EUROPEAN COMMISSION Brussels, 4.5.2017 SWD(2017) 148 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories {COM(2017) 208 final}

{SWD(2017) 149 final}



Table of contents Glossary and list of abbreviations used 1.INTRODUCTION 2.BACKGROUND AND POLICY CONTEXT 2.1.The over-the-counter (OTC) derivatives market 2.2.The G20 reforms of the OTC derivatives market 2.3.EMIR – the EU rules on OTC derivatives 2.3.1.Reporting obligations and requirements for TRs 2.3.2.Central clearing of standardised OTC derivatives and CCP requirements 2.3.3.Risk-mitigation techniques for uncleared OTC derivative contracts 2.3.4.Cross-border arrangements 2.4.EMIR and the implementation of the G20 OTC derivatives reforms 2.5.Consistency with other EU policies 3.PROBLEM DEFINITION 3.1.Methodology 3.1.1.Selection of relevant issues for the definition of the problems 3.1.2.Limitations when defining the magnitude of the problems 3.1.3.The relevance of the network structure when defining the magnitude of the problems

3.2.Disproportionate prudential and transparency requirements 3.2.1.Mandatory clearing and risk-mitigation techniques 3.2.2.Scope of EMIR reporting requirements 3.3.Insufficient transparency of OTC derivatives positions and exposures 3.3.1.Trade repositories – insufficient quality of data and difficulties of data use 3.3.2.Trade repositories – insufficient fines 3.4.Insufficient access to clearing 3.5.Potential risks from inaction 4.OBJECTIVES 4.1.Subsidiarity 4.2.Objectives 4.3.Consistency of the objectives with other EU policies 4.4.Consistency of the objectives with fundamental rights 5.POLICY OPTIONS AND ANALYSIS OF IMPACT 5.1.Methodology 5.2.Baseline scenario 5.3.On compliance costs that in a number of cases outweigh prudential benefits 5.3.1.On mandatory clearing and bilateral margin requirements that do not sufficiently take into account the features of certain participants 5.3.2.On excessively burdensome reporting requirements applying to certain transactions 5.3.3.Overview of preferred options relating to compliance costs

5.4.On insufficient transparency of OTC derivatives positions and exposures 5.4.1.Trade repositories – insufficient quality of data and difficulties of data use 5.4.2.Trade repositories – insufficient fines70 5.5.On insufficient access to clearing71 6.OVERALL IMPACT OF THE PACKAGE76 6.1.Global estimates of cost reductions and impact on financial stability76 6.1.1.Avoiding liquidity costs for PSAs76 6.1.2.Reducing compliance costs for NFCs76 6.1.3.Reducing compliance costs for small financials77 6.1.4.Financial stability78 6.1.5.Global estimates of total cost reductions78 6.2.Small and medium-sized enterprises81 6.3.Administrative burden81 6.4.EU budget82 6.5.Social impacts82 6.6.Impact on third countries82 6.7.Environmental impacts83 7.MONITORING AND EVALUATION83 ANNEX 1: Overview of changes addressing the recommendations of Regulatory Scrutiny Board (RSB)85 ANNEX 2A: Overview of derivatives markets86

ANNEX 2B: Additional tables and figures referred to in the text92 ANNEX 3: Procedural information concerning the process to prepare the impact assessment report and the related initiative97 ANNEX 4: Procedural issues and consultation of interested parties99 ANNEX 5: Evaluation114 ANNEX 6: Other changes to the existing framework that are outside of the assessment scope143 ANNEX 7: Who is affected by the initiative and how?148 ANNEX 8: Approach to estimate cost reductions150 Glossary and list of abbreviations used Glossary Central Counterparty (CCP) A legal person that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer. Clearing The process of establishing positions, including the calculation of net obligations, and ensuring that financial instruments, cash, or both, are available to secure the exposures arising from those positions. Clearing member/direct participant An undertaking which participates in a CCP and which is responsible for discharging the financial obligations arising from that participation. Collateral An asset or third-party commitment that is used by the collateral provider to secure an obligation to the collateral taker. Collateral arrangements may take different legal forms; collateral may be obtained using the method of title transfer or pledge. Counterparty credit risk The risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter. Credit risk includes pre-settlement risk (replacement cost risk) and settlement risk (principal risk). Credit risk The risk of a change in value due to actual credit losses deviating from expected credit losses due to the failure to meet contractual debt obligations. Credit risk comprises default and settlement risk. Credit risk can arise on issuers of securities (in the company’s investment portfolio), debtors (e.g. mortgagors), or counterparties (e.g. on derivative contracts, or deposits) and intermediaries, to whom the company has an exposure. Margin (initial/variation) An asset (or third-party commitment) that is accepted by a counterparty to ensure performance on potential obligations to it or cover market movements on unsettled transactions. ‘Initial margin’ means margins collected by the CCP to cover potential future exposure to clearing members providing the margin and, where relevant, interoperable CCPs in the interval between the last margin collection and the liquidation of positions following a default of a clearing member or of an interoperable CCP default. ‘Variation margin’ means margins collected or paid out to reflect current exposures resulting from actual changes in market price. Non-Financial Counterparty (NFC) An undertaking established in the European Union that is not a CCP or a financial counterparty, as defined in Article 2(9) of EMIR. The requirements of EMIR vary depending on the profile of a non-financial counterparty. In determining whether an NFC should be subject to the clearing obligation, EMIR gives consideration to the purpose for which that NFC uses OTC derivative contracts as well as to the size of the exposures that it has in those instruments. NFCs are subject to the clearing obligation and risk mitigation techniques requirements where their positions in non-hedging OTC derivatives exceed certain thresholds defined by ESMA. The thresholds are EUR 1 bn in gross notional value for credit and equity derivatives and EUR 3 bn for interest rate, foreign exchange, and commodity or other derivatives. Once an NFC surpasses one of these thresholds in any asset class, it becomes subject to these requirements across all asset classes. These NFCs are commonly referred to as 'NFC+' as opposed to NFCs below the threshold which are known as 'NFC-'. OTC The phrase "over-the-counter" (or OTC) can be used to refer to stocks that trade via a dealer network as opposed to on a regulated market. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network. OTC derivative A derivative contract the execution of which does not take place on a regulated market as within the meaning of Article 4(1)(14) of Directive 2004/39/EC or on a third-country market considered as equivalent to a regulated market in accordance with Article 19(6) of Directive 2004/39/EC. Small Financial Counterparty Financial counterparty as defined in Category 3 of the existing Commission Delegated Regulations on the clearing obligation. These are financial counterparties (and certain funds which are classified as non-financial counterparties) belonging to a group whose aggregate positions in OTC derivatives are EUR 8bn or below. List of abbreviations used CDS Credit Default Swaps CCP Central Counterparty CMU Capital Markets Union EMIR 'European Markets Infrastructure Regulation', short for: Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories ESA European Supervisory Authority ESCB European System of Central Banks ESMA European Securities and Markets Authority ESRB European Systemic Risk Board ETD Exchange-Traded Derivatives IRS Interest Rate Swaps ISDA International Swaps and Derivatives Association NFC Non-Financial Counterparty NFC+ A non-financial counterparty whose positions in non-hedging OTC derivatives exceed certain thresholds defined by ESMA and that therefore is subject to the clearing obligation and risk mitigation techniques requirements provided for in EMIR (cf. also Non-Financial Counterparty in the Glossary of this document). NFC- A non-financial counterparty whose positions in non-hedging OTC derivatives do not exceed certain thresholds defined by ESMA and that therefore is not subject to the clearing obligation and risk mitigation techniques requirements provided for in EMIR (cf. also Non-Financial Counterparty in the Glossary of this document). OTC Over The Counter SFC Small Financial Counterparty SFTR 'Securities Financing Transactions Regulation', short for: Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012. SIMM ISDA’s proprietary Standard Initial Margin Model for non-cleared derivatives TR Trade Repository VM Variation Margin 1.INTRODUCTION In the wake of the financial crisis, the EU adopted in 2012 the European Market Infrastructure Regulation (EMIR) to address the shortcomings observed in the functioning of the over-the-counter (OTC) derivatives market. One of the key shortcomings was that regulators lacked information about activity in the OTC derivatives market; this meant that risks could remain unnoticed until they materialised. Moreover, counterparty credit risk between OTC derivative counterparties was often unmitigated, which could lead to losses materialising were one counterparty to default prior to fulfilling its obligations. Due to the high volumes of OTC transactions across the derivatives market and the interconnectedness of market participants, such losses could pose a broader threat to the financial system. These shortcomings led the G20 leaders in 2009 to commit to far-reaching measures to increase the stability of the OTC derivatives market, including that all standardised OTC derivatives contracts should be cleared through central counterparties (CCPs), and that OTC derivatives contracts should be reported to trade repositories (TRs).

