives denominated in euro and Polish zloty; and Short-Term Interest Rate Derivatives (STIR) denominated in euro. It had previously been proposed for CDS denominated in euro to be included, but this product is no longer in scope.

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Topics : Derivatives, Financial Market Infrastructure

UK Regulator Consults on Proposed Reforms to the Commodity Derivatives Regulatory Framework

12/08/2023

The U.K. Financial Conduct Authority has launched a consultation on proposals for reforming the commodity derivatives regulatory framework, which covers position limits, the exemptions from those limits, position management controls, the reporting regime and the ancillary activities test. Responses to the consultation may be submitted until February 16, 2024.

The Financial Services and Markets Act 2023 has already made several reforms to the U.K.'s commodity derivatives regulatory regime. The MiFID II requirement for commodities position limits to be applied to all exchange-traded contracts and over-the-counter, or non-venue traded ("OTC"), contracts that are economically equivalent to exchange-traded commodity derivatives was revoked. Instead, the FCA will decide the scope of the commodity derivates to which position limits will apply. In addition, the powers for setting position controls were transferred from the FCA to the operators of trading venues. This contrasts with the EU approach, where position limits are not just set by the regulators, but actually in formulae in legislation, which have proven ill-thought-through and problematic for numerous markets. The FCA has retained the power to set position limits if certain conditions are satisfied, and has new rulemaking powers to establish how trading venues should set and apply position limits and what position management controls they should operate. Generally, the reversion of position limit controls to exchanges as self-regulatory organisations reflects the U.K.'s status quo ante, i.e., prior to MiFID II.

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Topics : Derivatives, MiFID II

HM Treasury Seeks Views on Clearing Exemption for Pension Schemes

11/29/2023

U.K. EMIR (the onshored European Market Infrastructure Regulation) generally requires the clearing at a central counterparty of all interest rate swaps and credit default swaps. As announced earlier this year, HM Treasury has launched a review of an applicable exemption for pension funds, with the publication of a call for evidence. Currently, pension schemes meeting certain requirements are exempt from the clearing obligation for a temporary period. The exemption was included in EMIR due to the difficulty that pension funds would find in funding margin calls; nominally, to provide CCPs with time to develop solutions for the transfer of non-cash collateral by pension schemes to meet variation margin calls. CCPs require highly liquid collateral, mostly cash, as variation margin, but pension schemes are not set up to hold large amounts of cash and would have to amend their business model at high costs to do so. In June, the Pension Fund Clearing Obligation Exemption and Intragroup Transaction Transitional Clearing and Risk-Management Obligation Exemptions (Extension and Amendment) Regulations 2023 extended the temporary exemption for pension schemes to June 18, 2025.

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Topics : Derivatives, Financial Market Infrastructure

UK Extends Clearing Obligation Exemption for Pension Funds and Intragroup Transactions

05/03/2023

On April 28, 2023, the Pension Fund Clearing Obligation Exemption and Intragroup Transaction Transitional Clearing and Risk-Management Obligation Exemptions (Extension and Amendment) Regulations 2023 were published, with an explanatory memorandum. These Regulations come into effect on June 12, 2023, and will extend the expiry date of the:

Exemption from the clearing obligation for pension schemes from June 18, 2023, to June 18, 2025. This means that U.K. and EEA pension funds will remain exempt from the U.K. clearing obligation. This change is made by amending U.K. EMIR, as provided for in the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) (No. 2) Regulations 2019.
Temporary intragroup exemption provisions from December 31, 2023, to December 31, 2026. This means that the U.K. clearing obligation and risk mitigation measures will not apply to OTC derivative contracts between U.K. firms and their overseas group entities.

This is the first time that HM Treasury has used its powers to extend these dates.

Topic : Derivatives

UK Government Publishes Draft Legislation Revising Application of the Ancillary Activities Test for Commodity Derivatives and Emission Allowances

03/30/2023

The U.K. government has published a draft statutory instrument (and related explanatory memorandum), which will be known as the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023. The draft SI will simplify the process for determining when a firm satisfies the “ancillary activities” test and reduce the burden on firms that apply the test. The changes were discussed under the Wholesale Markets Review and announced as part of the Edinburgh Reforms.

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Topics : Derivatives, MiFID II

The following posts provide a snapshot of selected UK, EU and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.