What you need to know about the European Market Infrastructure Regulation

We set out the key requirements of the European Market Infrastructure Regulation (EMIR). For more information on the EMIR requirements view our EMIR page.

Introduction

The European Market Infrastructure Regulation ( EU EMIR) sets out requirements for:

(a) the clearing of OTC derivatives through authorised central clearing counterparties ( CCPs);

(b) collateral exchange and risk mitigation requirements for non-cleared OTC derivatives; and

(c) post-trade reporting requirements for all derivatives.

As an EU regulation, it is directly applicable in all EU member states.

At 11:00 p.m. on 31 December 2020 ( IP Completion Day), the Brexit implementation period expired and EU EMIR ceased to be applicable in the UK. In its place, the "onshored" version of EU EMIR ( UK EMIR), as it has effect in domestic law by virtue of the European Union (Withdrawal) Act 2018 (the EUWA) now applies to in-scope UK entities. Obligations under UK EMIR are substantively the same as those under EU EMIR, but there are some notable divergences. These are discussed in detail throughout this guide, but in summary:

(a) various functions have been transferred from EU authorities to UK authorities; for example, the ability to make equivalence determinations in respect of third countries has been transferred from the European Commission (the Commission) to HM Treasury (the Treasury) under UK EMIR;

(b) the UK now constitutes a "third country" under EU EMIR, and EU countries are "third countries" under UK EMIR;

(c) UK entities must report details of their trades to a UK-authorised, rather than an EU-authorised, trade repository;

(d) UK entities must clear in-scope transactions through a UK-authorised, rather than an EU-authorised, CCP;

(e) since 31 March 2022, the margin rules have diverged, including with regard to the types of asset that constitute eligible collateral and the treatment of eligible collateral;

(f) since IP Completion Day, a number of amendments have been made to the EU Margin Rules (defined below), including (i) to amend and extend the initial margin phase-in dates, and (ii) to extend the temporary derogations available for intragroup transactions where one of the counterparties is established in a non-equivalent third country. The FCA and PRA have made similar amendments to the UK Margin Rules (defined below);

(g) EMIR 3 has introduced several changes to EU EMIR which have not been replicated in UK EMIR. These changes are summarised in this note.

For more information on the EU and UK changes, please see our list of Client briefings or speak to one of your Ashurst contacts.

There are certain circumstances, for example where a UK entity that is subject to UK EMIR trades with an EU entity that is subject to EU EMIR, in which clearing or margining obligations will arise under both EU EMIR and UK EMIR. In most cases, the effects of this outcome have been mitigated in the short term by temporary equivalence or the implementation of specific temporary transitional regimes. However, absent equivalence in the medium to long term, it is unclear how the two regimes will interact once the temporary provisions expire.

This guide explains the principal obligations that arise under EMIR, and summarises some of the key concepts. References to " EMIR" are to both UK EMIR and EU EMIR. Unless otherwise stated, the position described is the same under both regimes.

EMIR 3 – changes to EU EMIR

On 24 December 2024, important changes to EU EMIR took effect, creating a new iteration of EU EMIR known as EMIR 3. The changes introduced measures "to mitigate excessive exposures to third-country central counterparties and improve the efficiency of Union clearing markets", including a new "active account requirement", or AAR.

The UK has not indicated that it will follow suit, so EMIR 3 has brought about the first major divergence between EU EMIR and UK EMIR.

Much of the detail of EMIR 3 is still to come through multiple technical standards that will be published by ESMA throughout 2025. Where changes have been made to EU EMIR by EMIR 3, they are described in the relevant sections below.

You can read more about the changes in this briefing.

Overview

The principal requirements arising under EMIR are:

(a) mandatory central clearing of certain classes of OTC derivatives entered into between certain types of counterparty (the clearing obligation);

(b) collection of margin in respect of non-cleared OTC derivatives between certain types of counterparty (the margin requirements);

(c) reporting prescribed details of all derivatives (both OTC and exchange traded) to authorised trade repositories (the reporting obligation); and

(d) various other risk mitigation requirements.

EMIR 3 change: EMIR 3 also introduced an additional clearing requirement, referred to as the Active Account Requirement, or AAR. This is separate to the clearing obligation described above and requires in-scope entities to clear a minimum number of certain types of transaction through an EU CCP account established in the EU.

Full details of the AAR are not yet known but more information is provided at EMIR 3 – new Active Account Requirement below.

Key Concepts

Financial and Non-Financial Counterparties

EMIR divides counterparties to OTC derivative contracts into "Financial Counterparties" ( FCs) and "Non-Financial Counterparties" ( NFCs).

"Financial counterparties" are, broadly, regulated entities (or entities managed by regulated managers) in the financial services, funds and insurance sectors. They include:

(a) banks;

(b) investment firms;

(c) insurance undertakings;

(d) reinsurance undertakings;

(e) certain Undertakings for Collective Investment in Transferable Securities ( UCITS) and their management companies;

(f) central securities depositories;

(g) institutions for occupational retirement provision; and

(h) certain alternative investment funds ( AIFs).

"Non-financial counterparties" are all other in-scope counterparties to OTC derivative transactions (other than CCPs).

FCs are further divided into those which belong to groups conducting large volumes of derivative trading activity ( FC+s) and those which do not ( FC-s), according to certain thresholds, which are described below.

NFCs are further divided into those which belong to groups conducting large volumes of non-hedging derivative trading activity ( NFC+s), and those whose groups use derivatives to a lesser degree or chiefly for the purpose of hedging their normal commercial activities ( NFC-s), according to certain thresholds, which are described below.

Annual calculation

The +/- categorisation in each case is determined based on an annual calculation of the aggregate month-end average position in OTC derivative contracts for the previous twelve months.

NFCs: When performing the calculation, NFCs may exclude hedging transactions and need only include transactions entered into by other NFCs in the group.

