Deep Dive: ESMA Consultation on EMIR 3 Clearing Thresholds

EMIR 3 and the Strategic Rationale for Recalibrating Clearing Thresholds

EMIR 3 reorients the CT regime to focus on systemic risk drivers associated with non-cleared OTC derivatives. The legislation was driven by EU policymakers’ desire to enhance the resilience of EU clearing markets and reduce dependence on third-country CCPs while also reducing unnecessary burdens for market participants with low-risk or hedging-focused positions.

Uncleared vs. Aggregate Thresholds: Divergent Paths for FCs and NFCs

One of the most consequential changes under EMIR 3 is the bifurcation of threshold calculation methodologies between FCs and NFCs. Before EMIR 3, all counterparties assessed their exposures based on aggregate OTC derivatives, both cleared and uncleared, at the group level using a calculation methodology that distinguished between exchange traded derivatives (ETD) versus OTC (where only OTC derivatives counted towards the CT).

EMIR 3 replaces this methodology with a dual-track model. Specifically:

• FCs must now calculate both their (i) Aggregate OTC positions (cleared + uncleared) and their (ii) Uncleared OTC exposures separately while both calculations remain at a group level; while
• NFCs are required to calculate only their uncleared exposures, and do so at the entity level, not the group level.
• Hedge Exemption for NFC’s remains a group level calculation despite the revised NFC clearing threshold position calculation adjusting to an entity level calculation.

ESMA notes that an FCs requirement to report aggregate OTC positions is to ensure firms with material, systemic exposures routed through recognised but non-EU do not fall outside the scope of the CO.

As a reminder, Article 4(a)5 of EMIR defines an ‘uncleared position’ as:

The aggregate month-end average position for the previous 12 months in OTC derivative contracts that are not cleared by a CCP authorised under Article 14 or recognised under Article 25.

ESMA further reminds readers of the definition of OTC Derivatives and Uncleared Derivatives as follows:

OTC derivatives [are] bilateral derivatives trades and derivative trades executed on markets other than EU regulated markets or third country equivalent regulated markets and uncleared derivatives [are] derivative trades not cleared at a recognised or authorised CCP.

Derivatives executed on third-country markets not benefitting from an equivalence decision and cleared in authorised/recognised CCPs would be deemed as OTC under EMIR.

ESMA provides an example scenario for an FC with respect to the calculation of its uncleared versus aggregate threshold calculations noting an FC with a large portfolio cleared via a third-country CCP may fall below the uncleared threshold but exceed the aggregate threshold, triggering mandatory clearing despite limited uncleared exposure.

Compliance Impact. CT breaches trigger immediate notification obligations to ESMA and to competent authorities, followed by a four-month window to establish compliant clearing arrangements.

While most energy and commodity firms have already updated their systems to reflect EMIR 3’s new reporting requirements, firms are reminded to maintain their systems ability to differentiate between cleared and uncleared trades and track them at the appropriate aggregation level (entity or group). For those firms that are closer to the CT thresholds, incorporating more near real-time analytics may be appropriate to monitor trade volume and counterparty classification to ensure dynamic reporting to mitigate future risks of breaching CTs and requiring automatic clearing obligations.

CT Calibration and ESMA’s Data-Driven Methodology

In response to its dual mandate under EMIR 3, ESMA has undertaken a quantitative recalibration of the CTs based on a comprehensive analysis of TR data.

The move away from the legacy framework, where thresholds were applied to total OTC exposures, necessitated new, risk-focused thresholds targeting uncleared derivatives. To preserve continuity in regulatory coverage, ESMA conducted simulations to align the proposed thresholds with the existing population of counterparties subject to the CO.

ESMA’s effort reflects a shift toward evidence-based rulemaking, using granular trade data, EMIR Refit field enhancements, and legal entity hierarchies to build a more accurate risk profile of market participants.

ESMA’s CT Analysis Approach. ESMA employed a 12-month dataset (May 2023 to April 2024) from EMIR TRs, using trade state reports (TSRs) to assess average notional exposures. The data was analysed at both group and entity levels, depending on the counterparty classification, and was enriched using Global Legal Entity Identifier Foundation (GLEIF) Level 2 relationship data.

Key Findings from ESMA’s CT simulation in terms of updated EMIR thresholds are as follows:

[a] For FCs:

• Less than 5% of FC groups are above current CTs, yet they account for ~95% of total notional traded - validating the effectiveness of current thresholds.
• As a result, ESMA proposes retaining aggregate thresholds of EUR 3bn for interest rate derivatives (IRDs) and EUR 1bn for credit derivatives.

[b] For Uncleared Positions (FCs and NFCs):

• ESMA proposes lower thresholds to reflect the narrower scope of uncleared trades:

1. IRDs: EUR 1.8bn
2. Credit derivatives: EUR 0.7bn
3. Equity derivatives: EUR 0.7bn
4. FX: EUR 3bn
5. Commodity & Emission Allowances: EUR 3bn

Commodity Derivatives: Granularity vs. Complexity

Recital 21 of EMIR 3 encourages ESMA to consider separating clearing thresholds by commodity type and sustainability-linked features. This includes potential categories for agricultural, metal, and energy derivatives, as well as ESG-related or crypto-featured contracts.

