European pension funds might find it more economical to begin clearing their derivatives trades through central counterparties sooner rather than later, due to incoming bilateral rules.
Central clearing has become mandatory for most players in the over-the-counter derivatives market under the European Market Infrastructure Regulation, except for pension funds. To clear in this way, they must post collateral with the central counterparty in the form of cash for variation margin or high-quality liquid assets for initial margin.
But difficulties in sourcing the assets CCPs will accept as collateral have pushed the European Commission to extend an exemption — originally scheduled to end Aug. 16, 2017 — through August 2018, allowing pension funds breathing room on complying with the regulation. The European Commission granted an exemption until Aug. 16, 2018, late last year, concluding CCPs need additional time to find solutions for pension funds.
Following the decision, the regulator is due to conduct a review of EMIR in the first quarter of 2017, in consultation with asset owners, which will assess whether the current exemption could be prolonged further or made permanent.
While the exemption had sources at pension funds relieved, the realization of incoming requirements for non-centrally cleared derivatives trades, or bilateral trades, might have made that relief short-lived. After March 2017, bilateral trades will be subject to new margin rules under the Basel Committee on Banking Supervision and the International Organization of Securities Commissions framework, under which all users of uncleared OTC portfolios will need to exchange variation margin daily. And, this might just mean pension funds choose to get a head start on central clearing anyway.