FCs: In contrast, FCs may not exclude hedging transactions and must include transactions entered into by all the other members of the group.

The calculation is not mandatory; FCs and NFCs can elect not to calculate, but in such case they are automatically deemed to have exceeded the threshold. They therefore become subject to the clearing obligation, and are obliged to clear all transactions which have been designated as subject to mandatory clearing ( clearable transactions).

However, an NFC that elects to perform the calculation and only exceeds the threshold(s) for certain types of clearable transactions only needs to clear these transaction types. FC+s need to clear all clearable transactions.

Both calculating and non-calculating entities need to notify the FCA, or ESMA and the relevant competent authority (as applicable), either of their decision not to perform the calculation or of the fact that they exceed the threshold for one or more clearable transaction types.

Clearing thresholds

The clearing thresholds are:

(a) EUR1 billion in gross notional value for OTC credit derivative contracts;

(b) EUR1 billion in gross notional value for OTC equity derivative contracts;

(c) EUR3 billion in gross notional value for OTC interest rate derivative contracts;

(d) EUR3 billion in gross notional value for OTC foreign exchange derivative contracts; and

(e) EUR3 billion (under UK EMIR) or EUR4 billion (under EU EMIR) in gross notional value for OTC commodity derivative contracts and other OTC derivative contracts not provided for under points (a) to (d).

EMIR uses an accounting-based definition of "group" to establish which entities should be included in the determination of whether the clearing threshold is exceeded. Analysis of the extent of the "group" should be conducted on a case-by-case basis. Please speak to one of your Ashurst contacts should you wish to discuss this further.

EMIR 3 changes

Under EMIR 3, the calculation methodology will change in due course so that, when calculating whether they have exceeded any of the above thresholds:

(i) in certain circumstances (still to be prescribed by ESMA) FCs will only need to take account of transactions that are not cleared through an EU-authorised or recognised CCP; and

(ii) NFCs will only need to take account of transactions that are not cleared through an EU-authorised or recognised CCP and will no longer need to count transactions entered into by other NFCs in their group.

However, these changes will not take effect until the necessary technical standards are in place, which is likely to be in H2 2025.

The clearing thresholds and "hedging exemption" parameters are also expected to change in due course, after market consultation by ESMA.

The Clearing Obligation

Article 4 of EMIR requires the clearing of all OTC derivatives that are clearable transactions under EMIR and that are entered into between:

(a) two FC+s;

(b) an FC+ and an NFC+;

(c) two NFC+s;

(d) an FC+ or NFC+ and an entity established in a third country that would be an FC+ or NFC+ if it were established in the UK or EU (as applicable); and

(e) two entities which are established outside the UK or the EU (as applicable) ( Third-Country entities), and which would be FC+s or NFC+s if established in the UK or EU (as applicable), if the contract has a "direct, substantial and foreseeable effect" within the UK or EU (as applicable).

EMIR 3 change: EMIR 3 exempts from the clearing obligation transactions resulting from the use of post-trade risk reduction services such as portfolio compression. The exemption is subject to conditions, including that the service (i) reduces risk, (ii) is market risk neutral, and (iii) does not contribute to price formation. Some of the conditions require further detail, which ESMA will provide through technical standards.

Direct, substantial and foreseeable effect under UK EMIR

Under UK EMIR, a transaction will have a "direct, substantial and foreseeable effect" within the UK where:

(a) the two Third-Country entities transact through UK branches; or

(b) at least one of the Third-Country entities benefits from a guarantee provided by an FC established in the UK, if the guarantee (i) covers an aggregated notional amount of at least EUR 8 billion (or its equivalent in another currency), or a proportion of that threshold equal to the percentage of the liability covered by the guarantee, and (ii) is equal to at least 5% of the UK guarantor FC's total exposures to OTC derivative contracts.

Direct, substantial and foreseeable effect under EU EMIR

Under EU EMIR, a transaction will have a "direct, substantial and foreseeable effect" within the EU where:

(a) the two Third-Country entities transact through EU branches; or

(b) at least one of the Third-Country entities benefits from a guarantee provided by an FC established in the EU, if the guarantee (i) covers an aggregated notional amount of at least EUR 8 billion (or its equivalent in another currency), or a proportion of that threshold equal to the percentage of the liability covered by the guarantee, and (ii) is equal to at least 5% of the EU guarantor FC's total exposures to OTC derivative contracts.

What are "OTC derivatives"?

Under EMIR, "OTC derivatives" are defined, broadly, as derivative contracts that are not executed on a regulated market. Here, the UK and the EU positions differ.

UK EMIR: Under UK EMIR, a "regulated market" is (i) a regulated market which is a recognised investment exchange under section 285 of the Financial Services and Markets Act 2000, or (ii) a third-country market found to be equivalent thereto pursuant to Article 2a of UK EMIR.

The UK has found the EU to be equivalent under Article 2a of UK EMIR, meaning that derivative transactions executed on an EU regulated market (i.e. EU exchange-traded derivatives ( EU ETDs)) will not constitute OTC derivatives under UK EMIR. This is important because the calculation discussed at Annual calculation above must factor in all OTC derivative contracts. If EU ETDs were to constitute OTC derivatives, they would need to be included in the calculation, thereby increasing the likelihood of calculating entities exceeding the thresholds and becoming subject to clearing under UK EMIR.

EU EMIR: Under EU EMIR, a "regulated market" is (i) a market authorised under the second Markets in Financial Instruments Directive (EU Directive 2014/65, or MiFID II), or (ii) a third-country market found to be equivalent pursuant to Article 2a of EU EMIR.

No equivalence decision has been made in respect of UK regulated markets under EU EMIR, meaning that any calculation made by an EU counterparty to determine whether or not it exceeds the clearing thresholds will need to factor in derivatives executed on UK regulated markets (i.e. UK exchange-traded derivatives).

