The European Securities and Markets Authority on Tuesday called on European Union member states to hold off before penalizing pension funds for not meeting variation margin requirements when clearing over-the-counter derivatives, according to a news release.
Under European Market Infrastructure Regulation, participants in OTC trades — including asset owners — are required to meet initial and variation margin requirements. However, pension funds have been exempt due to their inability to post cash collateral as variation margin.
The European Commission, after consulting the industry, proposed last year that a relevant technical solution for pension funds is found in the market at the central counterparty level. To date, the European Commission, which proposes and implements legislation, has granted two temporary exemptions from clearing obligation to pension funds to allow time for a solution to be found.
However, with the impending expiration of the current exemption on Aug. 17 and the lack of a technical solution available for the transfer of non-cash collateral as variation margins, ESMA has asked supervisory authorities to postpone action against breaches to the current EMIR rules on the part of pension funds until the third or the fourth quarter of the year.
ESMA wants to cover any gap in time between when the amended version of EMIR, known as EMIR Refit, goes into effect and when the European Parliament and European Council negotiations are finalized. The European Council sets the European Union's overall political direction and priorities.
ESMA said in the news release: "The two positions adopted respectively by the European Parliament and the council on the Refit proposal also recognize the absence of a suitable technical solution for the transfer of non-cash collateral as variation margins and thus also appear to support the view of a further extension of the temporary exemption for (pension funds) from the clearing obligation, although with different lengths of the exemption between the two positions."
ESMA continued: "Any changes to the application of the EU rules would formally need to be implemented through EU legislation, and in this case through the amendments to EMIR resulting from the Refit negotiations. ESMA nonetheless acknowledges the difficulties that certain (pension funds) would face to start clearing their OTC derivative contracts (on Aug. 17) in the eventuality the Refit proposal is not applicable by then, and during this expectedly limited period of time until the day when the exemption will be effective again."