EMIR implements the 2009 G20 commitment in the EU. The main objective of EMIR is to reduce systemic risk by increasing the transparency of the OTC derivatives market, by mitigating the counterparty credit risk and by reducing the operational risk associated with OTC derivatives. To that end, EMIR establishes core requirements on OTC derivatives, CCPs and TRs. They include: 1.Central clearing of standardised OTC derivative contracts; 2.Margin requirements for OTC derivative contracts that are not centrally cleared; 3.Operational risk mitigation requirements for OTC derivative contracts that are not centrally cleared; 4.Reporting obligations for derivative contracts; 5.Requirements for CCPs; and 6.Requirements for TRs. EMIR entered into force on 16 August 2012. However, most of the requirements did not immediately become applicable, as EMIR empowered the Commission to adopt secondary legislation specifying the technical practicalities and the phase-in schedule of the core requirements. As a result, the requirements have entered into application in different stages. Some of them, such as mandatory clearing and margin requirements for uncleared derivatives, have either only recently come into operation or will soon start to apply. In accordance with Article 85(1) of EMIR, the Commission was mandated, by August 2015, to review EMIR and to prepare a general report for submission to the European Parliament and the Council. From May to August 2015, the Commission carried out an extensive assessment of the rules currently in place to prepare the report and a possible legislative proposal. The assessment included a public consultation with more than 170 contributions from a broad range of stakeholders, as well as reports required under Article 85(1) of EMIR from the European Securities and Markets Authority (ESMA), the European Systemic Risk Board (ESRB), and the European System of Central Banks (ESCB). In addition, it was decided to wait to take into account the input to the Call for Evidence on the EU Regulatory framework for financial services carried out between September 2015 and January 2016, in order to get further evidence on the state of play of EMIR implementation. The assessment also considered replies to this initiative, to the extent they concerned provisions in EMIR. In November 2016, the Commission adopted the EMIR report . On the one hand, the report indicated that no fundamental change should be made to the nature of the core requirements of EMIR, which are integral to ensuring transparency and mitigating systemic risk in the derivatives market and for which there is general support from authorities and market participants. In addition, a comprehensive review of the impact of EMIR is not yet possible since certain core requirements provided for under EMIR have yet to be implemented or completed. On the other hand, the report pointed to the possibility of amending EMIR in some specific areas so as to eliminate disproportionate costs and burdens on certain derivatives counterparties and to simplify rules without compromising the objectives of the legislation. The need to eliminate disproportionate costs and burdens to small companies, and to simplify rules without putting financial stability at risk is why the EMIR review was included in the 2016 Commission's Regulatory Fitness and Performance programme (REFIT). As part of REFIT, the Commission assessed the extent to which specific policy requirements in EMIR have met their objectives in an efficient and effective way, while at the same time being coherent, relevant and providing EU added-value. That evaluation fed into the problem definition of the impact assessment and is presented in Annex 5. The evaluation indicates that, even though the impact on the reduction of systemic risk is not yet fully measurable, EMIR may impose in some targeted areas disproportionate costs and burdens and that certain requirements may be simplified to achieve the objective of financial stability more efficiently. These areas include: (1) Disproportionate compliance costs for derivatives counterparties that are part of the periphery of the derivatives trading network (e.g. small financials, NFCs, pension funds); (2) Insufficient transparency; and (3) Access to clearing. This impact assessment report therefore considers the costs and benefits of areas of EMIR where targeted action could ensure fulfilment of the EMIR objectives in a more proportionate, efficient and effective manner. This impact assessment provides comprehensive evidence that a reduction of costs and burdens can be achieved hand-in-hand with a simplification of EMIR, without compromising financial stability. Such evidence includes input received from market participants and various authorities. The feedback that is not addressed in this report will be examined further and considered separately for future action. 2.BACKGROUND AND POLICY CONTEXT 2.1.The over-the-counter (OTC) derivatives market The European market infrastructure regulation (EMIR) establishes rules on OTC derivatives, central counterparties and trade repositories. The section below provides a definition of each concept. A derivative is a financial contract linked to the fluctuation in the price of an underlying asset or a basket of assets. Examples of assets on which a derivative contract can be written include equities, commodities or emission allowances. The value of a derivative can also be derived from the value of a market variable (e.g. an interest rate, an exchange rate or a stock index).

The purpose of derivatives is to redistribute risk amongst the counterparties to the contract. Derivatives can be used for insuring against risk (hedging) as well as for speculative purposes. An OTC derivative is one which is privately negotiated and not traded on a regulated exchange such as regulated markets. Activities in the area of OTC derivatives are in the trillions. As of end-June 2016, the outstanding notional of OTC derivatives amounted to USD 544.1 trillion, corresponding to 89% of the overall derivatives market. OTC derivatives therefore have a significant impact on the real economy, from mortgages to food prices. Central counterparties (CCPs) interpose themselves between counterparties to a derivative contract, becoming the buyer to every seller and the seller to every buyer. In doing so, CCPs become the focal point for derivative transactions, linking multiple financial actors, thus increasing market transparency and reducing the risks inherent in derivatives market. Such risks include counterparty risk, liquidity risk and market risk. Every day CCPs clear thousands of financial transactions in a range of financial instruments including equities, bonds, commodities, derivatives, repos. Before the financial crisis, derivatives traded outside regulated markets were usually not cleared through CCPs. Trade repositories (TRs) are central data centres that collect and maintain the records of derivative transactions. They play a key role in enhancing the transparency of derivative markets and reducing risks to financial stability. An overview of the main participants and of the structure of the OTC derivatives market is provided in Annex 2A. 2.2.The G20 reforms of the OTC derivatives market Derivatives play an important role in the economy, but they also bring certain risks. These risks were highlighted during the 2008 financial crisis, when significant weaknesses in the OTC derivatives markets became evident. In the run-up to the financial crisis, the use of OTC derivatives had experienced a sharp growth. According to BIS data, notional amounts of all types of OTC contracts stood at USD 683.7 trillion at the end of June 2008, 15% higher than at the end of December 2007. The near collapse of Bear Sterns in March 2008, the default of Lehman Brothers on 15 September 2008 and the bail-out of AIG the following day highlighted the shortcomings in the functioning of the OTC derivatives market. The financial crisis brought the OTC derivatives market to the forefront of regulatory attention. Given the global nature of the OTC derivatives market, the G20 took a leading role in seeking to tackle the shortcomings of that market and in coordinating a policy response. In September 2009 in Pittsburgh, the G20 leaders agreed that "All standardised OTC derivatives contracts should be […] cleared through central counterparties by end-2012 at latest. OTC derivatives contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements". At European level, EMIR, together with other pieces of EU legislation, implemented the G20's non-binding commitment to increase the stability of the OTC derivatives market. Similar initiatives were undertaken across G20 jurisdictions, such as in certain Asian countries (Hong Kong, Japan, Singapore and South Korea), and in the US via the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in July 2010. Today, many derivatives regulators across the globe have transposed this commitment into their legislative frameworks. 2.3.Several international work streams help coordinate the G20 derivatives market reforms under the frameworkEMIR – the EU rules on OTC derivatives In response to the financial crisis, the EU adopted EMIR in 2012. Its aims were to (i) increase transparency in the OTC derivatives markets (ii) mitigate counterparty credit risk, and (iii) reduce operational risk. EMIR establishes core requirements for the OTC derivatives market. In addition to these, EMIR empowered the Commission to adopt delegated acts in accordance with Article 290 of the Treaty on the Functioning of the European Union to spell out the details of some requirements. EMIR also required the European Securities and Markets Authority (ESMA) to draft regulatory technical standards for these delegated acts and carry out appropriate impact assessments. Therefore, while EMIR entered into force in August 2012, not all of the requirements it sets out already apply. The provisions of EMIR, together with the deadlines included within the different technical standards, imply a phased-in application of the legal framework. The section below provides an overview of EMIR's main requirements, including their scope and date of entry into application. 2.3.1.Reporting obligations and requirements for TRs In order to increase transparency, EMIR introduces reporting requirements to make the derivatives market more transparent. The requirements include the following: -detailed information on each derivative contract has to be reported to trade repositories (TRs) and made available to supervisory authorities;

