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European funds could get more time to comply with new clearing rules for derivatives

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European pension funds might be granted a further three-year exemption from compliance with new central clearing rules for derivative trades, in a move that could save them collectively up €1.6 billion ($1.7 billion), the European Commission said.

The commission on Friday proposed changes to the European Market Infrastructure Regulation, which was put in place in 2012 to address concerns over the multitrillion-dollar derivatives market.

The proposals build on a consultation-type exercise on financial regulation, which found EMIR “is doing well overall,” the EC said in a news release. “However, there is room for targeted adjustments to make it more proportionate and efficient. Our aim is to achieve the same prudential results but with less cost to Europe's companies and our economy.”

The EC said it would provide pension funds with three more years to develop the technical solutions they need to take part in central clearing. “While central clearing for pension funds remains our clear goal, this temporary exemption will help them avoid estimated losses of up to €1.6 billion,” the EC said.

The three-year exemption will give pension funds, central counterparties and providers of clearing services the time to develop a solution that will enable funds to take part in central clearing, but without negatively impacting the returns of future participants, the news release said.

In a separate Q&A document, the EC said central counterparties tend only to accept cash from clients to meet variation margin calls. Because pension funds tend to limit cash positions to invest for higher returns, requiring central clearing means these funds would need to shift assets into cash. Pension funds are currently exempt until August 2018, and “if, due to unforeseen circumstances, more time is needed to develop a solution, it also provides a mechanism for the commission to extend the exemption by two years,” the Q&A document said.

The EC added in the Q&A document that, because pension funds “are active users of derivatives, the proposal makes sure that the ultimate goal is that they participate in central clearing. It therefore establishes strict criteria to assess progress in developing clearing solutions for (these funds).”