A "derivative" is defined broadly, and includes swaps, futures, options and forwards, in each case where the underlying is a financial instrument, currency, rate or index, whether settled physically or in cash, or over commodities if settled in cash (or physically settled in certain circumstances), credit derivatives, climate and emissions derivatives which can be settled in cash, and financial contracts for difference.

Repo and stock lending contracts are not treated as derivatives for the purpose of EMIR and are covered instead by the Securities Financing Transactions Regulation, commonly known as SFTR.

Classes of derivative contract that must be cleared

The following classes of OTC derivative are clearable transactions (as defined in Annual calculation above):

(a) certain interest rate swaps, OIS and FRAs in G4 currencies (GBP, USD, EUR, JPY);

(b) certain interest rate swaps and FRAs in non-G4 currencies (NOK, PLN, SEK); and

(c) certain index credit default swaps.

The Bank of England (under UK EMIR) and ESMA (under EU EMIR) are able to designate further classes as subject to mandatory clearing in future.

Substituted compliance

Article 13 of EMIR provides for the legal, supervisory and enforcement arrangements of a third country to be declared (i) equivalent to the EMIR clearing requirements, and (ii) effectively applied and enforced. Where such an equivalence decision has been made, substituted compliance applies, meaning that counterparties to derivative transactions are deemed to have fulfilled the clearing obligation under EMIR where at least one of the counterparties is established in an equivalent third country.

The UK is a third country for EU EMIR purposes, and EEA states are third countries for UK EMIR purposes. However, no full equivalence decision has been made under either regime, so substituted compliance is not currently available.

EMIR 3 change: EMIR 3 amends Article 13 so that substituted compliance is only available in respect of the EU EMIR risk mitigation requirements, and does not extend to clearing or reporting. It also amends Article 13 so that substituted compliance applies where one of the counterparties is subject to requirements that are considered equivalent to the applicable risk mitigation requirements, rather than needing to be "established" in the equivalent jurisdiction.

CCP equivalence

Article 25 of EMIR provides for equivalence decisions to be made by the Bank of England or the Commission (as applicable) in respect of third-country CCPs where the third country has legally binding requirements for the supervision of CCPs that are equivalent to those under EMIR.

Where such an equivalence decision is made, a CCP in the relevant third country can apply for recognition under UK EMIR or EU EMIR (as applicable). Once recognised, a third-country CCP is eligible to clear trades for the purpose of EMIR compliance.

Pre-IP Completion Day equivalence decisions

Prior to IP Completion Day, the EU made equivalence decisions in respect of the CCP supervision regimes of several countries under EU EMIR, including Hong Kong, Singapore and the US. These remain in force for the purposes of EU EMIR, but the decisions were not onshored into the UK equivalence framework as part of the onshoring process and therefore are not effective for UK EMIR purposes. Instead, the Treasury intends to make its own third-country assessments and equivalence decisions in due course, and has established the temporary recognition regime discussed below in the meantime.

UK temporary third-country CCP recognition regime

In the UK, the Treasury has determined that the EEA's CCP framework is equivalent to that established under UK EMIR. No EEA CCP has yet been officially recognised under UK EMIR, but a temporary recognition regime (the TRR) has been introduced, under which eligible third-country CCPs (including EEA CCPs) are "deemed" recognised under UK EMIR until 31 December 2026 (or later, if the TRR is extended by the Treasury). This means that UK entities may continue to use such third-country CCPs to clear their OTC derivative transactions under UK EMIR until 31 December 2026 at the earliest. A list of non-UK CCPs that are deemed recognised pursuant to the TRR is available on the Bank of England website.

EU temporary recognition of UK CCPs

The EU has made a temporary equivalence decision in respect of the UK CCP framework, and ESMA has temporarily recognised the three UK CCPs (ICE Clear Europe Limited, LCH Limited, and LME Clear Limited). At present, equivalence is due to expire on 30 June 2025.

Permanent intragroup exemptions

An " intragroup transaction" is an OTC derivative contract which meets the conditions set out in Article 3 of EMIR. These are summarised in the Key Concepts box: What is an intragroup transaction?

Under Article 4(2) of EMIR, OTC derivative contracts which constitute intragroup transactions (see Key Concepts box: What is an intragroup transaction?) are exempt from the clearing obligation if either:

(a) both counterparties are established in the UK or the EU (as applicable) and have given 30 days' notice to their respective competent authorities of their intention to use the exemption and there has been no objection; or

(b) one counterparty is established in the UK or the EU (as applicable) and the other is a Third-Country entity, and the exemption has been authorised by the relevant competent authority.

Temporary intragroup exemptions – EU EMIR

One of the Article 3 "intragroup exemption" requirements is that the trading relationship is between either (i) two UK or EU entities (as applicable), or (ii) a UK or EU entity and an affiliate which is established in a third country in respect of which an equivalence determination has been made.

Therefore, where a trading relationship exists between an EU entity and an affiliate which is established in a third country in respect of which an equivalence determination has not been made, there can be no permanent exemption, as the intragroup transaction criteria are not met.

Instead, under EU EMIR, the application of the clearing obligation to transactions between such counterparties can be temporarily deferred until 30 June 2025 (subject to notification requirements).

This means that transactions entered into between such counterparties before this date will not need to be cleared. However, where a positive equivalence decision is made in the meantime, the deferral expires, as the determination of equivalence enables the obtention of a permanent exemption under Article 3 of EU EMIR. In such case, the clearing obligation will take effect 60 days after the equivalence decision's entry into force and will apply to relevant transactions from such date unless a permanent exemption is obtained.

The EU has not made the necessary equivalence determination in respect of the UK under EU EMIR, so intragroup transactions between an EU entity and a UK affiliate cannot benefit from a permanent exemption under EU EMIR and must therefore rely on the temporary deferral discussed above, while it persists.