-TRs have to publish aggregate positions by class of derivatives, for both OTC and listed derivatives; and -ESMA is responsible for the surveillance of TRs and for granting and withdrawing accreditation. Today, there are six authorised TRs in the EU. These TRs provide daily data to over 60 institutions in the EU, which have access to the data pertaining to their respective jurisdiction. EMIR grants ESMA and the European Systemic Risk Board (ESRB) with exclusive access to the full EU-wide data. The scope of the reporting requirement is broad. It applies to all derivatives classes (including credit, commodity, equity, interest rates, foreign exchange and "other") and encompasses trades cleared by CCPs. Both OTC and exchange-traded contracts are covered. Furthermore, the reporting obligation applies to all counterparties. The reporting obligation aims to provide a full picture of the EU derivatives market in order to provide complete and comprehensive information on OTC derivatives positions. The reporting requirement became applicable in February 2014. 2.3.2.Central clearing of standardised OTC derivatives and CCP requirements EMIR introduced rules to reduce the counterparty credit risk of derivatives contracts. In particular: -all standardised OTC derivatives contracts must be centrally cleared through CCPs; -CCPs must comply with stringent prudential, organisational and conduct of business requirements in order to adequately cover their exposures to diverse risks. EMIR also ensures that CCPs are subject to robust supervisory oversight. -if a contract is not cleared by a CCP, risk mitigation techniques must be applied. There are currently 17 CCPs that have been authorised to offer services and activities in the Union. The scope of the clearing obligation is far-reaching and includes all financial counterparties and the biggest non-financial counterparties (NFCs). This is because EMIR intends to cover all relevant market participants in order to cover all risks linked to derivatives transactions. EMIR does however only aim at 'systemic' NFCs: it acknowledges that NFCs use OTC derivative contracts in order to cover themselves against, i.e. hedge, commercial risks directly linked to their commercial or treasury financing activities. NFCs are subject to the clearing obligation where their positions in non-hedging OTC derivatives exceed certain thresholds defined in regulatory technical standards. Once an NFC surpasses one of these thresholds in any asset class, it becomes subject to the clearing obligation across all asset classes. These NFCs are commonly referred to as 'NFC+' as opposed to NFCs below the threshold which are known as 'NFC-'. The EU has adopted three central clearing determinations, on the basis of draft regulatory technical standards drafted by ESMA, following analysis carried out according to criteria set out in EMIR. The determinations cover two different asset classes: OTC interest rate derivatives – which represent by far the largest segment of OTC outstanding derivatives (80% of global outstanding derivatives), and OTC credit derivatives (representing 2.2% of global outstanding derivatives). Annex 5 provides further details. Today, the central clearing determination covering OTC interest rate swaps (IRS) related to the Euro, the USD, the Yen, and the British Pound has started to apply to clearing members (as of 21 June 2016) and financial counterparties above the EUR 8 billion threshold (as of 21 December 2016). For other IRS in European currencies (Norwegian Krone, Polish Zloty, and Swedish Krona) and Credit Default Swaps (CDS), the application has started phasing-in as of February 2017 for clearing members. The detailed compliance deadlines for the central clearing determination applying to various asset classes and to different types of counterparties are summarised in Annex 2A. 2.3.3.Risk-mitigation techniques for uncleared OTC derivative contracts Risk-mitigation techniques (RMT) refer to mechanisms that aim to reduce counterparty credit risk for uncleared OTC derivative transactions, i.e. transactions that are not cleared through a CCP, but traded bilaterally. RMT can include operational obligations on the procedures applying to bilateral transactions (e.g. timely confirmation of a trade, portfolio compression, portfolio reconciliation, and daily valuation). RMT can also refer to requirements that counterparties exchange collateral (margins) when entering into a bilateral transaction in order to protect counterparties from the risk of a potential default of the other counterparty. Rules on risk-mitigation techniques for OTC derivative contracts not cleared by a CCP started to phase-in in 2013. All uncleared derivatives are subject to requirements on timely confirmation, portfolio reconciliation, portfolio compression, dispute resolution and daily valuation requirements (above a certain portfolio size threshold). The requirements are in line with international standards developed by the International Organization of Securities Commissions (IOSCO), prepared in consultation with the Basel Committee on Banking Supervision (BCBS) and the Committee on Payments and Market Infrastructures (CPMI) and finalised in January 2015 . In addition to operational risk-mitigation techniques, the Commission adopted new regulatory technical standards on margin requirements in October 2016 to further mitigate risk in bilateral clearing and strengthen the incentive to move to central clearing, based on criteria set out in EMIR. These requirements follow international standards developed by the BCBS and IOSCO. The scope of the margin requirements reflects the one of the clearing obligation and applies to all financial counterparties and 'NFC+'. The margin rules require them to exchange two types of collateral in the form of margins. The first type is variation margin (VM), which is exchanged on a frequent basis and protects counterparties against exposures related to the current market value of their OTC derivative contracts. The second type is initial margin (IM), which is posted at the initiation of a transaction to cover future exposures that could arise from losses on the counterparty’s position after it has defaulted. The initial margin requirement applies to financial counterparties and NFC+ above a threshold of EUR 8bn in gross notional amounts of outstanding contracts. The entry into application of the requirements follows a phase-in schedule, starting on 4 February 2017 for clearing members and as of 1 March 2017 for other counterparties.

2.3.4.Cross-border arrangements In light of the global nature of the OTC derivatives market, the FSB encourages jurisdictions that have implemented the G20 commitments to provide some capacity to defer in some way to other jurisdictions. This aims to promote safer cross-border OTC derivative transactions and to avoid regulatory arbitrage. EMIR provides a mechanism for recognising CCPs and trade repositories based outside of the EU. Once recognised, EU and non-EU counterparties may use a non EU-based CCP to meet their clearing obligations and a non EU-based trade repository to report their transactions to. EMIR also empowers the Commission to adopt equivalence decisions for other areas of EMIR, such as reporting, margins for uncleared derivatives and risk mitigation techniques. 2.4.EMIR and the implementation of the G20 OTC derivatives reforms The FSB regularly monitors the implementation in its 24 member jurisdictions of the OTC derivatives reforms agreed by the G20 in 2009. In its latest progress report published in August 2016, the FSB highlights that, as of end-June 2016, the EU had implemented all of the G20 OTC derivatives reforms, except margin requirements for non-centrally cleared derivatives. Since the publication of the FSB progress report however, the EU adopted on 4 October 2016 regulatory standards on margin requirements for uncleared derivatives. This means that the EU has completed the implementation of the G20 OTC derivatives reforms with regard to trade reporting, central clearing and margin requirements. The FSB is currently focussing on assessing the effects of the OTC derivatives reforms in its 24 member jurisdictions. It is preparing a comprehensive review of the reforms that will feed into the 3rd annual report to the Leaders of the G20, ahead of the G20 summit scheduled for July 2017 in Hamburg under the aegis of the German Presidency. In the EU, several authorities have issued publications assessing the progress in delivering on the objectives of EMIR. The ECB published an article in December 2016 concluding that, while gaps remain, 'considerable progress has been made in making OTC derivatives markets more transparent and resilient'. The ESRB published a research paper in September 2016 on 'Shedding light on dark markets: First insights from the new EU-wide OTC derivatives dataset', focusing on EMIR's objective to increase transparency in the OTC derivatives market. The paper notes that, 'since the advent of the EMIR reporting obligation in February 2014, data quality has significantly improved'. The evaluation presented in Annex 5 concludes that, following the implementation of the core requirements of EMIR, the volume of reported trades has increased. In particular, a substantial share of new OTC derivative transactions (80–100% of new transactions in all asset classes) is estimated to be covered by reporting requirements. In addition, the evaluation highlights that a substantial share of OTC derivatives is now centrally cleared. As of end-June 2016, on average 62% of the $544 trillion in outstanding notional amounts reported by dealers was centrally cleared by CCPs across all types of derivative contracts. In terms of notional amounts, without adjusting for double counting arising from novation, BIS estimated that the volume of cleared OTC transactions at the end of June 2016 totalled USD 337.28 trillion, of which USD 328.5 trillion was attributable to interest rate derivatives and USD 4 trillion to credit OTC derivatives. 2.5.Consistency with other EU policies he Commission's proposal for a framework for the recovery and resolution of CCPs aims to ensure that, in the unlikely scenario where CCPs face severe distress or failure, the critical functions of CCPs are preserved while maintaining financial stability and helping to avoid that costs associated with the restructuring and the resolution of failing CCPs fall on taxpayers.The Commission' proposal on the amendment of the CRR EMIR is also related to the ongoing efforts to establish Capital Markets Union ('CMU'). Efficient and resilient post-trading systems and collateral markets are essential elements for the well-functioning of CMU. Therefore, effective and efficient EMIR rules contribute to achieving the objectives of CMU and of the Jobs and Growth agenda in line with the political priorities of the Commission. The impact assessment has considered the implications of targeted amendments to specific EMIR rules on these pieces of EU legislation and on the broader Commission's political priorities. Likewise, the impact assessment takes into account, to the extent possible, the expected impact of the Commission's proposals on CCP recovery and Resolution and on the amendment of the CRR on EMIR, as part of a holistic approach. 3.PROBLEM DEFINITION This section outlines why the scope of the problems identified in the impact assessment is limited, identifies limitations when defining the magnitude of the problems, and explains how the problems have been selected and why targeted action is necessary. The problems identified in this section draw on the outcome of the evaluation carried out in Annex 5. Those problems include: (1) Disproportionate compliance costs; (2) Insufficient transparency; and (3) Access to clearing. 3.1.Methodology 3.1.1.Selection of relevant issues for the definition of the problems