While this signals growing regulatory interest in aligning clearing policy with market realities and sustainability objectives, ESMA stops short of introducing more granular thresholds at this stage citing operational burdens, limited historical data under the pre-EMIR Refit regime, and the need to avoid unnecessary complexity during a period of significant structural change.

Specifically, regarding operational burdens as a result of more granular CT sub-categories, ESMA acknowledged that:

Market participants trading in commodity derivatives have some reservations against having more granular CTs for sub-categories as this would lead to reduced flexibility in their management of exposure and risk. In addition, such an approach would entail additional burden for market participants who would have to conduct separate assessments for their different exposures.

ESMA provided specific observations related to broader commodity categories where data was reviewed but deemed not sufficient to include as a new commodities CT subcategory at this time while reminding readers that certain new categories may be created based on new fields in EMIR reporting which would allow ESMA to review trade data in the future as follows:

• Sustainably produced commodities derivatives. While ESMA acknowledged limitations of historical data available to allow for the potential design of a new CT in this category, it reminds market participants that EMIR reporting under amended EMIR Refit now includes a field to identify renewable energy-related trades and signposts that for the purpose of future analysis, renewable energy may be looked at and assessed as a separate new category.
• ESG-resilient commodity derivatives. ESMA noted that the focus of its review on commodity derivatives was on those commodities most exposed to energy transition risks/shift to renewal energy e.g. oil, natural gas, coal. It investigated the uncleared positions of these derivatives to better understand the level of concentration and the distribution of counterparties and notional. Beyond the focus on fossil fuels, ESMA noted limitations in historical data availability for this sub-category to allow it to design any new CT.
• Commodity derivatives based on crypto features. While ESMA acknowledged limitations of historical data available to allow for the potential design of a new CT in this category, it reminds market participants that EMIR reporting under amended EMIR Refit now includes a field to identify crypto-asset related trades and signposts that for the purpose of future analysis, crypto-assets may be looked at and assessed as a separate new category.

ESMA’s stance. Rather than creating any new asset sub-category in commodities which would add additional burdens on market participants, ESMA proposes aligning the fifth asset class bucket with the updated EMIR Refit taxonomy to “Commodity and Emission Allowance Derivatives” provided for under Field 11 of Table 2 of the Annex to Commission Implementing Regulation 2022/1860 while postponing any move toward further disaggregation. ESMA considers that the fifth bucket, originally labelled “Commodity and Other derivatives” should no longer make reference to the residual category of “other” derivatives.

ESMA does not propose a sixth bucket for crypto or ESG derivatives yet, citing inadequate data granularity in pre-Refit regimes.

Compliance Impact. Firms with significant activity in commodity markets should anticipate future regulatory segmentation and begin tagging ESG and crypto-linked features where possible. While current obligations remain consolidated, the architecture of EMIR 3 and the enhanced EMIR Refit taxonomy point toward a future where differentiated risk treatment driven by sustainability, market volatility, and financial innovation may become the norm.

Hedging Exemptions: Clarifications and Illustrations

While EMIR 3 maintains the longstanding hedging exemption for NFCs, ESMA uses this consultation to reinforce how the exemption should be interpreted and applied under the new entity-level calculation framework.

The exemption allows NFCs to exclude trades that are demonstrably risk-reducing in relation to commercial or treasury activities, whether for themselves or intra-group entities, from the clearing threshold calculation.

ESMA offers a series of illustrative cases to clarify its application in complex group structures, especially where hedging is performed on behalf of affiliated NFCs.

Virtual PPAs. ESMA dedicates a portion of its consultation paper focused on industry concerns raised over the qualification of virtual PPAs as a hedge. It provides an overview and visual illustration of a virtual PPA transaction and the related financial and physical flows while outlining when a virtual PPA derivative contract would be included in the CTs of an NFC versus when it would be deemed a hedge and excluded from the CT.

Two Virtual PPA examples outlined in the Q&A in Section 3.2 (p. 32) are as follows:

[1] Financial derivative associated with the PPA is not deemed a hedge and would need to be included in the CTs of the NFC.

Virtual PPAs… are financially settled long-term contracts concluded between two counterparties, usually with the objective of providing long-term stable income to one of them (a renewable energy producer, an NFC [Counterparty B]) while the other counterparty [Counterparty A] might get the guarantees of origin of the renewable energy (certificates). These contracts take the form of a financial contract (generally analysed as a fix-for-floating swap or a contract for difference, as per MiFID II categories).

As such, they are derivative contracts covered by EMIR. Therefore, if not considered a “hedge”, the position resulting from a financial PPA would count towards the CTs of an NFC.

[2] Financial derivative associated with the PPA is deemed a hedge and would not need to be included in the CT calculation.

In December 2023, ESMA provided the following answer (click here) to the question: “Can virtual power purchase agreements be considered as ‘risk reducing transactions’ under EMIR?” noting that if the main commercial activity is to produce renewable energy and the virtual PPA provides stable long-term income from the output of the renewable energy, that the financial derivative contract could be deemed a hedge and excluded. ESMA notes:

In general, a transaction through which Counterparty A takes on market risk to allow Counterparty B to hedge risk related to Counterparty B's commercial activity cannot be considered as “risk reducing” under EMIR for counterparty A.

