The document outlines the EBA's technical advice on fees for the validation of pro forma models under the EMIR regulation. It discusses the methods for calculating fees, payment modalities, and the costs associated with the centralized validation of models. The recommendations aim to ensure a uniform approach while addressing stakeholders' concerns about excessive costs related to the proposed calculation method.
This technical report, published by the European Banking Authority (EBA) in June 2025, responds to a formal request from the European Commission dated July 31, 2024. It concerns the proposal of a delegated act related to fees for the validation of pro forma models under the European Market Infrastructure Regulation (EMIR), amended by EMIR 3 which entered into force on December 24, 2024. The scope covers pro forma models used by financial and non-financial counterparties in the calculation of initial margins for non-centrally cleared OTC derivatives across the European Union. The document details fee calculation methods, payment modalities, as well as the estimated costs for the EBA linked to its new central validation function.
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 for calculating initial margins under EMIR 3. This centralized validation aims to ensure uniformity and security of the clearing system for non-centrally cleared OTC derivatives, a crucial issue for European financial stability (p. 3). The EBA consulted stakeholders on the scope of tasks, associated costs, the fee calculation method based on the 12-month average of monthly notional amounts, and payment modalities. Respondents welcomed the validation centralization but highlighted that exact 12-month calculation would be costly and complex, especially for small counterparties (p. 3, 26). In response, the EBA recommends that the delegated act cover all direct and indirect costs related to validation, maintenance of statistical and IT tools, as well as billing and collection (p. 3, 12). To reduce complexity, the EBA proposes simplified methods to calculate the notional average, notably the "Equivalent Portfolio Notional" method and approximations by regulatory brackets, while respecting fee proportionality (p. 13-16, 26-27). Payment modalities provide for a single annual invoice with a 30-day payment term, and specific rules for counterparties starting to use a validated model after key dates (September 30 or March 31) to avoid disproportionate fees (p. 4-5, 20-21). The EBA estimates annual costs related to this function between 1.5 and 2 million euros, mainly for staff and infrastructure, and emphasizes that fees will be adjusted annually based on actual costs (p. 10-12, 23). In conclusion, the EBA proposes a balanced, proportionate, and pragmatic framework for fee setting, ensuring financial viability of the validation function while limiting administrative burden for counterparties (p. 24-25).
EMIR 3, effective since December 24, 2024, aims to strengthen the resilience of the OTC derivatives clearing system by improving supervision of counterparties and initial margin models. The EBA is entrusted with a new central validation mission for pro forma models used by financial and non-financial counterparties in initial margin calculation, to ensure a harmonized approach across the Union (p. 6-7). Article 11(12a) of EMIR provides that the EBA collects annual fees proportional to the 12-month average of monthly notionals of non-centrally cleared amounts, covering all costs related to this function. The European Commission requested a technical opinion from the EBA on July 31, 2024, to define the fee calculation method and payment modalities (p. 3, 6-7). The objective is to establish a clear, transparent, and proportionate framework, taking into account operational constraints and stakeholder feedback, while ensuring full funding of validation activities (p. 7, 22-25). The scope excludes any exemption based on counterparty size or activity, in accordance with EMIR (p. 7).
Regulatory framework and EBA’s role: EMIR 3 assigns the EBA the central validation function for pro forma models, which are standardized models used by a large number of counterparties in the EU for calculating initial margins on non-centrally cleared OTC derivatives. This function includes initial validation, ongoing monitoring, international cooperation, and support to competent authorities (p. 6-7, 9-10).
Costs and budget: The EBA estimates annual costs related to this function between 1.5 and 2 million euros, mainly for hiring experts, developing and maintaining IT and statistical tools, as well as billing and collection activities. These costs include direct charges (salaries, consultants, IT) and indirect charges (infrastructure, shared services). The budget is managed according to an activity-based approach, balancing revenues and expenses, without recovering deficits or reimbursing surpluses to counterparties (p. 8-12).
Fee calculation methods: Three cases are distinguished:
- Case 1: pro forma models already in use before EMIR 3. Fees are proportional to the counterparty’s share in the annual average of notionals of non-centrally cleared amounts, with a minimum of 200 EUR. The average is calculated over 12 months preceding the EBA’s availability date, with the possibility to estimate over a shorter period in the first year. Several methods are proposed to calculate the notional average, the main one being the "Equivalent Portfolio Notional" which converts initial margin amounts by asset class into weighted notional amounts (p. 13-15).
- Case 2: new pro forma models. A fixed amount of 500,000 EUR per calendar year is equally shared among counterparties requesting validation of the new model. Counterparties starting to use the model after September 30 are not charged that year (p. 16).
- Case 3: steady state after initial validation. Total costs are divided by the number of validated models, then allocated proportionally among users of each model according to Case 1’s method. Counterparties using a model after March 31 are not charged that year (p. 16-18).
Payment modalities: The EBA issues a single annual invoice per counterparty and per model, with a 30-day payment term. Invoices are sent before October 31 to comply with the annual budget cycle. Late payments incur interest according to European regulations. Communication between EBA and counterparties is electronic, with an annual obligation to declare models used, average notional amounts, and financial information necessary for billing (p. 20-21).
Public consultation and feedback: Two responses were received, notably from ISDA, developer of the ISDA SIMM model. Respondents welcomed centralization but criticized the complexity and cost of exact notional average calculation. The EBA incorporated this feedback by proposing simplified methods and flexibilities for the first application year, while respecting EMIR’s legal requirements (p. 26-31).
Findings: EMIR 3 imposes on the EBA a central validation function for pro forma models with funding via annual fees proportional to the 12-month average of monthly notionals of non-centrally cleared amounts. The EBA estimates annual costs between 1.5 and 2 million euros, covering validation, monitoring, IT tools, billing, and collection (p. 6-12, 23).
Assumptions: Fee calculation must be proportional to counterparty activity, measured by the notional average. The EBA assumes most counterparties will use the "Equivalent Portfolio Notional" method to simplify calculation. The fixed amount of 500,000 EUR for new models is based on an estimate of initial validation costs (p. 13-16, 31).
Interpretations: The proposed approach balances the need to recover full costs and the desire to limit administrative burden, especially for small counterparties. Cost division by model in steady state reflects that costs are partly fixed per model (p. 16-18).
Uncertainties: The exact number of affected counterparties and frequency of model changes may vary annual costs. Counterparties’ ability to provide accurate data on notionals remains a challenge, hence the need for alternative methods (p. 11-12, 26-28).
The EBA recommends that the Commission adopt a delegated act that:
- Covers all direct and indirect costs related to the central validation function of pro forma models, including initial validation, ongoing monitoring, development and maintenance of IT and statistical tools, as well as billing and collection (p. 12-13).
- Authorizes the use of several methods to calculate the annual average of notional amounts, favoring the "Equivalent Portfolio Notional" method and simplified alternatives by regulatory brackets, to reduce administrative burden and ensure fee proportionality (p. 13-16, 26-28).
- Provides for a fixed amount of 500,000 EUR per calendar year for validation of new models, equally shared among requesting counterparties (p. 16).
- Establishes simple payment modalities with a single annual invoice, a 30-day payment term, and specific exemption rules for counterparties starting to use a validated model after key dates (September 30 or March 31) (p. 20-21).
- Allows the EBA to adjust fees annually based on actual costs incurred, thus ensuring budget balance without recovering deficits or reimbursing surpluses to counterparties (p. 9-12, 23).
This approach guarantees the financial viability of the validation function while limiting costs and complexity for counterparties, thereby contributing to the stability and security of the OTC derivatives market in the European Union.
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