The main problems and shortcomings assessed in this impact assessment concern areas where the evaluation carried out in Annex 5, as well as input received from various authorities and stakeholders as presented in the EMIR report of November 2016, indicate that targeted action is necessary to ensure fulfilment of the EMIR objectives in a more proportionate, efficient and effective manner. More specifically, the impact assessment considers the costs and benefits of targeted amendments of specific EMIR rules, including those applying to central clearing and to reporting. While the definition of the problems is targeted, the impact assessment considers the cumulative impact of targeted changes as presented in section 5. The key element to consider is that, while the implementation of EMIR can now be considered as complete by FSB standards, the application of EMIR remains work in progress five years after its adoption. Certain core EMIR requirements (including clearing obligations and bilateral margin requirements) are yet to enter into application. This has a number of consequences on the availability of data on the costs and benefits of EMIR requirements. First, while it is not possible to consider the impact of EMIR in its entirety, feedback from stakeholders and public authorities collected during the 2015-2016 public consultations, the evaluation of EMIR in Annex 5, and international monitoring of the G20 OTC derivatives market reforms all indicate that EMIR has positively contributed to promote transparency in derivatives market and mitigate systemic risk through its core requirements. Therefore, no fundamental change should be made to the nature of the core requirements of EMIR, which are integral to ensuring transparency and mitigating systemic risks in the derivatives market. Second, the recent application of certain requirements and the absence of failure in the application of the relevant international standards caution against the introduction of significant changes to EMIR. This explains why a number of issues raised by public authorities and stakeholders (see Annex 4 for more detail) are not covered in this impact assessment. For instance, assessing the need to define greater intervention capacity in the area of margin efficiency to limit procyclicality would be premature in light of the recent application of existing margin and anti-procyclicality requirements and the lack of evidence concerning any failure in margin rules being at the level of central clearing or bilateral margining. Other issues raised by stakeholders and authorities, such as the functioning of the supervisory framework for CCPs or cross-border activity, require to be further examined by European authorities at horizontal level as the overall EU financial services supervisory infrastructure and the third-country framework is based on an horizontal Union approach. Third, under the REFIT framework, priority has been given to issues where targeted action could help alleviate existing burdens without compromising EMIR's objective to increase financial stability. For instance, the recalibration of reporting requirements applying to certain entities could lead to a reduction of compliance costs, while the simplification of reporting requirements could help increase the transparency of the OTC derivatives market more efficiently, without putting financial stability at risk. Priority is also given to requirements where targeted amendments could help either pre-empt significant burdens for specific counterparties or avoid the build-in of risks for financial stability. This concerns the impact that the central clearing obligation for PSAs, due to apply in August 2018, could have on the revenue income of policy holders and on market liquidity. This also includes the expected burdens from the upcoming application of the clearing obligation to NFCs and small financials, as well as the deadline for backloading historic trades which expire in February 2019, according to the recently adopted revised implementing technical standard on trade reporting. 3.1.2.Limitations when defining the magnitude of the problems It is important to bear in mind the following limitations when defining the magnitude of the problems. First, the phased-in application of EMIR core requirements means that there is only a limited amount of evidence available on the impact of the application of the rules. For example, in the specific instance of margin requirements, there is no data available, as margins rules have only recently started to phase-in since February 2017. Second, while the Commission has received qualitative input and anecdotal evidence from market participants and stakeholders on the impact, as well as the expected impact, of core EMIR requirements, limited quantitative data is available to measure costs for market participants (such as the IT costs associated with the EMIR reporting requirements). This is for a number of reasons, including because: (i) EMIR was the first regulation seeking to increase transparency in the OTC derivatives market, (ii) the market for OTC derivatives is global and highly interconnected, limiting the relevance of EU-focused data, and (iii) there are concerns with regards to the quality and the usability of the data collected via the EMIR reporting requirement, which this impact assessment considers. Addressing the identified reporting issues will help to improve the availability and quality of data, which can then be used for monitoring the future impact of EMIR. Third, it is difficult to quantify financial stability as there is still no agreed model for measuring the concept. The assessment of the extent to which specific EMIR requirements have reduced systemic risk raises methodological challenges. These come on top of the data issues mentioned before. The nature of EMIR data requires new tools and innovation in the field of network analysis, statistical physics and certain mathematical concepts. How to assess systemic risk using transaction-based reporting data is an active and open field of research. With these limitations in mind, the definition of the magnitude of the problem draws on the data collected by ESMA, ESRB, ESCB, responses to the public consultations, where stakeholders and authorities have provided evidence regarding the problems at stake, and targeted market intelligence. It also draws on data relating to other EU measures that establish similar requirements to EMIR. For example, based on preliminary, non-public findings in the Commission project on financial data standardisation, it seems that the EMIR reporting requirements may be at least as burdensome as reporting requirements under CRR/CRD IV. In relation to the latter, the Commission has assessed the proportionality of the reporting burden in a 2009 study and found that smaller reporting entities are strongly disproportionally impacted by compliance cost related to reporting obligations. Where there is no data available at EU level, the impact assessment draws on evidence provided by the Financial Stability Board (FSB) and the Bank of International Settlements (BIS) stemming from the monitoring of the G20 reforms of the OTC derivatives reform. While such evidence is useful because of the global nature of the OTC derivatives market and the comparability of certain rules in other jurisdictions, it should, however, be noted that the participant scope of mandatory central clearing requirements in EMIR is farther-reaching than in the legal and regulatory frameworks adopted in other jurisdictions. 3.1.3.The relevance of the network structure when defining the magnitude of the problems When defining the magnitude of the problems, it is also necessary to consider the relative systemic risk profile of the counterparties covered by EMIR. Two aspects can help in that process: i) the size of the portfolio of OTC derivatives entered into by a counterparty and ii) the degree of 'interconnectedness' of a counterparty with other counterparties. On the second point, it is useful to take into account the network structure of the OTC derivatives market because there are some indications that market participants at the periphery of the market seem to present a relatively lower systemic risk for financial stability. Figure 1 below provides a sense of the relative share of various market participants in cleared OTC derivative contracts, on the basis of an analysis carried out by the ESRB. It highlights that 'G16 dealers', which include mainly clearing members, represent a substantial share of this market, followed by banks. By comparison, other financials as well as non-financial counterparties, represent a smaller share.





Figure 1 – Share of total notional of centrally cleared contracts by type of market participant (DTCC OTC interest rate derivatives dataset, based on the 02/11/15 trade state report) Source: European Systemic Risk Board, Occasional Paper Series No11/September 2016 The ESRB has also illustrated in a recent paper published in September 2016 the network structure of the market through the visualisation of the outstanding bilateral IRS positions. This provides a sense of “who trades with whom" and of the degree of interconnectedness between market participants active in the IRS market. Figure 2 below illustrates that CCPs, clearing members (referred to as G16 dealers), and banks, which appear in the core of the chart, are connected to a large number of counterparties, with many connections between them, suggesting a high degree of systemic risk. By contrast, counterparties in the periphery, including NFCs and other financials, tend to be connected to only one intermediary, suggesting limited systemic risk.



Figure 2 Network of gross notional links between counterparties in a subset of the interest rate swap (IRS) market Source: Jorge Abad, Jorge Abad, Iñaki Aldasoro, Christoph Aymanns, Marco D’Errico, Linda Fache Rousová, Peter Hoffmann, Sam Langfield, Martin Neychev, Tarik Roukny, Shedding light on dark markets: First insights from the new EU-wide OTC derivatives dataset, ESRB, Occasional Paper Series No 11, September 2016, p. 18. 3.2.Disproportionate prudential and transparency requirements Stakeholders have highlighted a number of cases where the rules set out in EMIR may impose compliance costs on certain market participants that outweigh prudential benefits. These concern: (i) the scope of entities subject to the requirements set out in EMIR; and (ii) the scope of transactions covered by reporting requirements.. 3.2.1.Mandatory clearing and risk-mitigation techniques

This section assesses the application of the mandatory clearing and margin requirements to the following counterparties: (1) Pension Scheme Arrangements; (2) Non-Financial Counterparties (NFCs); and (3) small financials, hereafter referred to as Small Financial Counterparties (SFCs). Table 1 below provides a summary of the scope of the clearing and bilateral margin requirements in EMIR, as described in section 2: Table 1: Scope of EMIR clearing and margin requirements FC (including SFCs) PSAs NFC+ NFCs- Clearing obligation Yes Transitional exemption Yes No Operational risk-mitigation techniques for uncleared OTC derivatives Yes Yes Yes Yes (except daily valuation) Variation Margin requirements Yes Yes Yes No Initial Margin requirements (when OTC derivatives uncleared activities are above EUR 8bn in gross notional outstanding amounts) Yes Yes Yes No Reporting of all derivative contracts Yes (including backloading, ETDs, IGTs and double-sided reporting) Yes (including backloading, ETDs, IGTs and double-sided reporting) Yes (including backloading, ETDs, IGTs and double-sided reporting) Yes (including backloading, ETDs, IGTs and double-sided reporting) 3.2.1.1.Pension Scheme Arrangements ('PSAs') Pension Scheme Arrangements typically enter into derivative transactions to protect their long-term liabilities to current and future pensioners against complex market risks (including interest rate and inflation volatility). PSAs therefore tend to have a preference for derivatives with longer maturities than other counterparties. Figure 3 below illustrates that PSAs, together with insurers, are disproportionately extensive users of Interest Rate Derivatives (IRS) with original maturities of 20, 40 and 50 years. Indeed, about 20% of IRSs with at least one counterparty as an insurer or pension fund have a maturity of 30 years, compared with a global average of less than 10%. This also reflects the specific mandates governing the investment management and risk taking of PSAs, as compared to other financial counterparties. Source: European Systemic Risk Board, Occasional Paper Series No11/September 2016 As significant users of derivatives, PSAs are subject to several EMIR requirements that aim to mitigate related systemic risks, including the obligation to report trades and to mitigate counterparty risk in non-centrally cleared OTC derivatives. However, EMIR recognises that PSAs have structural difficulties in clearing OTC derivatives through CCPs, as CCPs tend to accept only cash collateral for variation margin (VM), which allows for a rapid liquidation in the event of a default. The results of the latest available Margin Survey of the International Swaps and Derivatives Association ('ISDA') highlights the dominance of cash, which accounts for 99.4% of the amount delivered to meet variation margin against cleared derivative transactions in House Trades and 100% in client clearing (as of December 2014). PSAs generally hold limited amounts of cash, as they invest in higher yielding assets to enhance returns for pensioners. PSAs mainly hold cash for the purpose of provisioning for cash-flows within the schemes themselves (see Figure 4). Source: OECD Global Pension Statistics, October 2016 If PSAs were to reduce their holdings of non-cash assets in order to meet cash collateral requirements this would have a detrimental impact on future pension benefits. Recital 26 of EMIR acknowledges this risk, which a baseline study prepared for the Commission also highlighted in 2014. According to the modelling in this study, which assumed that PSAs would create a cash buffer of between 80% and 100% of the maximum expected variation margin call under a 100 basis points increase in interest rates, the aggregate variation margin call would be EUR 204–255 billion for EU PSAs (see table below). This compares to the estimated annual cost of the current bilateral arrangements of about EUR 43 million, and of EMIR (with the exemption) of EUR 52 million. The baseline study estimated the cumulated reduction in the retirement income of future pensioners to be a up to 3.66% across the EU over 40 years.

