EU racing to comply with active account rules

Industry wants simpler route to exemptions ahead of ‘challenging’ deadline for new clearing regime

Esma (pictured) may potentially make “very targeted adjustments”

Photo: Esma

The schedule for complying with the European Union’s new regime governing the location of derivatives clearing poses challenges for the industry and regulators alike. The rules require eligible EU firms to maintain an operational active account for derivatives clearing onshore, from June 24 this year.

“People are still very much in the design phase of what they want to do,” said Gaspard Bonin, deputy global head of derivatives clearing and execution at BNP Paribas. “There is not one single approach that fits everyone at the moment and people are still asking questions.”

Klaus Löber, the European Securities and Markets Authority’s chair of the central counterparty supervisory committee, said Esma is confident about hitting the June deadline to finish drafting the regulatory technical standard (RTS) that will lay down the details around the active account requirement. But the RTS will still need to be endorsed by the European Commission, and there will be a further delay while it is considered by the European Parliament and Council. The rule will only enter into force if they voice no objections.

“It needs to go through the non-objection procedure with the co-legislators – that will still take a bit of time,” said Löber. Bonin and Löber were both speaking at the Eurex Derivatives Forum in Frankfurt on February 26. Bonin described the timelines faced by both market participants and the regulator as “challenging”.

Too complicated?

The active accounts rule is part of the latest iteration of the European Market Infrastructure Regulation (Emir 3.0). It requires EU firms to clear a representative portion of their trades in euro- and zloty-denominated interest rate swaps and short-term interest rate products within the EU, and to report trade data that allows Esma to ensure the correct numbers of trades are being cleared onshore.

Esma set out the details for this regime last year, sparking concerns that the rules were excessively complicated, especially for end-clients. Scott O’Malia, chief executive of the International Swaps and Derivatives Association, suggested on the same panel that Esma should have focused on exactly what information Löber and his team needed in order to assess the systemic risk of offshore derivatives clearing.

We are mindful and very receptive to looking at how we can reduce burdens, streamline processes, make them more efficient

Klaus Löber, Esma

“We want to make sure that we don’t create additional or unnecessary reporting,” said O’Malia. “What does Klaus see today and what does he need to see? What’s missing?”

Löber said Esma may potentially make “very targeted adjustments” based on industry feedback to the current RTS proposal. The consultation closed on January 27.

“We are mindful and very receptive to looking at how we can reduce burdens, streamline processes, make them more efficient,” he said, adding that Esma had chosen “not to spell out the full maximum” granularity of the rule that was “theoretically possible” under the legislation. Esma has the discretion to choose how many different sub-categories there are for each category of interest rate instrument, and how frequently each sub-category has to be reported.

But Löber emphasised that “burden reduction is not deregulation,” adding that Esma must adhere to the requirements provided by the EC under the Level 1 legislative text of Emir 3.0. O’Malia accepted that some of the problems may lie in the initial legislation, and suggested it contradicted the 2024 report by former European Central Bank chair Mario Draghi, which set out ways to enhance EU competitiveness – for instance, by reducing regulatory complexity.

“When you go back to the Level 1 text, maybe that wasn’t drafted consistently with where the European regulatory conversation is, if you think about the Draghi report,” he said. Draghi argued the EU should “minimise and optimise regulations”, O’Malia added. “This doesn’t feel like that.”

Elusive exemption

The RTS includes a number of elements designed to reduce the burden for smaller firms. Those with gross notional over-the-counter derivatives positions below €3 billion are exempt altogether, and those with less than €100 billion per year need to report less frequently than those over the threshold. In addition, firms are exempt if they already clear at least 85% of their eligible trades onshore.

Appearing on the same Eurex panel, Jasper Valstar, senior portfolio manager at Achmea Investment Management, said the proposed RTS had brought greater clarity for asset managers.

“It’s been uncertain what was requested from us for quite a number of years, so I think it’s good now that at least we know 95% of what we need to do,” he said. “It’s also good that the requirements for smaller clients are very easy to meet.”

Related

Complex EU active account reporting could drive trades out of UK 

Draft Emir rules might not force large volumes to move to EU, but will make compliance difficult

However, Bonin noted that a 12-month lookback requirement – from June 24, 2025 – makes it “challenging” to qualify for the 85% exemption. He said this might discourage clients from migrating trades to the EU after June, because they will still fail to meet the threshold initially and will therefore need to set up an operational active account and report trades to Esma according to the representativeness requirements.

“Once they are there, they might just use [the active account] and choose not to benefit from the 85% [exemption],” said Bonin.

O’Malia agreed the 85% exemption was an important area where the compliance burden could be reduced.

“We’d like to make sure that it’s as easy as possible to comply, maybe even using an assumption that people are complying and have hit that threshold and have a look-back afterwards, as opposed to something completely complex and difficult to produce, to validate that at the beginning,” said O’Malia.

Valstar added that it is also important to tackle the reporting requirements: “There needs to be a way that it doesn’t make a whole new operational burden on us or banks to comply.”

Löber promised Esma would go as far as possible to leverage data that is already reported under Emir, bringing together the data pools from national authorities to reduce the reporting complexity.

Editing by Philip Alexander