Activity

With the EMIR 3.0 Active Account Requirement (AAR) set to come into force on June 24, 2025, market participants dealing in Short-Term Interest Rate (STIR) derivatives in Euro need to be well-prepared. The AAR is a key component of EMIR 3.0, aiming to enhance the resilience of the EU’s clearing infrastructure by encouraging greater clearing activity at EU-based Central Counterparties (CCPs).
Here’s a breakdown of practical considerations for STIR activity ahead of the EMIR 3.0 AAR:
I. Understanding the Scope and Requirements for STIR Derivatives:
* In-Scope Products: The AAR specifically applies to Short-Term Interest Rate (STIR) derivatives denominated in Euro, alongside interest rate derivatives (IRD) in Euro and Polish Zloty. While EUR STIRs are technically exchange-traded derivatives, they can be classified as OTC derivatives under EU EMIR if not executed on an EU regulated market or a non-EU “equivalent” regulated market.
* Clearing Thresholds: Firms need to determine if they are subject to the AAR and the clearing obligation, and if they meet the clearing thresholds for euro-denominated STIR products. These derivatives count towards EMIR 3.0’s €3 billion clearing threshold for OTC interest rate derivatives, which can trigger the AAR.
* Three Key Requirements: To comply with the AAR, firms must satisfy three general requirements:
* Operational Criteria: Firms must have the operational capability to clear new transactions at an EU CCP and the infrastructure to move outstanding transactions to an EU CCP. This involves validating front, middle, and back-office systems.
* Representativeness Criteria: Market participants must clear a “representative number” of their STIR activity at an EU CCP. ESMA has defined subcategories for Euro-denominated STIRs (Euribor and €STR) based on maturity ranges, and firms generally need to clear at least five trades in each of these subcategories within a reference period (e.g., one month for large counterparties, six months for small counterparties).
* Reporting Requirements: In-scope counterparties are mandated to report their compliance with the AAR, including activities, risk exposures, operational conditions, and their adherence to the representativeness obligation. This reporting will be done to their relevant National Competent Authority (NCA) every six months.
II. Key Actions for Market Participants:
* Assess Your Current Clearing Setup:
* EU CCP Connectivity: Firms already connected to an EU CCP’s exchange-traded derivatives (ETD) infrastructure (e.g., Eurex for Euribor and €STR futures) will have a reduced operational lift.
* Non-EU CCP Reliance: Firms currently clearing STIR products at a UK CCP or other non-EU CCPs will need to establish arrangements to clear their business at an EU CCP if necessary to meet the AAR.
* Test Operational Capabilities:
* “Pipe Testing”: It’s crucial to test the ability to clear new transactions and to move outstanding transactions at an EU CCP. This involves validating front, middle, and back-office systems.
* Stress Testing: Stress testing of operational capability is also part of the AAR framework.
* Analyze STIR Portfolio for Representativeness:
* Categorization: Categorize your euro-denominated STIR activity (Euribor and €STR) into the subcategories defined by ESMA’s Regulatory Technical Standards (RTS).
* Volume Assessment: Determine how much of your STIR activity needs to be cleared at an EU CCP to meet the representativeness criteria (e.g., at least five trades in each subcategory).
* Establish Active Accounts with EU CCPs:
* Early Onboarding: Firms are encouraged to set up active accounts with EU CCPs now to be ahead of the curve.
* Existing Processes: Ideally, firms should be able to leverage existing internal processes, legal documentation for account setup, and IT connectivity to access these accounts.
* Address Reporting Obligations:
* Data Collection: Implement systems to collect the necessary data on STIR activities and risk exposures for the bi-annual reporting to NCAs.
* Internal Policies: Ensure internal policies and procedures are in place to support compliance with the AAR.
* Consider Group-Level Implications:
* For groups headquartered in the EU, the AAR’s scope considers derivative contracts of systemic importance cleared by any entity within the group, including those in third countries, to prevent circumvention. Groups with different approaches to trading and clearing (e.g., using intragroup exemptions) need to carefully assess their compliance.
III. Potential Challenges and Considerations:
* Operational Burden: The need to monitor trades across multiple CCPs, perform stress-testing, and meet reporting obligations can create operational and financial burdens, especially for smaller firms.
* Clarification on Minimum Transaction Thresholds: There have been calls for clarity on how the AAR applies when fewer than five transactions occur per reference period in a subcategory, to ensure firms aren’t forced to execute additional trades solely to meet minimum thresholds.
* Initial Margin Model Validation: EMIR 3.0 also introduces a framework for the supervision of Initial Margin (IM) models with a greater focus on larger counterparties. While the onus is largely on CCPs and clearing firms, increased margin transparency can benefit firms in predicting margin impacts.
While the clearing industry generally appears to be in a good position for the June 24 deadline, proactive engagement and thorough preparation are essential for all market participants in the STIR space to ensure a seamless transition and full compliance with EMIR 3.0’s Active Account Requirement.

Video courtesy of Eurex

Video courtesy of Eurex