Source: Europe Economics and Bourse Consult study, July 2014 Furthermore, in response to the Commission's Call for Evidence, one industry association gave an example of a large German pension fund with more than EUR 10bn in assets under management that would have had to hold between 0.5% and 1.0% of total assets in cash in the last 5 to 10 years to meet the variation margin call related to central clearing instead of investing this amount in higher-yielding assets. The FSB also highlighted in a recent report that requirements to post cash for variation margin represent a challenge for counterparties that do not hold much cash, such as some pension funds. Taking into account these difficulties, Article 89(1) of EMIR provides a temporary clearing exemption for PSAs meeting certain conditions . There are approximately 15000 PSAs benefiting from the clearing exemption in the EU. Nearly all the PSAs are institutions for occupational retirement provision as defined under Article 2(10)(a) and (b) of EMIR, which automatically qualify for the exemption. The remainder includes 22 PSAs referred to in Article 2(10)(c) or (d) of EMIR, which have been granted an exemption by ESMA, as they encounter difficulties in meeting the variation margin requirements in accordance with Article 89(2). The PSAs benefiting from the exemption include life insurance undertakings, provided that all corresponding assets and liabilities are ring-fenced, managed and organised separately, without any possibility of transfer. The exemption was agreed explicitly in order to provide time for CCPs to develop technical solutions to accept non-cash collateral. As viable technical solutions failed to emerge, the Commission, in accordance with Article 85(2) of EMIR, extended this exemption by two years in 2015. A Commission Report issued in February 2015 assessed the progress and effort made by CCPs in developing technical solutions for the transfer by PSAs of non-cash collateral as variation margin. The Report fulfilled the mandate set out in Article 85(2) of EMIR and was based on the baseline study referred to above. The Report found that CCPs had not made sufficient progress in developing appropriate technical solutions. Only one CCP had started developing a repurchase (repo) transaction clearing service that could address the needs of PSAs to use non-cash assets. The Report, however, highlighted that certain important questions remained, as to the viability of such a collateral transformation service. In particular, it considered that the bilateral repo markets did not appear to hold sufficient liquidity to withstand the needs of PSAs in stressed scenarios. Based on an analysis of the EU government bond markets, the baseline study underpinning the Report highlighted that the aggregate variation margin call for a 100 basis point move (amounting to EUR 204-255 billion for EU PSAs, as per above) would exceed the apparent daily capacity of the relevant bilateral repo markets. Similarly, respondents to the EMIR consultation expressed concerns that in stressed market scenarios, PSAs would face a substantial liquidity risk as they might not be able to raise enough cash to meet their variation margin calls. On this basis, on 20 December 2016, the Commission adopted a delegated act to prolong the exemption by an additional and final year, until August 2018. Under the current legal framework, the transitional exemption cannot be further extended. However, as indicated by respondents to the EMIR consultation and to the Call for Evidence, viable CCP clearing solutions for PSAs continue to be insufficient. Recent comments received during the public feedback period on the draft delegated act, which took place in November 2016, made a similar point. Four business associations expressed support for the extension by a further year of the clearing exemption for PSAs and highlighted the negative consequences of not doing so. Therefore, there is a genuine risk that in August 2018 PSAs could be subject to the clearing obligation without a technical solution to post non-cash variation margins, which would generate disproportionate damage to the returns of (future) pensioners. While PSAs benefit from an exemption from central clearing, they are however subject to bilateral margin requirements applying to uncleared OTC derivatives. The objective of these requirements is to mitigate the risk of a counterparty credit default in the absence of clearing via a CCP, as well as to provide an incentive towards central clearing. The application of these requirements will be phased in from March 2017, including requirements for PSAs' margin. 3.2.1.2.Non-Financial Counterparties ('NFCs') The scope of clearing and bilateral margin requirements is far-reaching and includes all financial counterparties and the biggest non-financial counterparties (NFCs). This is because EMIR intends to cover all relevant market participants in order to cover all risks linked to derivatives transactions. EMIR does however only aim at 'systemic' NFCs: it acknowledges that NFCs use OTC derivative contracts in order to cover themselves against commercial risks directly linked to their commercial or treasury financing activities. Consequently, in determining whether an NFC should be subject to the clearing obligation, EMIR gives consideration to the purpose for which that NFC uses OTC derivative contracts, as well as to the size of the exposures that it has in those instruments. NFCs are subject to the clearing obligation and risk mitigation techniques requirements where their positions in non-hedging OTC derivatives exceed certain thresholds defined in a regulatory technical standard. The thresholds are EUR 1 bn in gross notional value for credit and equity derivatives and EUR 3 bn for interest rate, foreign exchange, and commodity or other derivatives. Once an NFC surpasses one of these thresholds in any asset class, it becomes subject to these requirements across all asset classes. These NFCs are commonly referred to as 'NFC+' as opposed to NFCs below the threshold which are known as 'NFC-'. The public consultations identified several problems in applying the EMIR requirements to NFCs. First, significant problems emerged in relation to the application of the hedging/non-hedging distinction. NFCs pointed out the difficulty of classifying transactions as 'hedging' or not, as the definition of hedging is not in line with accounting rules and differs in their interpretation between regulators. These problems were also confirmed by ESMA, which concluded that many NFCs do not seem to apply the hedging/non-hedging distinction because many counterparties classify 100% of their trades either as hedging or as non-hedging. Those counterparties have not developed systems to monitor the hedging or non-hedging nature of their transactions. These systems generate compliance costs. ESMA estimated at EUR 50 000 on-off plus EUR 40 000 on-going per year and per counterparty to monitor trades. However, as a result of diverging regulatory practices and application of the hedging definition, NFCs that undertake similar activities and which hold comparable OTC derivative portfolios end-up qualifying either above or below the threshold, leading to an unlevelled playing field. Some industry participants and authorities also drew attention to the difficulty for market participants to determine which of their non-financial counterparties are above or below the clearing threshold. More generally, NFCs also highlighted the operational challenges with EMIR requirements and stated that the transaction costs associated with OTC derivative trading, whether hedging or not, had increased. Due to a sizeable cost increase for non-centrally cleared transactions, they argue that EMIR has reduced incentives to engage in derivative transactions, including hedging transactions. In particular, some NFCs pointed out the lack of available cash and eligible collateral to cover their derivatives activities in line with EMIR rules. Non-financial counterparties that are active in derivatives markets are numerous (64 295), and represent 72% of all counterparties. However, it is important to contrast the number of NFCs active in derivatives markets with the volume of their OTC derivative positions and their degree of interconnectedness in order to appreciate the risks NFCs may pose for financial stability. According to ESMA data, only 2% of the notional value of the OTC derivatives markets is made up of NFC activity. This accounts for EUR 9.5 trillion outstanding volumes as measured by notional amount out of a grand total of EUR 608 trillion, including both financial counterparties and non-financial counterparties. ESMA also indicates that on average, NFCs have portfolios of around 30 trades, representing EUR 150mn of notional. This compares to portfolios of 1,000 trades representing EUR 25,000mn of notional for financial counterparties. Therefore, the positions of NFCs in the OTC derivatives market appear to be very limited when compared to the group of financial counterparties. In addition, NFCs tend to transact with less than 6 other market participants, which suggests not only a lack of interconnectedness across the system, as far as NFCs are involved, but also a lower level of risk than financial counterparties' risk (as the latter hold much larger volumes of derivatives and have a far higher level of interconnectedness). This lower degree of interconnectedness can be illustrated by Figure 2 in section 3.1.3, which provides a picture of the network structure of the OTC derivatives market in the IRS segment. It highlights that non-financials generally tend to sit at the periphery of the market, while CCPs, clearing members and banks appear at the core, with many connections between them. This shows that non-financial counterparties present a relatively lower systemic risk for financial stability. There is also a need to consider the distribution of OTC derivative positions within NFCs, in order to provide a more nuanced approach of the risk profile of non-financials. When it comes to NFCs subject to clearing and margin requirements (or NFC+), ESMA identifies 43 groups corresponding to the definition of NFC+, which include 424 counterparties. While the number of groups is limited, ESMA indicates that, as an order of magnitude, the typical portfolio size of a group of NFC+ is about five times bigger than the average portfolio of FCs in terms of trade count and 1.5 times bigger in terms of notional amount. Nevertheless, when considering the relative share of their OTC derivatives positions, these NFCs+ represent a notional value of 16% of NFCs notional amount, which is equivalent to 0.32% of the total notional amount. The systemic relevance of most of the NFCs is therefore very limited. ESMA concluded that the only asset classes in which NFCs may have some systemic relevance, measured as the number of contracts (trade counts) or as the number of counterparties, are the commodity and other asset classes and the FX asset classes. Concerning the impact of other regulatory developments, the MiFID II framework aims at reclassifying large non-financial commodities traders as financial counterparties. MiFID II puts in place an 'ancillary activity test' that determines how much non-hedging (or speculative) commodity derivative or emission allowances derivative trading non-financial firms can conduct before this activity is no longer deemed 'ancillary to the main business' of the firm and the firm be obliged to seek a MiFID authorisation. Two thresholds will be used in MiFID: one based on the value of contracts traded by the firm as a percentage of the overall EU market size for that commodity derivative or emission allowance derivative, and one based on whether commodity derivative or emission allowance derivatives make up more than 10% of the firm's business. Hence the largest NFCs active on commodity derivative or emission allowance derivative markets will need to seek a MiFID authorisation. This development will lead the largest NFCs to being subject to the clearing obligation under EMIR, limiting EMIR clearing thresholds to a residual tool for picking up 'systemic' NFCs. However, it should be noted that the MiFID thresholds operate differently from the EMIR ones in two important respects: first, both MiFID thresholds are percentage-based, rather than absolute numerical values as in the case of EMIR. Second, they only apply to commodity derivatives and emission allowances derivatives (for which, as noted above, the EMIR threshold is EUR 3 billion). Furthermore, according to the FSB report on OTC Derivatives Market Reforms - Eleventh Progress Report on Implementation of August 2016, the EMIR scope is much broader than the scope of OTC derivatives regulations in the majority of non-EU jurisdictions. NFCs are not subject to mandatory clearing in other major third countries with important derivatives markets (e.g. US, Japan, Canada, Australia, HK, Republic of Korea, Singapore) as they consider that these counterparties do not bring systemic risk to the financial system. This situation risks creating an un-level playing field at the international level and puts EU NFCs in a less favourable position than their competitors established in third countries, especially for groups with ties in third countries and when the same type of derivatives are traded within and outside the EU. As a result, keeping in mind the objective of EMIR to capture and address the systemic risks of derivatives transactions, it would appear that the EU framework currently covers at least some NFCs which present very limited systemic risk to the financial system as has already been recognised in other global jurisdictions. Furthermore, the inclusion of such non-systemic entities under EMIR's requirements is both costly and impractical for some of them to apply, particularly in light of the obstacles that smaller market participants face in accessing central clearing, as further described in section 3.4. 3.2.1.3.Small Financial Counterparties ('SFCs') As presented in Table 1, the scope of the EMIR clearing obligation captures all financial counterparties irrespective of their size and of their volume of OTC derivatives activity. Trading associations, as well as associations that typically represent small banks, argued that the costs generated by the clearing obligation were disproportionate in light of the limited systemic risk posed by smaller financial counterparties. They also explained that the clearing obligation creates considerable implementation issues for these smaller financial counterparties, notably because of the difficulties smaller market participants, including very small financials, face with regards to access to clearing. This concerns financial counterparties with small derivatives portfolios, for instance small banks, that need to conclude interest rate swaps to cover their activities (i.e. interest rate swaps to cover their mortgage loan portfolio) or small funds that want to cover risks linked to their portfolios (i.e. foreign exchange risk). EMIR does not differentiate between (very) small and larger financial counterparties. It is therefore challenging to provide a clear difference of what would represent a small financial counterparty. Lacking a common definition, and in order to provide an order of magnitude, this impact assessment considers Small Financial Counterparties (SFCs) as financial counterparties defined as Category 3 counterparties under the existing Commission Delegated Regulations on the clearing obligation. These are financial counterparties (and certain funds which are classified as non-financial counterparties) belonging to a group whose aggregate positions in OTC derivatives are EUR 8bn or below.

