Operational requirements
Operational requirements for an active account (stress tested at least once a year):
- permanently functional – it should have the necessary IT connectivity, internal processes and legal documentation in place;
- sufficiently resilient to allow clearing of large volumes of OTC derivatives at all times.The account should be able to withstand a sudden increase in clearing activity and be suitable for clearing all new trades in contracts of the classes referred to in Article 7a(6) of the Regulation;
- operational continuity – the account should clear at all times all new trades of the counterparty in derivative contracts referred to in EMIR 3.0 for an active account.
Activity requirements
Activity requirements (counterparties which already clear at least 85% of their trades in contracts of the classes referred to in Article 7a(6) of the Regulation at an EU CCP will be exempt from the AAR altogether). If the number of trades exceeds half of the number of all transactions of that counterparty in the preceding 12 months, the representativity requirement referred to in Article 7a(3)(d) of the Regulation is deemed to be met if that counterparty clears at least one trade in each of the most relevant subcategories per class of derivative contracts during the reference period.
Trades cleared through the active account should be representative of the overall portfolio of trades cleared by the counterparty in a reference period based on different classes of derivative contracts, maturities, and trade sizes.
ESMA will specify a maximum of three classes of derivative contracts and will set a maximum of five subcategories per class based on the most relevant trade size and maturity ranges - limits of four maturities and a limit of three trade size ranges overall. To fulfil the representativeness obligation, counterparties will need to clear at least five trades per reference period (calculated on an annual average basis) in each subcategory of derivative contracts per class of derivative contracts. The reference period will be not shorter than six months for counterparties with less than EUR 100 billion outstanding volume (notional amount of uncleared derivatives contracts) and not shorter than one month for counterparties with more than EUR 100 billion outstanding volume (In accordance with Article 7a(4), the representativeness obligation referred to in Article 7a(3)(d) does not apply to the provision of client clearing services. In calculating the outstanding notional clearing volume of a counterparty referred to in the fourth indent of Article 7a(8), its client clearing activity is not taken into account).
Trades cleared through the active account should be representative of the overall portfolio of trades cleared by the counterparty in a reference period based on different classes of derivative contracts, maturities, and trade sizes.
ESMA will specify a maximum of three classes of derivative contracts and will set a maximum of five subcategories per class based on the most relevant trade size and maturity ranges - limits of four maturities and a limit of three trade size ranges overall. To fulfil the representativeness obligation, counterparties will need to clear at least five trades per reference period (calculated on an annual average basis) in each subcategory of derivative contracts per class of derivative contracts. The reference period will be not shorter than six months for counterparties with less than EUR 100 billion outstanding volume (notional amount of uncleared derivatives contracts) and not shorter than one month for counterparties with more than EUR 100 billion outstanding volume (In accordance with Article 7a(4), the representativeness obligation referred to in Article 7a(3)(d) does not apply to the provision of client clearing services. In calculating the outstanding notional clearing volume of a counterparty referred to in the fourth indent of Article 7a(8), its client clearing activity is not taken into account).
Reporting and disclosure requirements
Reporting and disclosure requirements (additional reporting obligations):
- activities and risk exposures in the categories of derivatives which are subject to AAR will be reported to the national competent authority (NCA) every six months, the reports will also need to demonstrate that all other aspects of the AAR, including legal documentation, technological connectivity, internal processes and resources, and systems that ensure resilience are fit for purpose;
- counterparties that clear at a recognised third-country CCP will need to report on an annual basis the type of contracts and the average value of financial or non-financial instruments cleared during the year, broken down by EU currency and by asset class, the amount of margins collected, the default fund contributions, and the largest payment obligation (Article 7d of the Regulation);
- counterparties that provide client clearing services will need to disclose (at least quarterly) fees and other costs associated with the provision of clearing services. Counterparties that provide clearing services at a recognised and authorised third-country CCP will need to inform their clients about the option to clear a derivative contract in the EU (the RTS will specify the type of information to be disclosed).
Supervision and enforcement
Supervision and enforcement (if the AAR is breached, NCAs can impose a periodic penalty, for a period not exceeding 6 months, after which they review the status and extend it if necessary) ESMA will establish and chair a Joint Monitoring Mechanism (JMM) which will monitor among others:
- the AAR implementation and its effect on the overall exposure to Tier 2 CCPs;
- fees charged by CCPs for setting up the active account and for clearing;
- other developments in clearing which can affect EU CCPs, such as cross-border client clearing relationships, concentration risks due to integration of EU financial markets, and cross-border risks.