Pension funds in Europe should be granted a further two-year exemption from compliance with new central clearing rules for over-the-counter derivative transactions, said a report from the European Commission.
The exemption temporarily saves pension funds from an estimated €2.3 billion ($2.6 billion) to €2.9 billion annual cost of clearing.
The European Market Infrastructure Regulation requires financial entities to clear their OTC derivatives transactions through a central counterparty, in an effort to mitigate risks in the derivatives markets. It came into force in August 2012, and pension funds were initially granted an exemption until August 2015.
However, the EC commissioned the report to identify whether there had been sufficient progress in solving a problem specific to European pension funds that hedge interest rate and inflation risks through the use of OTC derivatives. To clear these instruments CCPs require that collateral, in the form of highly liquid assets — generally cash — be posted against positions.
“Pension funds aim to be fully invested,” the EC's report said. “Therefore the concern is that in order to hold cash to post (a type of collateral), pension funds would need to reduce their investments, which could have an impact upon investment returns.”
The EC recommended a further two-year exemption from central clearing on the basis that CCPs “need this time to find solutions for pension funds,” said a statement accompanying the report.
The report also set out a number of ways for central clearing to be made accessible for pension funds. “But none of them is straightforward and it is sensible to take more time to develop a solution which is proportionate,” said Jonathan Hill, European Union commissioner for financial stability, financial services and capital markets union.
