EBA technical advice a possible delegated act on fees for the validation of pro forma models under EMIR

General Information

This technical report was published by the European Banking Authority (EBA) in June 2025. It responds to a formal request from the European Commission dated July 31, 2024, aiming to provide a technical opinion for the development of a delegated act on fees related to the validation of pro forma models under EMIR 3 regulation (amendment to the EMIR regulation, effective December 24, 2024). The document covers the calculation and payment modalities of fees to be paid by financial and non-financial counterparties using these pro forma models for managing initial margins on non-centrally cleared OTC derivatives. The scope includes direct and indirect costs borne by the EBA for central validation of models, maintenance of statistical and IT tools, as well as invoicing and fee collection. The report is based on a public consultation and a qualitative impact analysis, and is addressed to stakeholders involved in the supervision of initial margin models within the European Union.

Executive Summary

The subject addressed is the definition of a regulatory framework for setting and collecting fees related to the EBA's validation of pro forma models used by counterparties for calculating initial margins on non-centrally cleared OTC derivatives, in accordance with EMIR 3. This central validation aims to ensure uniformity and security of the clearing system in the EU. The challenge is to ensure that the costs borne by the EBA for this new mission are fully covered by fees charged to model users, while respecting the principle of proportionality based on the 12-month average notional amount of the derivatives concerned. The main findings from the public consultation are that stakeholders approve the central validation function but consider the fee calculation based on an exact 12-month notional amount too complex and costly, especially for small entities. In response, the EBA proposes a simplified fee calculation method, notably through an "Equivalent Portfolio Notional" approach that converts initial margins into weighted notional amounts, as well as more conservative and less costly alternative methods. The report recommends that the delegated act allow full coverage of the EBA's direct and indirect costs, that fees be calculated annually and invoiced in a single installment with a 30-day payment term, and that counterparties provide the EBA with necessary information before March 31 each year. Specific provisions are planned for counterparties starting to use a validated model after the reporting deadlines, who will not be charged for the current year. Finally, the EBA highlights that the estimated annual costs for this function are around 1.5 to 2 million euros, mainly related to human resources and IT infrastructure, and that these fees will be adjusted annually based on actual costs. These recommendations aim to ensure an effective, proportionate, and transparent implementation of the fee mechanism for pro forma model validation under EMIR 3.

Context and Objectives

The document was drafted in response to the European Commission's request for technical assistance in preparing a delegated act on fees related to the validation of pro forma models under EMIR 3, which is an amendment to the EMIR regulation aimed at strengthening the resilience of clearing markets in Europe. EMIR 3, effective end of 2024, grants the EBA a central role in validating pro forma models used by certain financial and non-financial counterparties for calculating initial margins on non-centrally cleared OTC derivatives. This new mission involves costs for the EBA, which must be covered by fees proportional to the counterparties' activity, measured by the 12-month average notional amount of the derivatives concerned. The document's objective is to define the calculation, invoicing, and payment modalities of these fees, taking into account operational constraints, stakeholder feedback, and principles of proportionality and efficiency. The scope covers direct and indirect costs related to initial and ongoing model validation, development and maintenance of IT and statistical tools, as well as administrative fee management. The document also specifies limitations, notably the absence of exemptions based on counterparty size and practical difficulties related to precise notional amount calculation.

Summary of Key Points by Theme

Regulatory framework and EBA's role: EMIR 3 assigns the EBA the central validation of pro forma models used for calculating initial margins on non-centrally cleared OTC derivatives. This validation aims to ensure uniformity and security of practices in the EU (p. 6-7).

Costs and budget: The EBA estimates that the annual costs related to this mission amount to between 1.5 and 2 million euros, mainly for specialized personnel, IT infrastructure, and external services. These costs include initial validation, ongoing validation, development of statistical and IT tools, as well as invoicing and fee collection (p. 8-12).