EMIR 3 change: EMIR 3 amends Article 3 to remove the requirement for an equivalence decision to be in place for a transaction to constitute an intragroup transaction for EU EMIR purposes.

Instead, assuming that the other criteria are met, a transaction is an intragroup transaction as long as the relevant counterparty jurisdiction is not on a "blacklist" of jurisdictions which are (i) deficient in their AML or counter-terrorist regimes, (ii) non-cooperative tax jurisdictions or (iii) otherwise designated by the EU.

Temporary intragroup exemptions – UK EMIR

Under UK EMIR, transitional provisions have been introduced for temporary intragroup exemptions that were granted under EU EMIR. The effect of this is that, where a temporary intragroup exemption was in place under EU EMIR as of 21 December 2020, the exemption will continue under UK EMIR until 31 December 2026.

However, where a positive equivalence decision is made in the meantime, the temporary exemption expires, as the determination of equivalence enables the obtention of a permanent exemption under Article 3 of EU EMIR. In such case, the clearing obligation will take effect two months after the decision's entry into force and will apply to relevant transactions from such date unless a permanent exemption is obtained.

The UK granted partial equivalence (equivalence is limited and is relevant for Article 3 intragroup exemptions only) to all EEA states from IP Completion Day, so pre-existing temporary intragroup exemptions for transactions between UK and EEA counterparties expired on 1 March 2021 (being two months after entry into force of the equivalence decision). UK entities should apply instead for a permanent intragroup exemption in respect of such trading relationships, under Article 3 of UK EMIR.

ISDA and FIA initiatives in relation to clearing

The International Swaps and Derivatives Association ( ISDA) and the Futures Industry Association (the FIA) published their Client Cleared OTC Derivatives Addendum as a supplement to their master agreements in order to facilitate compliance with the clearing obligation under a principal-to-principal client clearing model. The Client Clearing Addendum is designed to enable clearing through all the major CCPs on the basis of their rules, so that separate terms do not need to be negotiated for clearing of each clearing class through individual CCPs.

ISDA has also published other clearing-related documentation, including an EMIR counterparty classification letter, which allows counterparties to indicate (i) their counterparty status for each of the clearing classes, and (ii) their category for phase-in purposes.

The classification letter only covers counterparty classifications under EU EMIR, and not UK EMIR. However, UK entities requiring confirmation of their counterparties' status under UK EMIR are able to obtain this through use of a new "UK" Appendix to the ISDA Master Regulatory Disclosure Letter.

EMIR 3 – New Active Account Requirement

Overview

At present, the vast majority of euro-denominated derivatives are cleared through LCH Limited or ICE Clear Europe Limited (the Tier 2 UK CCPs), both of which provide clearing services which are considered to be systemically important to the EU.

The purpose of the new AAR is to reduce financial instability in the EU by limiting EU entities' exposure to the Tier 2 UK CCPs. The EU hopes that the AAR will achieve this by requiring in-scope EU market participants to clear through an EU CCP a minimum number of certain types of in-scope transaction each year, across one or more defined "reference periods" of between one and twelve months.

The applicable reference period varies according to counterparty type and trading levels.

In-scope transactions are:
(a) euro-denominated interest rate derivatives;
(b) Polish zloty-denominated interest rate derivatives;
(c) euro-denominated short-term interest rate derivatives; and
(d) any additional transaction type deemed by ESMA to be of substantial systemic importance and specified as such in technical standards.

Two elements

The AAR comprises two elements:

1. The operational requirement, under which in-scope entities need to hold an "active account" with an EU CCP. The account needs to be capable of clearing all the entity's new in-scope transactions and be able to accept multiple in-scope transactions from Tier 2 UK CCPs at short notice.An in-scope entity needs to establish the account within six months of becoming subject to the AAR. For many firms, this will mean within six months of the AAR entering into force on 24 December 2024 – i.e. 24 June 2025. The deadline for ESMA to delineate the parameters for such accounts is also 24 June 2025, so ESMA plans to expedite the implementation process so that the necessary technical standards are in place before then.
2. The representativeness requirement, under which in-scope entities need to clear a minimum (or "representative") number of prescribed sub-categories of in-scope transactions through their active EU accounts, on an annual average basis.

This is still subject to consultation by ESMA. For each type of in-scope transaction described above, ESMA will specify up to five sub-categories, based on a combination of asset class, maturity and trade size. In-scope entities will need to clear a certain number of transactions in each sub-category per reference period.

When determining whether the requirement has been fulfilled, competent authorities will look at the total number of trades over a year.

The applicable reference period will be at least one month for counterparties with an outstanding notional in-scope clearing volume of over €100 billion, and at least six months for counterparties with an outstanding notional in-scope clearing volume of under €100 billion, with actual timeframes still to be determined by ESMA.

Within 18 months of the amending regulation's entry into force, ESMA will assess the effect of the new rules on UK and EU clearing levels and determine whether additional measures are necessary to further reduce non-EU clearing.

Further reporting

Entities that are subject to the AAR need to report to their competent authorities their exposure to in-scope transactions every six months, so that the competent authority can assess AAR compliance. They also need to demonstrate that their active accounts are functional and that all the necessary legal documentation is in place. In-scope entities that also clear in-scope transactions through Tier 2 UK CCPs need to show that their EU accounts can receive large volumes of in-scope transactions from those CCPs at short notice.

EU clearing members and clients that clear through Tier 2 UK CCPs, whether or not in scope of the AAR, also need to report details of their UK clearing, including the types of instruments cleared, average annual values cleared per currency and asset class, and the amount of margin collected. ESMA will develop technical standards on this in due course.

For entities that are part of EU-consolidated groups, the EU parent needs to report on behalf of its subsidiaries. This information will assist ESMA in its ongoing comparison of UK and EU clearing levels and its determination as to whether additional rules are needed to increase the volume of clearing through EU CCPs.

