The European Commission is considering changes to central clearing requirements for certain derivatives trades for pension funds as part of a review of European regulation.
Pension funds in Europe are exempt from the requirement to post cash for initial margin for central clearing under the European Market Infrastructure Regulation until August 2017, and that might be extended one additional year.
As part of the review of the EMIR, the European Commission concluded: “An assessment should be made as to whether the current exemption could be prolonged or made permanent, without compromising on EMIR's objective of reducing systemic risk.”
The EC review highlighted the progress and effort made by central clearing counterparties in developing ways for pension funds to post the required collateral as margin. “Clearing solutions for pension scheme arrangements to post non-cash assets as variation margin are however unlikely to be available in the foreseeable future.”
Rather, upon expiration of the exemption, pension funds will either need to rely on repo markets for collateral transformation trades to satisfy their need for collateral or increase their cash holdings. “The first scenario may not provide a robust solution in times of market volatility, and a strain on capacity of the repo markets could pose liquidity and stability threats to those markets more broadly. The second scenario would have a negative impact on retirement incomes of beneficiaries of the pension scheme arrangements, estimated by the baseline study ordered by the European Commission to be up to 3.66% across the (European Union) over 20-40 years,” the review said.
The EC said a regulatory fitness and performance revision of EMIR is planned for early next year “in order to eliminate disproportionate costs and burdens to small companies in the financial sector, (corporations) and pension funds, and to simplify rules without putting financial stability at risk.”