Fee calculation methodology: Fees must be proportional to the 12-month average notional amount of non-centrally cleared derivatives, in accordance with EMIR. The EBA proposes a main method called "Equivalent Portfolio Notional" which converts initial margins into weighted notional amounts according to regulatory coefficients. Additionally, two simpler alternative methods are proposed to reduce operational burden, notably for small entities: (i) using the total initial margin amount without pro forma distinction, (ii) applying regulatory band thresholds to estimate the notional amount (p. 13-16).

Special cases: For models already in use before EMIR 3, fees are calculated over a reference period adapted to the EBA's availability date. For new models, an annual flat fee of 500,000 EUR is distributed among requesting counterparties. Counterparties that start using a validated model after the deadlines (September 30 the first year, March 31 subsequent years) are exempt from fees for the current year (p. 4-5, 16-19).

Payment modalities: The EBA will invoice once per year, with a 30-day payment term. Invoices will be sent before October 31 to comply with the annual budget cycle. In case of delay, late payment interest in accordance with European regulations will be applied. Communication between the EBA and counterparties will be electronic, with an annual obligation to declare used models and calculated notional amounts (p. 20-21).

Public consultation and feedback: The consultation received two major responses, notably from ISDA, which highlighted the complexity and excessive cost of exact notional amount calculation. The EBA incorporated this feedback by proposing simplified methods and increased flexibility for the first year of application (p. 26-35).

Impact analysis: The EBA conducted a qualitative analysis showing that estimated costs are proportionate to legal obligations and that the proposed methods balance the need to recover costs and reduce burdens for counterparties (p. 22-25).

Main Findings and Lessons Learned

Findings: EMIR 3 imposes on the EBA a new mission of central validation of pro forma models, with the obligation to fully recover costs via fees proportional to the 12-month average notional amount of non-centrally cleared OTC derivatives (p. 6-7, 18). The estimated annual costs for the EBA are 1.5 to 2 million euros, mainly related to human resources and IT infrastructure (p. 31).

Assumptions: Fee calculation strictly based on the exact 12-month notional amount is operationally complex and costly, especially for small counterparties (p. 28-29). The proposed alternative methods (Equivalent Portfolio Notional and conservative band methods) are assumed to reduce these costs and facilitate compliance (p. 13-16).

Interpretations: The EBA considers that the simplified approach respects the principle of proportionality while reducing costs and error risks. It also recommends flexibility for the first year of application to mitigate difficulties related to retrospective data collection (p. 14, 26-27).

Uncertainties: The exact financial impact on counterparties will depend on the number of validated models and user distribution. Annual fee adjustment based on actual costs aims to limit discrepancies (p. 31, 81). Counterparties' ability to provide accurate data remains an operational challenge (p. 28-29).

Conclusions and Recommendations

The EBA recommends that the future delegated act specify that fees charged to counterparties cover all direct and indirect costs related to the central validation of pro forma models, including initial and ongoing validation, development of statistical and IT tools, as well as administrative fee management (p. 12-13).

It proposes that fees be calculated annually based on the 12-month average notional amount, with the possibility to use several simplified calculation methods to reduce operational burden, notably the "Equivalent Portfolio Notional" approach and conservative alternative methods based on regulatory bands (p. 13-16).

For new models, an annual flat fee of 500,000 EUR is proposed, distributed among requesting counterparties (p. 16-17).

Payment modalities should provide for a single annual invoice sent before October 31, with a 30-day payment term and application of late payment interest in case of non-payment (p. 20-21).

Exemptions are planned for counterparties starting to use a validated model after the reporting deadlines (September 30 the first year, March 31 subsequent years) to avoid charging them for the current year (p. 4-5, 16-19).

Finally, the EBA recommends that counterparties annually provide the EBA, before March 31, with the information necessary for fee calculation, notably the list of models used, notional amounts calculated according to the chosen method, and financial data for invoicing (p. 21).

These measures aim to ensure an effective, proportionate, and transparent implementation of the fee mechanism, ensuring that the EBA has the necessary resources to fulfill its new central validation role under EMIR 3.