Exemptions

A number of exemptions apply in certain circumstances:

(a) the representativeness requirement is subject to a de minimis threshold of €6 billion, so does not apply to entities with a notional outstanding clearing volume under this amount (although the operational requirement will still apply);

(b) if the applicable minimum number of trades to be cleared exceeds half a counterparty's total trades over the preceding twelve months, the representativeness requirement can be met by clearing one trade in each of the sub-categories per reference period, rather than five;

(c) entities that clear at least 85% of their in-scope transactions through an EU CCP are exempted from the operational requirement; and

(d) the representativeness requirement does not apply to the provision of client clearing services.

The Margin Requirements

Requirements for exchange of collateral

Article 11(3) of EMIR requires all FCs and NFC+s to have risk management procedures in place that require the exchange of collateral for OTC derivative contracts not cleared by a CCP. More detailed requirements are set out in EU Delegated Regulation 2016/2251 on risk mitigation requirements for OTC derivative contracts not cleared by a CCP (the EU Margin Rules). The EU Margin Rules, as they have effect in domestic law by virtue of the EUWA, are referred to as the UK Margin Rules and, together with the EU Margin Rules, the Margin Rules.

In summary, the Margin Rules require that the risk management procedures include:

(a) a requirement to collect Initial Margin (without offsetting amounts due between the parties) and Variation Margin in respect of OTC derivative transactions that are not centrally cleared (see "Key Concepts box: Initial Margin and Variation Margin" below);

(b) certain exemptions and thresholds limiting the requirement to collect margin;

(c) a requirement to segregate Initial Margin and a restriction on its re-hypothecation;

(d) rules concerning operational procedures and documentation;

(e) concentration limits for Initial Margin and eligibility criteria for Initial Margin and Variation Margin; and

(f) details of calculation timing and methodology for, and timing for provision of, Initial Margin and Variation Margin.

The Recitals to the Margin Rules also require the posting of margin where an in-scope counterparty enters into an OTC derivative contract with a Third-Country entity that would be subject to the rules if it were established in the EU or the UK (as applicable).

Key Concepts

Initial Margin and Variation Margin

"Initial Margin" is collateral collected by a party to cover its current and potential future exposure in the interval between the last exchange of margin and (i) the liquidation of positions following the default of its counterparty, or (ii) the hedging of that exposure (the Margin Period of Risk or MPOR). In the 1995 ISDA Credit Support Annex, Initial Margin is represented by the "Independent Amount".

"Variation Margin" is collateral collected by a party on a regular basis to reflect changes to the market value of relevant outstanding contracts.

The requirements to exchange Variation Margin and Initial Margin were phased in over time based on notional amount thresholds. They are both now fully phased in.

Initial Margin thresholds

The requirement to exchange Initial Margin only applies where both entities have, or belong to groups each of which has, an average notional amount of non-cleared OTC derivatives of over €8 billion.

In assessing whether the average of the total gross notional amount of OTC derivatives exceeds the €8 billion threshold, counterparties must:

(a) include all amounts recorded in the last business day of the months March, April and May of the relevant year;

(b) include all the entities in the group;

(c) include all the non-centrally cleared OTC derivative contracts of the group; and

(d) include all the intragroup non-centrally cleared OTC derivative contracts of the group, counting each once.

The requirement to exchange Variation Margin is not subject to a threshold, and applies irrespective of notional amounts.

Margin – grandfathering

The requirements for exchange of collateral only apply to new contracts entered into after the relevant phase-in dates, although this does catch new transactions under a pre-existing master netting agreement. Counterparties will need to consider how to apply the rules to a netting set within which a portion of the individual OTC derivative contracts are entered into prior to the relevant phase-in date and the remainder are entered into thereafter.

Margin – direct application to Third-Country entities

Under Article 11(12) of EMIR, collateral exchange requirements also apply in respect of OTC derivative contracts entered into between Third-Country entities that would be subject to the requirements if they were established in the UK or the EU (as applicable) where the contract has a "direct, substantial and foreseeable effect" within the EU. The meaning of "direct, substantial and foreseeable effect" is as explained in "The Clearing Obligation" above. This means that, notwithstanding the UK's departure from the EU, UK entities transacting with non-EU counterparties could still be required to comply with collateral exchange requirements under EU EMIR.

Margin – equivalence

Article 13 of EMIR provides that the Treasury (under UK EMIR) and the Commission (under EU EMIR) may determine that the legal, supervisory and enforcement arrangements of a third country are equivalent to the margin requirements under UK EMIR or EU EMIR (as applicable), and are being effectively applied and enforced so as to ensure effective supervision and enforcement in that third country. Where such an equivalence decision has been made, in-scope counterparties will be deemed to have fulfilled their EMIR margin requirements where at least one of the counterparties is established in that equivalent third country. This means that compliance with only one set of rules is required (i.e. the applicable EMIR margin rules or the equivalent third country's margin rules). This is known as substituted compliance.

Thus far, neither the UK nor the EU has recognised the equivalence of the other. Therefore, where a UK entity transacts with an EU entity, to the extent that the Margin Rules differ, the stricter of the two regimes must be followed.

EMIR 3 change: under EMIR, the highlighted word "established" above has been removed and the requirement is instead that one of the counterparties is "subject to the requirements which are considered equivalent under [the equivalence decision]". This will be helpful for entities which are subject to the regulatory requirements of a jurisdiction in which they are not actually established (for example, the U.S.).

