The final countdown: Practical considerations for STIR activity ahead of EMIR 3.0 AAR

How will firms’ STIR activity affect their compliance with EMIR’s 3.0 active account requirement (AAR)?

Andreas Stillert: While we are still awaiting the final RTS from ESMA, the draft RTS has provided the clearing industry with a wealth of helpful information to ensure their readiness.  

To comply, a firm must determine whether it is subject to the AAR and the clearing obligation, and whether it meets the clearing thresholds for euro- and zloty-denominated OTC interest rate derivatives, as well as euro-denominated STIR products. 

Much of the industry and media attention focused on how OTC interest rate derivatives affect AAR compliance. However, a firm’s STIR business will also affect how the rules ultimately impact their compliance burden. This might appear counterintuitive since STIRs already trade on-exchange, leading to the reasonable assumption that they are exempt from clearing thresholds. However, ever since Brexit, STIR contracts executed in the UK have been classified as OTC, according to EU rules. Consequently, such derivatives count toward EMIR 3.0’s €3bn clearing threshold for OTC interest rate derivatives and are therefore relevant for triggering the AAR as well. 

Organizing STIR activity to meet the AAR is a task that varies in complexity for each firm, depending on their current clearing setups. Firms will have to satisfy three general requirements — operational criteria, representativeness criteria and reporting requirements.  

Firms that already trade Eurex Bund, Bobl and Schatz contracts face a reduced lift on the operational front, as they are already connected to Eurex’s ETD infrastructure. However, firms currently clearing STIR products at a UK CCP will need to establish arrangements to clear their business at an EU CCP if necessary. Stress testing of that operational capability is also part of the AAR framework. 

So, how should firms calculate STIR activity within the framework?

To comply with the representativeness criteria, market participants must determine how much of their STIRs activity needs to be cleared at an EU CCP. They must categorize their euro-denominated STIR activity (Euribor and €STR) into subcategories defined by ESMA’s RTS. Subcategories are determined by maturity and trade size ranges within each in-scope contract class. In the case of STIRs, there are four proposed subcategories for Euribor and €STR contracts. 

Firms will then need to clear at least five trades in the most relevant subcategories during a specific reference period that varies according to contract type and clearing volume (<€100bn or >€100bn). Based on the table below, for smaller firms that clear more than €6bn and less than €100bn in the contracts relevant for the AAR, the reference period will be six months for Euribor contracts and twelve months for €STR contracts. Larger firms that clear more than €100bn in total will work with reference periods of one month for Euribor contracts and six months for €STR contracts. 

^{Based on the ESMA draft RTS from November 2024}

What is the logic behind these divisions of activity?

The shorter reference periods for Euribor contracts are because of that market’s greater maturity and liquidity. The reference periods are then used to calculate each firm’s annual average activity requirement. 

While the frequency at which firms are obliged to clear varies by class of STIR contract, the four maturity ranges ESMA has allocated for Euribor and €STR mean that at least five trades will have to be cleared in each subcategory. So, a firm active in each maturity range will have to clear at least 20 trades through an EU CCP during the reference period for the contract class.  

Given the variation in reference periods, firms should therefore prepare to direct more Euribor clearing activity to the EU compared to €STR, given the shorter reference periods given to those STIR contracts.  

However, do note that these formulas could still change as ESMA moves from the draft to the final RTS. 

What operational criteria do firms need to consider when meeting the AAR?

Firms that must have an active account at an EU CCP, need to establish arrangements for portfolio migration to an EU CCP, if necessary. Firms already trading Eurex Bund, Bobl, and Schatz contracts already have the necessary connections to Eurex's ETD infrastructure. However, these firms should also comply with a list of operational provisions defined by ESMA, including regular stress tests to ensure operational readiness to migrate their UK STIR portfolio if needed.

How can Eurex specifically help firms navigate these operational hurdles and ensure EMIR 3.0 compliance?

Eurex recognizes its responsibility in the market structure envisaged in the AAR.    

As a key facilitator in the transition to EMIR 3.0 readiness, we are committed to supporting our clearing members and the broader market. We've actively engaged with clearing members to provide insights and support, including comprehensive resources and training sessions on the practical implications of EMIR 3.0 and how best to leverage Eurex’s services to ensure compliance.  

This support also covers guidance on margin optimization strategies and available funding efficiencies gained by clearing more products along the euro yield curve at Eurex. We encourage firms to explore these efficiencies with us and their clearing members. Eurex offers highly integrated services across the euro yield curve, coupled with strong growth in the liquidity of our swaps and STIR products.  

By partnering with Eurex, firms gain a reliable and experienced partner to navigate the AAR complexities, streamline operations, and optimize their STIR clearing strategies.