The European Commission will review legislation that could force pension funds to centrally clear over-the-counter derivatives transactions.
The European Market Infrastructure Regulation requires that over-the-counter derivatives trades are cleared through central counterparties, which in turn require that cash be posted as margin against these trades. Pension funds were granted a temporary exemption until August 2015, which can be extended until only 2018 before a legislative change is necessary.
“While it is too early to (make) a decision, I will be launching a review of the EMIR legislation shortly, which will provide an opportunity for reflection,” said Lord Jonathan Hill of Oareford, European commissioner for financial stability, financial services and capital markets union, speaking Thursday at the National Association of Pension Funds annual investment conference in Edinburgh.
“I know you are also concerned that EMIR will increase the cost of hedging for pension schemes through the requirement of the posting of an initial margin and consequently will lead to a reduction in equity investments.”
Mr. Hill said he recognizes that pension funds do not generally hold cash. “If they were required to clear through a CCP and to source the necessary cash for margin calls, this could ultimately reduce pensioners' retirement income,” he said.
“No possible alternative solutions for the posting of non-cash assets by pension schemes have yet been found,” he added.
The legislation, passed in 2012, included a three-year temporary exemption for pension funds from OTC clearing, until August 2015. In February, a European Commission report recommended a further exemption until August 2017.
“Thereafter, the commission could extend the exemption by another year, but any exemption after 2018 would require a legislative change,” Mr. Hill said.
He encouraged pension funds to participate in the review to ensure the requirements of EMIR are “balanced against the need to preserve investment practices of pension funds.”
In a separate speech Thursday, Steven Maijoor, chairman of the European Securities and Markets Authority, told delegates that the supervisory authority would launch a second consultation paper on the topic of non-centrally cleared OTC derivatives trades, “in a few weeks."