Margin – opt-outs and exclusions

The risk mitigation procedures of FCs and NFC+s may provide that:

(a) no Initial Margin or Variation Margin is required for trades with NFC-s or with entities which would be NFC-s if they were established in the UK or the EU (as applicable). This means that most repackaging, CLO and other securitisation vehicles will not be required to post collateral to their swap providers;

(b) no Initial Margin is required to be collected for new contracts from January of each year where one of the counterparties has, or belongs to a group which has, an average month-end aggregate notional amount of non-cleared derivatives for the months March, April and May of the preceding year below EUR8 billion;

(c) no Initial Margin need be collected where the counterparties are unconnected and the amount of Initial Margin otherwise required to be collected from all parties in the posting group (or from individual parties, if neither party is part of a group) for all non-cleared OTC derivatives would be equal to or less than EUR50 million (the IM Transfer Threshold). Where the counterparties are part of the same group, the IM Transfer Threshold reduces to EUR10 million. Collecting counterparties may alternatively collect a reduced amount in these circumstances, instead of waiving the full EUR50 million. It has also been confirmed by the European Supervisory Authorities (in relation to the EU Margin Rules) and the FCA and PRA (in relation to the UK Margin Rules) that, in such case, not only can margin collection be waived, but counterparties are also not required to implement the operational provisions and custodial arrangements necessary to make a transfer, provided that they act diligently to ensure that the necessary arrangements are put in place if the IM Transfer Threshold is exceeded;

(d) no collateral (whether Initial Margin or Variation Margin) need be collected from a counterparty where the amount due from that counterparty would be equal to or less than EUR500,000 (or its equivalent in another currency) across all relevant transactions (counterparties may set a lower threshold if preferred);

(e) no Initial Margin need be collected on physically-settled FX forwards and swaps or on the exchange of principal and interest in currency swaps;

(f) no Variation Margin need be collected on physically-settled FX forwards and swaps under EU EMIR, except where both counterparties are large investment firms or credit institutions under the EU Capital Requirements Regulation (or third-country equivalents). This opt-out is also available under UK EMIR, except where both counterparties are investment firms or credit institutions under the onshored Capital Requirements Regulation (or third-country equivalents); and

(g) no margin need be collected from covered bond issuers or securitisation special purpose entities provided that certain structural protections for the hedge counterparties are built into the transaction.

EMIR 3 change: Before EMIR 3, there was no grace period for NFC- entities that became NFC+ entities, meaning that they needed to comply with the EU Margin Rules as soon as they calculated that they had breached the "+" threshold. EMIR 3 has introduced a four-month implementation period for such entities to establish the necessary arrangements, during which the rules do not apply.

For further details of these opt-outs and exemptions, including application of the threshold amounts to funds and their managers, see our list of Client briefings or speak to one of your Ashurst contacts.

Margin – UK and EU divergence

Since IP Completion Day, a number of changes have been made to the EU Margin Rules. Although the changes had been widely consulted on, and were expected to apply before IP Completion Day, the amending legislation did not enter into force until 18 February 2021, so the changes were not onshored as part of the UK Margin Rules. In summary, the amendments:

• altered the initial margin phase-in timetable such that Phase 5 implementation occurred on 1 September 2021 and Phase 6 implementation occurred on 1 September 2022;

• introduced an "opt-out" from variation margin requirements applicable to physically-settled FX swaps and physically-settled FX forwards except where both counterparties are investment firms or credit institutions under the EU Capital Requirements Regulation (or third-country equivalents);

• extended until 4 January 2024 the temporary exemption from the requirement to exchange margin for single-stock equity options and index options; and

• extended until 30 June 2022 the temporary derogation from the requirement to clear or exchange margin for intragroup transactions where one counterparty is located in a third country in respect of which no equivalence decision has been made. This has since been extended to 30 June 2025.

The UK Margin Rules were amended on 30 June 2021 to mirror the above amendments to the EU Margin Rules, with the exception of the extension described in the final bullet point. The extension is not required under UK EMIR, as the applicable onshoring legislation implements temporary transitional provisions for pre-existing exemptions, permitting them to continue after 1 January 2021 (subject to applicable application/notification requirements). It also makes provision for the granting of new exemptions, which would run until 31 December 2026, unless extended. (EMIR 3 change: This exemption was made permanent by EMIR 3, subject to regular review to ensure that the EU's treatment of these products is aligned with that of other major jurisdictions).

In addition to these amendments, temporary transitional relief under the UK Margin Rules was extended so that EEA UCITS qualified as eligible collateral until 31 March 2023, rather than 31 March 2022.  In contrast, UK UCITS ceased to be eligible collateral under the EU Margin Rules on 1 January 2021.

For more information, see our list of Client briefings or speak to one of your Ashurst contacts.

Margin – intragroup transactions

The requirements for exchange of collateral do not apply to intragroup transactions (see below "Key Concepts box: What is an intragroup transaction?") provided that, where relevant, the competent authority(ies) has either (i) made a positive decision that (a) there is no practical or legal impediment to the transfer of capital or payment of liabilities between the counterparties, and (b) the risk management procedures of the counterparties are adequate and consistent with the complexity of the transaction, or (ii) has been notified that those two conditions are met and does not disagree within a prescribed period. The detailed requirements for notification and approval by competent authorities will depend upon the counterparties' EMIR categorisation and location. Please speak to one of your Ashurst contacts for further information.

Key Concepts

What is an intragroup transaction?

Under Article 3 of EMIR, an OTC derivative contract will constitute an intragroup transaction if it meets one of the sets of criteria set out below (the Intragroup Conditions):

1. the contract is entered into between a UK or EU (as applicable) NFC and a counterparty which is part of the same group and is established in the UK or EU (as applicable) or, if established in a third country, an equivalence decision has been made under Article 13(2) of EMIR (a Third-Country equivalence decision) in respect of that third country (an Equivalent Third Country);
2. the contract is entered into between either (i) a UK or EU FC (as applicable) or (ii) an Equivalent Third-Country FC, and another counterparty which is part of the same group and is an FC, a financial holding company, a financial institution or an ancillary services undertaking subject to appropriate prudential requirements;
3. the contract is entered into between a UK or EU FC (as applicable) and an NFC which is part of the same group and is established in the UK or EU (as applicable) or an Equivalent Third Country,

provided that, in each case:

(a) both counterparties are part of the same consolidation on a full basis; and

(b) they are subject to appropriate centralised risk evaluation, measurement and control procedures.