Direct access to a CCP implies costs and risks that at least some of those SFCs are not in a position to bear: to be a direct participant in a CCP, firms are required to put in place specific infrastructures and dedicate a large amount of resources that smaller financial counterparties do not necessarily have at their disposal. But even if the small financial counterparties would overcome these problems, this would not necessarily mean that (all) CCPs were in a position to accept smaller participants as clearing members for infrastructure or risk management reasons. For these small financial counterparties, it is therefore necessary to become the client of a clearing member, or to establish indirect clearing arrangements. However, ESMA confirmed in a consultation paper that Category 3 counterparties, i.e. those with the smallest level of activity in OTC derivatives, are facing important difficulties in preparing the arrangements with clearing members that are necessary for clearing the contracts. First, in relation to client clearing, recent evidence suggests that clearing members find little incentives to develop extensively their client clearing offer because of cost issues, and even more so for clients with limited activity in OTC derivatives. Estimates by ISDA reported by the Financial Times suggest that many clearing members are setting minimum revenues or clearing fees that range from EUR 95 000 to EUR 265 000 according to current exchange rates. This may be a significant fixed cost for a small financial counterparty with a very limited volume of OTC derivatives activity. Second, in relation to indirect clearing arrangements, ESMA indicated that counterparties are currently unable to access CCPs by becoming an indirect client of a clearing member, because of the scarcity of the offer. These obstacles to central clearing are dealt with further in the separate section on 'insufficient access to clearing' that deals with factors impacting the offer of such services (Section 3.4). The important constraints and costs for SFCs to have access to clearing services risk forcing them to cease some of their activities. This risk, as well as the high costs, may however not be justified by the added value achieved for regulatory purposes. Taking into account the costs and administrative burden that the clearing obligation represents, there is a need to appreciate the degree of systemic risk that these SFCs pose, by considering both (i) the volume of their OTC derivatives activity and (ii) their level of interactions with other counterparties. On the first point, ESMA presented in 2016 extensive data in a consultation paper on the clearing obligation for financial counterparties with a limited volume of activity. ESMA assessed the activity of financial counterparties in OTC derivatives asset classes already subject to a clearing obligation, using data from European trade repositories, on three different dates covering a timespan of one year: 20 February 2015, 3 August 2015 and 29 February 2016. As shown in Figure 6, ESMA established that around 6 000 European financial counterparties were active in the OTC interest rate asset class, the number being relatively stable on the three dates of the study, whereas in the OTC credit asset class the number of active European financial counterparties oscillated between around 2 000 in February 2015 and 2 800 one year later. Figure 6. Number of counterparties per asset class (credit and interest rate asset class) Source: European Securities and Markets Authority The ESMA paper highlights that the distribution of trades among financial counterparties is highly concentrated, i.e. a relatively small number of the largest financial counterparties account for an important share of the total market. Figure 7 below highlights the asymmetric distribution of trades both in the interest rate and the credit asset classes. Based on the trades outstanding on 29 February 2016, the largest 50 counterparties accounted for 95% of the credit and interest rate OTC derivative volume; and the largest 100 counterparties accounted for 96%-97% of the credit and interest rate OTC derivative volume, measured by outstanding notional amounts. Source: European Securities and Markets Authority Both the interest rate derivative and the credit derivative markets show important levels of concentration on a small number of large counterparties. For example in the interest rate derivative asset class, 490 counterparties (the ones with portfolios of OTC interest rate derivatives above EUR 5bn) represent 99.4% of the activity, while only accounting for 8.4% of the total number of financial counterparties. Looking at different categories of counterparties, clearing members represent 94.5% of the volume and 1.2% of the number of counterparties, other counterparties with individual portfolios above EUR 8bn represent 4.4% of the volume and 4.5% of the number of counterparties and counterparties with individual portfolios below EUR 8bn represent only 1.1% of the volume but 94.3% of the number of counterparties. Similarly, in the credit derivative asset class, less than 400 counterparties (the ones with portfolios of OTC credit derivatives above EUR 500mn) represent 98.6% of the activity, and 14.5% in terms of number of counterparties. Conversely, this means that an important number of counterparties account for only a small fraction of the total volume. Analysing this in more detail, clearing members represent 85.6% of the volume and 0.7% of the number of counterparties, other counterparties with individual portfolios above EUR 8bn represent 9.3% of the volume and 5.9% of the number of counterparties and counterparties with individual portfolios below EUR 8bn represent only 5.1% of the volume but 93.5% of the number of counterparties. Additional tables and charts illustrating this are included in Annex 2B. The asymmetry in the distribution of trades was one of the justifications for the adoption of a phased-in implementation schedule for the clearing obligation, i.e. starting with the few but most active counterparties (clearing members) and adding progressively an increasing number of less active counterparties (see also the impact assessments of the first two final reports on the clearing obligation on interest rate swaps (IRS) and credit default swaps (CDS)). In November 2016, based on the data presented above ESMA proposed to delay the application of the clearing obligations for small financials (category 3 counterparties) by two additional years with regard to the clearing obligation for OTC interest rate derivatives denominated in EUR, GBP, JPY, and USD and the shorter delay of about 1 year and 4 month with regard to the clearing obligations for OTC index credit default swaps and OTC interest rate derivatives denominated in NOK, PLN and SEK (all until June 2019) due to the disproportionate burden or impossibility for these counterparties to use central clearing in 2017. Finally, with regard to the degree of interconnectedness of SFCs, it is necessary to take into account the network structure of the OTC derivatives market, as presented in Figure 2 of section 3.1.3, which focuses on the interactions between market participants active in the IRS market. Figure 2 shows that the category 'other financials', which does not include the largest Financial Counterparties such as clearing members and banks, do not sit at the core of the market. This suggests that SFCs tend to be connected to fewer intermediaries than larger FCs, suggesting a relatively lower systemic risk for financial stability. 3.2.2.Scope of EMIR reporting requirements In the public consultation, stakeholders characterised a number of different aspects of the existing reporting requirements under EMIR as excessively burdensome. 3.2.2.1.The backloading obligation According to Article 9(1) of EMIR, counterparties are required to report their derivative contracts which: (a) were entered into before 16 August 2012 and remain outstanding on that date; (b) are entered into on or after 16 August 2012. Article 9(6)(b) empowers ESMA to “develop draft implementing technical standards specifying the date by which derivative contracts are to be reported, including any phase-in for contracts entered into before the reporting obligation applies”. These implementing technical standards (ITS) were adopted by means of Commission Implementing Regulation (EU) No 1247/2012 of 19 December 2012. In addition to setting out a start date for the reporting obligation (which depended on certain conditions being fulfilled, but became effective on 12 February 2014), the ITS put in place a 3 year phase-in for the reporting of contracts entered into between the date referred to in Article 9 of EMIR and the start of the reporting obligation, and which were no longer outstanding on the latter date. In other words, ‘historic’ contracts were to be reported by 12 February 2017 at the latest. The main reason for this phase-in period was to avoid a huge number of trades being reported shortly before the start of the reporting obligation. The revised ITS adopted by the Commission on 26 October 2016 extended this deadline for a further 2 years, until 12 February 2019.

