ESMA’s latest supervisory briefing gives clarity to AAR under EMIR 3.0

The European Securities and Markets Authority (ESMA) has published a supervisory briefing on the representativeness obligation in the active account requirement (AAR). The briefing aims to clarify how counterparties should comply with and report on the obligation.

ESMA reiterates in the report that the AAR, implemented as a part of the review of the European Market Infrastructure Regulation (EMIR 3) “seeks to address the financial stability risks caused by EU clearing members and clients being exposed to systemically important third-country central counterparties (Tier 2 CCPs)”. Certain counterparties that have “exposures to clearing services of substantial systemic importance” are required to hold an active account at EU CCPs.

The briefing covers two areas of concern – how counterparties should identify the most relevant subcategories to comply with the AAR representativeness obligation, and how to report trades. The report is rounded up with a worked example for illustration.

Staying relevant

In identifying the most relevant subcategories, ESMA states that “counterparties should identify on a continuous basis, for each reference period, the relevant number of most relevant subcategories”. It acknowledges an exception for euro-denominated over-the-counter (OTC) interest rate derivative (IRD) contracts. For this category, “the identification of the most relevant subcategories may change from one reference period to the other, depending on the activity of the counterparty in the relevant derivatives at the clearing service of substantially systemic importance”.

Report back

Under trade reporting, ESMA concedes, “given the potential changes in the identification of the most relevant subcategories, it would be challenging to require counterparties to rapidly clear five trades “on average” in a given subcategory which was not considered as most relevant during the previous reference period(s)”. Counterparties should thus identify, on reporting dates, “the five most relevant subcategories, “on average”, over the past rolling 12 months period, and demonstrate that they have cleared the relevant number of trades per subcategory on average over this 12 months period”.