Intragroup transactions under EU EMIR will include contracts between:

4. EU FCs and certain group holding or services companies if both entities are part of the same institutional protection scheme under the Capital Requirements Directive; and
5. contracts entered between two credit institutions affiliated to the same central body as referred to in the Capital Requirements Directive (or where such central body is the other counterparty to the credit institution).

Transitional provisions: intragroup transactions

The Margin Rules contain transitional provisions which are designed to allow a "grace" period during which Third-Country equivalence decisions may be made under Article 13(2) of EMIR.

In effect, this means that where a Third-Country equivalence decision has not been made in respect of the relevant Third Country, but the transaction would otherwise be an intragroup transaction, the Initial Margin requirements will be delayed.

Changes to the original deferral periods under UK EMIR and EU EMIR are discussed at Margin – UK and EU divergence above.

EMIR 3 change: EMIR 3 amends Article 3 to remove the requirement for an equivalence decision to be in place for a transaction to constitute an intragroup transaction for EU EMIR purposes.

Instead, assuming that the other criteria are met, a transaction is an intragroup transaction as long as the relevant counterparty jurisdiction is not on a "blacklist" of jurisdictions which are (i) deficient in their AML or counter-terrorist regimes, (ii) non-cooperative tax jurisdictions or (iii) otherwise designated by the EU.

Trade Reporting

The reporting obligation requires derivative market participants to report details of all of their derivative contracts to a trade repository registered or recognised by the FCA (under UK EMIR) or ESMA (under EU EMIR). There is no minimum threshold in terms of volume or value of transactions below which the reporting obligation will not apply, and it applies wherever the counterparty is located.

The FCA and ESMA are required to publish on their websites an up-to-date list of registered trade repositories for EMIR trade reporting purposes. Alternatively, market participants may report such details to a trade repository established in a third country where the trade repository has been recognised by the FCA or ESMA (as applicable).

Trade Reporting – equivalence

Article 13 of EMIR provides for the adoption of implementing acts declaring that the legal, supervisory and enforcement arrangements of a third country governing trade reporting are equivalent to the EMIR reporting obligation and are being effectively applied and enforced so as to ensure effective supervision and enforcement in that third country.

Article 75 of EMIR provides for equivalence decisions to be made in respect of a third country where that third country has equivalent legally binding requirements for supervision of trade repositories.

The UK is now a third country under EU EMIR, and EU countries are third countries under UK EMIR. Neither the UK nor the EU has adopted implementing acts or made equivalence decisions in respect of the other's trade reporting regime, so in-scope entities need to ensure that trade details are reported to a trade repository that is registered or recognised by the FCA or ESMA, as applicable.

UK branches of EEA firms are not in scope of the UK EMIR reporting regime, but EEA branches of UK firms are in scope.

EMIR 3 change: EMIR 3 amends Article 13 so that substituted compliance is only available in respect of the EU EMIR risk mitigation requirements, and does not extend to clearing or reporting.

Trades subject to the reporting obligation

The reporting obligation is triggered when a counterparty:

(a) executes a derivative contract;

(b) restructures or modifies the terms of an existing derivative contract; or

(c) terminates an existing derivative contract before its scheduled maturity date.

Details of the derivative contract must be reported no later than the working day after the conclusion, modification or termination of the contract.

What details need to be reported?

If the reporting obligation is triggered, over 80 data items must be reported to a trade repository, split into two broad categories:

(a) Counterparty Data, which includes detailed information about the counterparties and other entities involved in the trade, such as brokers, clearing members, CCPs and trade repositories.

(b) Common Data, which includes detailed information about the contract itself, such as the underlying, notional amount, maturity, price, rates and currency, amongst other items. Counterparties should ensure that the Common Data is agreed between both parties.

For further details, see " Sources of Regulation".

EMIR Refit

The EU reporting requirements changed on 29 April 2024, under what is commonly referred to as "EMIR Refit" (not to be confused with the original "EMIR Refit", discussed here, which occurred in June 2019 and made various broad changes to EU EMIR).

The relevant regulations are EU Regulations 2022/1855 and 2022/1860. There is a transition period so that legacy transactions don’t need to be reported until 26 October 2024.

Key changes include:

(a) a requirement for reports to be made in a new template (ISO-20022-XML);
(b) significantly more reporting fields;
(c) a new requirement to notify competent authorities of reporting issues, errors, and omissions.

The FCA has implemented broadly comparable changes to the UK EMIR reporting framework. Most of the changes have applied since 30 September 2024, with a transition period for some aspects.

How to comply with the reporting obligation

In order to be able to comply with the reporting obligation, a market participant must obtain a unique Legal Entity Identifier ( LEI) from the Global LEI System which has local operational units ( LOUs) in various countries. The LOU in the UK is the London Stock Exchange. If multiple entities within a group enter into derivative contracts, then a separate LEI will be required for each entity.

Mandatory delegated reporting

Since 18 June 2020, EU FCs have been responsible and legally liable for accurately reporting both sides of their trades with EU NFC-s, unless the NFC- has specifically requested otherwise (a system referred to as mandatory delegated reporting). Where an FC is reporting details of a trade with a NFC-, the NFC- is required to provide details that the FC cannot reasonably be expected to know, and remains responsible for their accuracy. Where an NFC- chooses to report for itself (and informs its FC counterparty), it may still delegate the reporting to a separate third party.

Mandatory delegated reporting also applies under UK EMIR, with UK FCs bearing the responsibility and legal liability of reporting on behalf of UK NFC- counterparties which have not opted out.