The requirement to report historic trades was intended to give regulators a complete overview of the derivative markets since the entry into force of EMIR by providing them with relevant historic reference data and thus enable regulators to obtain a picture of potential ongoing risks and exposures. This has however not happened for several reasons. Firstly, in practical terms, this requirement is virtually impossible to fulfil. For example, there are very high failure rates due to the lack of certain reporting elements which were not required at that time or to the lack of a requirement to use the Legal Entity Identifier (LEI) prior to the start of the reporting obligation. As such, the quality and therefore the added value of the generated data is very low compared to the burden it generates, which implies that there is a high likelihood that this data will remain unused. The provision of such inaccurate and low quality data therefore will not enable regulators identify risks and thus achieve what it was originally designed to do. Secondly, the fact that the data will remain unused is made even more likely by the fact that backloaded data will, for the most part, be quite old and will therefore be of less use than more recent data. Quite a few historical transactions will have already expired and with them, the corresponding exposures and risks. Furthermore, some of the non-expired historic trades are reported in any case, as modifications to the original contract made after the start of the reporting obligation need to be – and are – reported according to the rules for new trades. Therefore, the number of historic trades which remain unreported is likely to be only a fraction of all historic trades falling within the scope of this requirement. For the above reasons, respondents to the public consultation (primarily companies and industry associations, but also non-governmental associations and public authorities) considered the ‘backloading’ requirement as very problematic and burdensome while bringing virtually no added value. This view was also shared by ESMA, which based its assessment on a limited number of trades which have already been backloaded. 3.2.2.2.Reporting of intragroup transactions Intragroup transactions are defined in Article 3 of EMIR as OTC derivative contracts entered into with another counterparty which is part of the same group. With the exception of certain risk-mitigation techniques, from which intragroup transactions are exempt under certain conditions, all other EMIR requirements currently apply to intragroup trades in the same way as they do to all other transactions. Intragroup derivative transactions are usually carried out to hedge against certain market risks or aggregate such risks at the level of the group. Their number is usually quite large – according to one source, the volume of IGTs entered into by companies on an annual basis varies between approximately 28 000 and more than 120 000 trades. However in practice, in most cases these large volumes of intragroup trades result in significantly fewer external trades after netting. This is illustrated by the table below. Source: Deutsches Aktieninstitut e.V. In another case, 122 000 intragroup trades netted down to just over 16 000 external trades. This is in line with other data which indicated that the inclusion of IGTs in the reporting requirement can result in as much as a threefold increase in the number of transactions which need to be reported. As can be deduced from the above, in most cases, intragroup trades do not have a significant impact on the risk profile of the group as a whole. Given this nature of intragroup transactions, there is reason to believe that such trades have a more limited impact on systemic risk than trades between different groups or companies. The requirement to report these transactions can be considered particularly burdensome for smaller counterparties and in particular NFCs, whose intragroup trades represent only an insignificant proportion of the market. Reflecting these concerns, some jurisdictions (notably the CFTC in the United States) have excluded NFCs and small financials from the requirement to report their intragroup transactions. Many respondents to the public consultation (including companies, industry associations, trade associations, public authorities and others) confirmed this view by asserting that the obligation to report intragroup transactions is unnecessary as these transactions carry very little systemic risk, while it is highly burdensome (due to the potentially very significant volumes of such trades but also to the fact that every entity in the group needs to be assigned a LEI) and potentially even harmful, as this data can distort the true picture of the market. Several respondents pointed out that the requirement to report intragroup transactions may also reduce the use of delegation of reporting by corporates, as these trades do not involve an external counterparty to which reporting could be delegated. For the same reason, it requires NFCs which are part of a group to establish relationships with trade repositories, in many cases just for a few intragroup trades. 3.2.2.3.Reporting of exchange-traded derivatives ('ETDs') According to Article 9(1) of EMIR, counterparties are required to report the details of all of their derivative contracts to trade repositories, irrespective of whether these are OTC or ETD contracts. As far as the reporting obligation is concerned, EMIR does not make any distinction between these two types of derivative contracts. Many respondents felt that the obligation to report ETDs is superfluous since the exchanges should normally possess a good portion (if not all) of the relevant data on the trade, as a result of the set-up of the reporting obligation in Article 26 of Regulation (EU) No 600/2016 of the European Parliament and the Council (Markets in Financial Instruments Regulation - MiFIR) and Regulatory Technical Standard 22 to MiFIR. The respondents (primarily companies and industry associations, but also public authorities and trade unions) claimed that this requirement therefore increases burdens without adding any value. They also pointed out that the G20 never called for the reporting of ETDs, and many other jurisdictions do not require the reporting of ETDs. The majority of respondents called for the exemption of ETDs from EMIR reporting requirements. ESMA acknowledges that the requirement to report ETDs on a trade-by-trade basis poses a rather significant burden in terms of costs of reporting and data storage capacity of counterparties and trade repositories. These costs are due to the substantial number of ETDs trades being transacted on a daily basis and the significant number of positions that are opened and closed intraday. Given the significant number of derivative transactions concluded on exchanges and the fact that the exchanges already possess many of the details of such transactions, the claim that the requirement to report ETDs is burdensome and even to some extent redundant appears to have some merit. More broadly, ESMA shares the respondents' view concerning significant costs and burdens of ETD reporting. Nevertheless, as it is also pointed out by ESMA, the reporting of ETDs under EMIR serves a variety of purposes for several EU authorities and there are direct linkages with other pieces of legislation (e.g. MiFIR exemptions provided transactions are reported under EMIR). Furthermore, the data received by trading venues is not the same as that required to be reported under EMIR. In light of the above, at this stage ESMA does not recommend an exemption for ETDs from the reporting obligation. However, they suggest that, by modifying certain aspects of the requirement, it seems possible reduce the burden of reporting ETDs while ensuring that the necessary data is reported to TRs. 3.2.2.4.Double sided reporting Article 9(1) of EMIR requires all counterparties and CCPs to ensure that the details of any derivative contract that they have concluded, as well as any modification or termination of such a contract, are reported to trade repositories. While a counterparty or a CCP may delegate the reporting to another actor, this does not exonerate it from the obligation to report the transaction. In other words, both sides to the transaction have the obligation to report the contract in a system known as 'double-sided reporting' (as opposed to 'single-sided reporting', where only one party to the transaction reports). Respondents (primarily companies and industry associations, but also including public authorities, trade associations, non-governmental organisations and others) to the public consultation considered that the requirement for double-sided reporting causes significant costs and burdens, leads to a high-level of mismatched trades, and produces a risk of double-counting contracts. This in turn supposedly puts into question the data held in TRs and its usefulness for assessing systemic risk. Some respondents went so far as to say that double-sided reporting actually increases risk. Many claimed that the lack of standardised data fields and insufficient guidance further accentuate the problem. The vast majority of industry respondents suggested a move to single-sided reporting, though there were a number of variants (e.g. for all trades/counterparties, only for NFCs/NFC-s, for all smaller counterparties, only for exchange-traded derivatives, only CCPs to report, etc.). It should also be mentioned that a small number of respondents (including at least one company and one industry association) opposed the idea of moving to single-sided reporting for all transactions, either because they felt that double-sided reporting ensures better quality of data by facilitating trade reconciliation or because they did not wish to see the investments made to put into place the necessary reporting system go to waste. While there is no question that double-sided reporting does entail a greater burden in terms of reporting when looking at it from the point of view of both counterparties to a transaction, the main reason for using this approach in EMIR is to help ensure a high level of data quality. Good data quality is indispensable for supervisory authorities to be able to carry out their obligations in terms of monitoring systemic risk and market abuse. Without high quality data, regulators and supervisors cannot fully optimise the data at their disposal. National competent authorities frequently complain about the poor quality of data at present, which restricts their ability to effectively monitor the market and identify risks. Nevertheless, even despite the poor quality of data, the reported data is already starting to be used for assessing market liquidity, market concentration, for checking whether various thresholds have been met, etc., as was evidenced by anecdotal confidential information from several regulators/supervisors as part of the EMIR public consultation. Several other jurisdictions globally also apply a double-sided reporting system to ensure data quality. Specifically, when both counterparties to a trade are required to report data on their transaction, all elements of the reported data should match. Where the data do not match, this is a clear indication that there is a problem either with the reporting or, in the worst case scenario, with the underlying transaction. The trade repository can then request the two sides to verify their data with a view to reconciling the trade. In a single-sided reporting system, this automatic check does not exist, and the trade repository has to trust that the reporting counterparty has submitted correct data. As such, contrary to what was claimed by some respondents to the public consultation, double-sided reporting generally results in higher rather than lower quality of data in trade repositories, which in turn means that the data is more useful to market supervisors when carrying out their obligations.

