a) Ensuring permanent functionality, incl. IT connectivity, internal processes, legal documentation

To ensure compliance with a), ESMA suggests that affected market participants need to sufficiently document and demonstrate that they have the contractual arrangements supporting the provision of the respective clearing services, that they have the internal policies and procedures to access the respective clearing services, that they have cash and collateral accounts established and provisioned, and that they have set up the IT connectivity. 

b) Ensuring systems and resources are in place to clear large volumes or take on large flows from Tier 2 CCPs even at short notice 

c) Ensuring that all new trades can be cleared at all times on the EU account

To ensure compliance with b) and c), ESMA suggests that affected market participants need to have internal systems to monitor exposure and internal arrangements to support large flows from Tier 2 CCPs under different scenarios, including the assessment of any legal or operational barriers to this effect. In addition, affected market participants shall appoint at least one staff member to support the functioning of the clearing arrangements at all times and obtain a written certification from the CCP that the firm's account has the operational capacity to withstand a threefold increase in clearing activity.  

There is an exemption from the operational criteria for affected market participants that clear 85% of their relevant business in the EU (including from related reporting requirements on compliance). Nevertheless, this exemption does not apply to the representativeness criterion and the subsequent requirements outlined below.

d) Affected market participants need to clear, on an annual average, at least 5 trades in each of the 5 most relevant subcategories in each of the contract classes determined by ESMA during a specific reference period as defined by ESMA. For proportionality, small firms with a notional amount outstanding cleared of >6 and <100 bn EUR shall get a longer reference period compared to large firms with a clearing volume of >100bn EUR. 

To comply with d), ESMA provides a proposal for the definition of classes of derivatives in scope of the requirement, the maturity ranges and trade size ranges to determine the subcategories for each of those derivatives classes, the number of the most relevant subcategories in which affected market participants need to clear at least 5 trades each, and how often affected market participants need to be active in this respect depending on their clearing volume.  

By determining those key parameters, ESMA suggests a grid through which affected market participants can determine their individual activity requirement per annum based on their individual portfolio and clearing volume:

There is an exemption from the representativeness criterion for affected market participants with a clearing volume of up to 6 bn EUR notional amount outstanding cleared (including from the related reporting requirements on compliance). Nevertheless, this exemption does not apply to the operational criteria and subsequent requirements, which means that all market participants subject to the active account regime still need to maintain an operational account with an EU CCP even if they are carved out from the representativeness requirement.

Further, there is a relief for affected market participants to clear 1 trade instead of 5 trades per subcategory, in case the required activity would amount to >50% of their total trades in the previous 12 months.

This regime is underpinned by monitoring and enforcement mechanisms such as the requirement for affected market participants to report every 6 months to their competent authority their level of activity and risk exposure as well as their compliance with the above criteria. In addition, compliance with the criteria shall be stress-tested regularly and new penalty payments are added to the existing supervisory toolbox to sanction non-compliance, if needed. Therefore, both the reporting requirements and the stress testing provisions are also specified by the above-mentioned ESMA RTS. For reporting the activity under the representativeness criterion, in particular, ESMA also announced that they would to provide further guidance to facilitate market participants' compliance. Generally, EMIR 3.0 foresees that the reported information will be shared with ESMA and the new Joint Monitoring Mechanism on EU level to monitor the effectiveness of the regime together with the national competent authorities.  

Capacity considerations:

Legal resource
The client and the clearing broker will both need to assign legal resources to negotiate and review the clearing agreement.

Capacity considerations:

Account setup

Accounts will be required with the clearing broker and on behalf of the client at Eurex Clearing. If the client demands CCP reporting, additional lead time will be needed.

The middleware static data setup and technology layer implementation will also be needed.

Capacity considerations:

Setting up and testing the trade execution and clearing workflow (which may require the brokers’ and the clearing brokers' support) will be required. In addition, considerations need to include a full front-to-back review of the cleared workflow.

Trading workflow setup

• Client
• Bloomberg/Tradeweb
• Dealer/Clearing Broker (CB)

Client cleared workflow setup

• Books and records
• Reconciliation
• CCP reporting (optional)

Capacity considerations:

Considerations should include optimizing collateral and margin requirements to maintain an active account with an EU CCP.

Client workflow setup - multi-CCP/multi-clearing broker

• Build to multiples of the previous steps
• CCP/IM optimization
• CCP switching
• Backloading
• Collateral optimization
• Netting/Compression