There is no mandatory delegated reporting across regimes, so a UK FC would not be legally liable for reporting on behalf of an EU NFC-, and vice versa.

Intragroup exemption for NFC entities trading with a Third-Country entity

The trade reporting provisions of both UK EMIR and EU EMIR contain an exemption for intragroup transactions where one or both counterparties is an NFC or a third-country equivalent NFC, subject to notification requirements and the following conditions:

(a) both counterparties are included in the same consolidation on a full basis;

(b) both counterparties are subject to appropriate centralised risk evaluation, measurement and control procedures; and

(c) the parent undertaking is not a financial counterparty.

ESMA's level 3 Q&A guidance has confirmed that the exemption does not apply where the parent undertaking is outside the EEA, even if the contracting parties are established in the EEA.

EMIR 3 change: For EU groups containing one or more NFC+s or third-country equivalent NFC+s that benefit from the exemption, the EU parent needs to report their net aggregate positions on a weekly basis, per entity and broken down by transaction type.

ISDA initiatives in relation to trade reporting

ISDA and the FIA have jointly published an EMIR Trade Reporting Delegation Agreement enabling derivative participants to delegate their reporting obligations under EU EMIR to their bank counterparty.

The agreement does not contemplate UK EMIR, but counterparties wishing to delegate their reporting obligations under UK EMIR (as well as EU EMIR, UK SFTR and EU SFTR) are able to do so using the standard form Master Regulatory Reporting Agreement published by ISDA, the FIA and other trade associations.

Other Risk Mitigation Requirements

Besides the margin exchange requirements, Article 11 of EMIR sets out a number of risk mitigation requirements which apply to OTC derivative contracts which are not cleared by a CCP.

Portfolio reconciliation and dispute resolution

Before entering into non-cleared OTC derivative contracts, all OTC derivative market participants are required to agree in writing with their counterparty certain arrangements for reconciling portfolios. In addition, all market participants are required to agree detailed procedures and processes in relation to:

(a) the identification, recording and monitoring of disputes in relation to:

(i) the recognition or valuation of their non-cleared OTC derivative contracts;

(ii) the exchange of collateral between the counterparties; and

(iii) the timely resolution of those disputes.

The portfolio reconciliation and dispute resolution requirements apply to all market participants in the EU or the UK (as applicable) irrespective of where the facing entity is established, and regardless of its status.

The frequency of portfolio reconciliations between counterparties depends on the number of OTC derivative contracts outstanding between the two parties and the status of the counterparties. Frequencies range from each business day to once a year.

FCs are required to report to their competent authority any disputes relating to an OTC derivative contract, its valuation or the exchange of collateral for an amount or a value higher than EUR15 million and outstanding for at least 15 business days.

ISDA portfolio reconciliation and dispute resolution protocols

The ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol allows counterparties which are subject to EU EMIR to amend the terms of their ISDA Master Agreements to implement the portfolio reconciliation and dispute resolution requirements imposed by EU EMIR. In adhering to the Protocol, counterparties also waive confidentiality obligations to the extent of the required disclosure under EU EMIR.

The ISDA 2020 UK EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol allows counterparties which are subject to UK EMIR to do the same in respect of the obligations imposed by UK EMIR.

Portfolio compression

All OTC derivative market participants with 500 or more non-cleared OTC derivative contracts outstanding with a counterparty are required to have in place procedures to review regularly, and at least twice a year, the need for a portfolio compression exercise in order to reduce their counterparty credit risk and to conduct portfolio compression if appropriate.

Market participants are required to ensure that they are able to provide a reasonable and valid explanation to their competent authority where they conclude that a portfolio compression exercise is not appropriate.

Daily mark-to-market requirements

All FCs and NFC+s are required to mark to market the value of their outstanding derivative contracts on a daily basis. Where market conditions prevent marking to market, reliable and prudent marking to model must be used.

FCs and NFC+s must also report the mark-to-market valuations of any collateral supporting their derivative contracts on a daily basis.

Timely confirmation

All OTC derivative market participants are required to have procedures in place to ensure the timely confirmation of the terms of their non-cleared OTC derivative contracts. The deadlines imposed by EMIR in relation to timely confirmation depend on the type of OTC derivative being entered into and the status of the counterparties to the trade for EMIR purposes.

ISDA initiatives in relation to timely confirmation

The ISDA 2013 Timely Confirmation Amendment Agreement (the Timely Confirmation Agreement) allows market participants to amend the terms of their ISDA Master Agreement to provide for compliance with the timely confirmation requirements of EMIR.

The Timely Confirmation Agreement does not contemplate UK EMIR, so parties which are in scope of the UK EMIR requirements as regards timely confirmation may need to enter into additional documentation, or amend existing documentation to include the necessary provisions.

Direct application of other risk mitigation requirements for non-centrally cleared trades to Third-Country entities

Under Article 11(12) of EMIR, the risk mitigation requirements described in this section also apply to OTC derivative contracts entered into between Third-Country entities that would be subject to the requirements if they were established in the UK or the EU (as applicable) where the contracts have a "direct, substantial and foreseeable effect" in that jurisdiction or the requirements are necessary or appropriate to prevent the evasion of any provision of EMIR. As to the meaning of "direct, substantial and foreseeable effect", see The Clearing Obligation above.

Risk mitigation – equivalence

Article 13 of EMIR provides for the adoption of implementing acts declaring that the legal, supervisory and enforcement arrangements of a third country are equivalent to the risk mitigation requirements laid down in EMIR and are being effectively applied and enforced so as to ensure effective supervision and enforcement in that country. This would permit substituted compliance to apply.

No such equivalence determination has been made by either the UK in respect of the EU or vice versa. Consequently, counterparties to OTC derivative transactions may be required to comply with both sets of risk mitigation rules.

The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.