Assuming Counterparty A (‘the buyer’) buys the environmental attributes and benefits associated with the renewable energy generated by Counterparty B (‘the seller’) through a virtual PPA, Counterparty B may claim that the virtual PPA is objectively measurable as reducing risks directly relating to its commercial activity, assuming its main commercial activity is to produce renewable energy and the virtual PPA provides a stable long-term financial income to compensate from the variable output of renewable energy production.

In accordance with Article 10 of Commission Delegated Regulation (EU) No 149/2013, a derivatives contract concluded by Counterparty A to offset risks resulting from the virtual PPA concluded with Counterparty B could be considered as “risk reducing” under EMIR and therefore the resulting position in those derivatives does not have to be included in the calculation of Counterparty A’s position towards the clearing thresholds.

ESMA Seeks Feedback on Virtual PPAs used by Energy Producers. ESMA notes, based on discussions with its Consultative Working Group (CWG), that virtual PPAs can significantly increase a counterparty’s OTC exposure for CT calculations, particularly for energy producers entering into these agreements as Counterparty A in Scenario 1 above e.g. energy producers who are interested in entering into virtual PPAs as an investment in green energy production, in other markets, etc. and who would be acting as Counterparty A.

While existing EU Commission Q&A guidance clarifies how virtual PPAs fit within the current regulatory framework, ESMA is seeking stakeholder feedback on whether the current definition of hedging should be expanded to explicitly include virtual PPAs and related derivative contracts, especially from the perspective of NFCs.

ESMA invites suggestions on how Article 10 of Commission Delegated Regulation (EU) No 149/2013 could be revised accordingly, if needed, while remaining consistent with Level 1 EMIR provisions. Additionally, ESMA welcomes broader input on whether other types of transactions should be considered within the scope of hedging.

Further Illustrative Hedge Exemption Cases. ESMA provides additional detailed use cases on p.12 to clarify how the CT exemption for NFC’s applies as follows:

• Case A: A single NFC hedges its own exposures - only non-hedging trades count toward the threshold.
• Case B: An NFC hedges on behalf of a group affiliate - only the hedging entity includes non-hedging trades in its calculation; the affiliate has no reportable exposures to include in its CT calculation.
• Case D: Mixed-use portfolios require segregation of hedging vs. non-hedging positions by trade-level intent. All non-hedging activity traded by the lead entity (portfolio management) would be included while the CT position in the other legal entity would be EUR 0.

Compliance Impact. The hedging exemption remains a valuable CO relief mechanism for energy and commodity firms, but it is only defensible if firms can demonstrate consistent, objective trade classification. Compliance teams must ensure that:

• EMIR reporting fields (notably Field 1_20) are accurately populated;
• Intercompany hedging arrangements are clearly documented; and
• Systematic underestimation of positions is avoided through sound methodology and audit-ready controls.

These clarifications also imply that any misapplication of the exemption, either through misclassification or lack of evidence, could result in non-compliance with the CO, exposing firms to clearing obligations which in turn requires capital commitments and governance oversight.

Review Triggers and Ongoing Calibration

EMIR 3 introduces a forward-looking mechanism that empowers ESMA to revise clearing thresholds not only on a scheduled biennial basis (i.e. once every two years), but also in response to significant market developments, noting the most recent experience during the 2022 EU energy crisis which was characterised with price spikes and led to the modification of the CT for commodity derivatives.

ESMA is of the view that any mechanism defined…should be of a more qualitative nature and leave a certain degree of judgement for ESMA to determine whether there should be a revision of the CTs, based on a careful assessment of the situation. Such trigger mechanism would therefore not be based on strict quantitative thresholds in terms of price fluctuations in the derivatives underlying or increase of financial stability risks, to avoid a mechanistic approach, and implement instead a risk-based trigger approach.

In addition to mandatory biennial reviews of CTs, ESMA proposes qualitative trigger events to initiate earlier reassessments under Article 11b. These may include:

• Sudden increases in uncleared volumes for specific asset classes;
• Emergence of novel derivatives markets (e.g., ESG or crypto-linked products);
• Regulatory or infrastructural changes in clearing access or CCP recognition; or
• Structural shifts in how counterparties manage risk (e.g. reduced use of clearing).
• The evolution of the inflation rate, global financial conditions, or geopolitical and economic policy uncertainties.

This mechanism gives ESMA greater agility in responding to market evolution and in preserving the prudential integrity of the CO. It also increases the compliance burden for firms, who must now anticipate not just existing thresholds, but the possibility of mid-cycle changes based on evolving supervisory assessments.

Compliance Impact. Firms should implement internal controls capable of identifying threshold-relevant trends (e.g. uptick in uncleared trades or growth in non-traditional derivatives). In addition, firms may benefit from periodic internal scenario testing to simulate the impact of prospective threshold adjustments under different market conditions or different CT sub-category asset classes.