In fact, it has been found that most of the data quality issues are due to insufficiently defined and harmonised reporting standards, an issue which has to a large degree been addressed by way of amendments to the relevant technical standards adopted recently by the Commission. ESMA is currently also working on more detailed guidelines for trade repositories on the method for aggregating trades, which should help to minimise the double-counting of trades. ESMA generally shares the view that double-sided reporting ensures better data quality and recommends in its contribution that this reporting system be maintained, although it suggests that the approach taken in the Securities Financing Transactions Regulation ('SFTR'), to exempt from reporting small and medium-sized non-financial counterparties, could be considered. Also, double-sided reporting simplifies the enforcement of the reporting obligation. With this system, there is no doubt that both counterparties to the trade need to report the transaction, and there is no excuse for not doing so. In a single-sided reporting system, sometimes quite complex rules are necessary for defining which counterparty is responsible for reporting the trade. There are known instances where trades have gone unreported as both sides to the trade claimed that they believed the obligation to report was on the other counterparty. With double-sided reporting, such situations will not occur by definition. It should be noted that, recently, some jurisdictions which currently use the single-sided reporting approach are recognising that significant data quality issues may in part stem from the use of this system. 3.3.Insufficient transparency of OTC derivatives positions and exposures A number of different issues adversely affect transparency of OTC derivatives positions and exposures, thus hampering supervision and oversight of the derivatives market. 3.3.1.Trade repositories – insufficient quality of data and difficulties of data use In the EMIR public consultation, numerous respondents (in particular companies and industry associations) indicated that the data produced by trade repositories is of low quality and not sufficiently transparent, and therefore difficult to use. This is despite the large volumes of data being made available; in fact, the sheer volume of data may even further complicate the matter. In the public consultation three main reasons for the poor quality of data were identified: (i) the excessive complexity and insufficient standardisation of reporting requirements; (ii) the lack of validations of the reported data by the trade repositories and reconciliations between them; and (iii) the lack of a common methodology or clear rules for the subsequent production of the data. By way of example, prior to the introduction of ESMA's validation requirement (verification of the correctness of the data) through technical standards at the end of October 2015, the level of non-compliant reporting messages was, on average, above 10%. After the introduction of this requirement, and after an initial spike or the level of erroneous messages (which suggests that the error levels in the previous period may have been underestimated), the level of incompliant messages dropped to 6%.



Figure 9 - Level of non-compliant reporting messages Source: European Securities and Markets Authority Underlying these problems is the absence of adequate binding guidance in this respect. In order to remedy the problem of low data quality, the respondents (in particular companies and industry associations) suggested that the standards, format, and content of reported data should be further harmonised and, where possible, simplified; that trade repositories should be obliged to validate (i.e. verify) incoming data for completeness and correctness and reconcile data between them; that end users (counterparties) should be granted access to data reported by them or on their behalf in order to be able to ensure its correctness; and that trade repositories should be required to make available anonymised consolidated/aggregated data to facilitate its use and promote greater transparency of the OTC derivative markets while ensuring data privacy. Finally, it was suggested that ESMA should provide adequate guidance in these areas, for example by setting out harmonised validation rules and a common aggregation methodology to be implemented by all trade repositories. Easily accessible, high quality derivatives data is crucial for regulators and relevant authorities to be able to fulfil their respective mandates correctly. Unfortunately, it is now acknowledged that the data produced by trade repositories is not only of insufficient quality, but that the way in which it is produced and made available to the relevant authorities makes it very difficult to use for the intended purpose of monitoring the derivatives market. This is not only inefficient (high reporting costs with limited benefits) but it could potentially prevent regulators and supervisors from identifying financial stability risks in a timely manner. The problem is due in part to the fact that EMIR was not precise enough in some of its elements relating to trade reporting and data availability. In line with its mandate, ESMA developed draft regulatory technical standards, which were adopted by the Commission, specifying that an application for registration of a trade repository should include a description of the procedures and arrangements to ensure the compliance of the reporting entity with the reporting requirements and the correctness of the data reported. However, there was no requirement for such procedures and arrangements to be harmonised, resulting in trade repositories not verifying the compliance of the reports with EMIR requirements in a consistent manner. As a result, the quality of the data held in trade repositories varies. In an attempt to remedy this situation, ESMA has developed guidance (in the form of Q&As) on the data validations to be commonly applied by trade repositories. It must be noted, however, that these Q&As are not legally binding. A similar situation exists with regard to the EMIR requirement for trade repositories to publish aggregate data and make data available to the relevant entities. Technical standards were adopted, but these too were very general due to the strict mandate for the development of the technical standards, thus giving insufficient guidance on what was expected in practice. Some efforts to address these issues are already ongoing. Recently adopted technical standards introduce much more detailed requirements and standards to the data which is to be reported, and another set of technical standards currently under preparation by ESMA will tackle the consolidation, aggregation, and publication of data. Nevertheless, remaining flexibility in terms of the form of the reports, the data standards which can be used, and the methods and arrangements for reporting, as well as the lack of a legal basis for the definition of the procedures to be used for the validation and reconciliation by TRs of reported data continue to pose challenges. Finally, there are currently no requirements for TRs to make data reported on their behalf available to counterparties. Action in this area would help to improve the quality and transparency of the reported data, enabling authorities to use it more efficiently and effectively to monitor and identify financial stability risks. Given that the Regulation on Securities Financing Transactions (SFTR) already gives ESMA a broader mandate to develop draft technical standards in this respect, it would also have the benefit of aligning the two Regulations in order to ensure a common quality framework for trade repositories. 3.3.2.Trade repositories – insufficient fines Article 65 of EMIR empowers ESMA to impose fines on trade repositories in case they intentionally or negligently commit any of the infringements listed in the Annex I to EMIR. The same fines apply to trade repositories for securities financing transactions under the Regulation on Securities Financing Transactions (SFTR) by way of a cross-reference to EMIR.

The basic amounts of fines depend on the infringement and vary between EUR 5 000 and 10 000 or EUR 10 000 and 20 000. When deciding on the basic amount of the fines, ESMA needs to have regard to the annual turnover of the preceding business year of the trade repository concerned. The basic amounts can be adjusted by taking into account aggravating or mitigating factors that are listed in Annex II to EMIR. The amount of a fine cannot exceed 20% of the annual turnover of the trade repository concerned in the preceding business year, unless the trade repository has directly or indirectly benefited financially from the infringement, in which case the amount of the fine should be at least equal to that benefit. In its input to the Commission's consultation on the EMIR Review, ESMA first states that the amounts are not adequate and therefore not sufficiently dissuasive in view of the current turnover of the trade repositories (between EUR 1 and EUR 10 million). Accordingly, ESMA suggests that the basic amounts should be raised to EUR 50 000, 100 000 and 200 000 respectively, and that a provision should be added that the amount of the fine is at least 2% of the trade repository's turnover. As to the aggravating and mitigating factors, ESMA considers that the current list should be reviewed to be more appropriate with the trade reporting industry and the type of infringements at stake. In particular, ESMA points out that the factors which relate to the duration of the infringement should be reviewed. The significance of a confidentiality breach is, for example, not linked to its duration, which can be very short. Therefore, too many infringements could benefit from the mitigating factor that the infringement has been committed for less than 10 days. On the contrary, the aggravating factor that the infringement has been committed for more than six months would be applicable in only very few cases. Second, ESMA draws attention to an oversight whereby no basic amounts have been specified for infringements relating to obstacles to the supervisory activities (Section IV of Annex I of EMIR). The amount of fines imposed by ESMA on the largest EU registered trade repository for negligently failing to put in place systems capable of providing regulators with direct and immediate access to derivatives trading data was low. The amount of fines for the breach that lasted for nine months with three applicable aggravating factors was EUR 64 000. In comparison, for Credit Rating Agencies (CRAs), ESMA can impose fines between EUR 10 000 and 150 000 for infringements related to obstacles to supervisory activities, and between EUR 90 000 and 750 000 for infringements related to conflict of interest, organisational or operational requirements. As such, the level of fines that ESMA may impose potentially limits the effectiveness of ESMA's supervisory powers under EMIR vis-à-vis trade repositories. Furthermore, the inability to impose adequate fines may limit the compliance with trade repositories with EMIR requirements, in particular on transparency, and thus indirectly financial stability. 3.4.Insufficient access to clearing Article 4 of EMIR requires a wide range of counterparties to clear through CCPs the OTC derivatives pertaining to a class that has been declared subject to the clearing obligation. Only a limited number of these counterparties have direct access to CCPs and have become clearing members. Figure 2 in section 2 helps illustrates this degree of intermediation, through the visualisation of the outstanding bilateral IRS positions. Presented by the ESRB in a September 2016 paper, the chart shows that several layers of intermediation exist between core and non-core market participants. While CCPs, G16 dealers, and banks, which appear in the core of the chart, are connected to a large number of counterparties, with many connections between them, peripheral counterparties, including NFCs and other financials, tend to access CCPs only indirectly, via only one intermediary. Although CCPs lowered their membership requirements to enable more counterparties to become clearing members, a clearing membership still requires sufficient financial and knowledge resources, efforts that are only economically reasonable to make if they can be spread over a high business volume most of these counterparties do not have. As described in section 3.2., for OTC derivatives asset classes already with a clearing obligation, in the OTC interest rate asset class 6 000 European financial counterparties were active, whereas in the OTC credit asset class the number of active European financial counterparties oscillated between around 2 000 and 2 800. These numbers do not include non-financial counterparties that typically do not fulfil the regulatory requirements for a direct access to clearing. In contrast, CCPs in the EU have between 3 (ICE Clear Netherlands) and 186 (Eurex Clearing) clearing members. The second subparagraph of Article 4(3) of EMIR requires counterparties that are not themselves clearing members to become a client of a clearing member or to establish indirect clearing arrangements with a clearing member in order to fulfil their clearing obligation for certain OTC derivatives once such an obligation enters into force for these counterparties. Some of these counterparties need to become the client of a clearing member or establish indirect clearing arrangements with a clearing member (i.e. becoming the client of a client) because they have to fulfil certain requirements for client status or want to pool clearing related activities within groups. The ability of most counterparties to fulfil their clearing obligations is therefore subject to the availability of clearing services provided by clearing members or their clients in the case of indirect clearing. It seems that very few clearing members are currently offering client clearing services and indirect clearing services to financial counterparties and NFC+, or at least not to the smallest ones: the offer is not sufficient and/or is concentrated on ve