Pension schemes will be exempt from derivatives legislation despite US pressure

Anne Plested

Seems there may still be time for more industry lobbying!

Extract from article in Financial News

“MEP Kay Swinburne, a former investment banker who sits on the Economics and Monetary Affairs Committee of the European Parliament, told a London trading conference that the European Parliament is considering granting pension schemes a full exemption from the new rules.

The new rules, outlined under the European Market Infrastructure Regulation, are designed to improve the transparency and robustness of the European derivatives market. Under the new rules, the majority of firms that trade in derivatives, including pension funds, would be required to clear their trades through a central clearing counterparty.

This would create additional cost by requiring funds to post collateral upfront in order to secure the trade, as well as requiring firms to pay clearing fees and to provide daily variation margin. Clearing houses require highly liquid collateral meaning pension funds may be required to liquidate some assets in order to meet the clearing house collateral requirements.

However, speaking at the WBR TradeTech trading conference yesterday, Swinburne said that the Economic and Monetary Affairs Committee was holding an “exchange of views” meeting on the new rules next week that could result in a “full exemption for pension funds.”

Financial News reported on Monday that policymakers in both the European Parliament and Council are close to approving an exemption for pension funds, which were not the intended target of the regulation.

Many pension schemes use over-the-counter derivatives to help manage their liabilities, and an exemption from the rules would allow them to conduct the trades without providing collateral.

Swinburne confirmed yesterday that policymakers in the European Council and European Parliament were leaning towards providing an exemption on pension funds, and added that property firms may also be exempted from some parts of the text.

Emir was proposed in response to policymakers’ perception that OTC derivatives had exacerbated the financial crisis. Part of the US Dodd-Frank Act was designed to make the derivatives market more transparent and more robust, and Emir is the equivalent in the EU.

Swinburne yesterday described the EMIR legislation as “the most co-ordinated piece of legislation ever” between the US and Europe, and said that regulators from the regions were in “intense and frequent” dialogue over their reforms to the OTC markets.

She added: “This is the point in time for financial services firms to engage with regulators. The industry needs to come up with alternative solutions and engaging early with reasoned arguments can have really positive effects.”

One Response to “Pension schemes will be exempt from derivatives legislation despite US pressure”
  1. Robin Strong says:

    This is a great example of defining the solution before analyzing the problem!

    In this case, the defined solution is “all OTC trades should be centrally cleared”. This is not a problem for most investment managers, apart from the obvious cost implications. It is clearly an issue for certain types of investment firm, particularly those that hold little cash in their portfolios e.g. life and pension firms and property investment firms. Forcing these types of firm to comply will reduce one set of risks (OTC counterparty exposure) only to increase another set of risks (ability to meet liabilities, interest rate risks, etc.), and the regulator will have to determine which is the lessor of the two evils!

    The unfortunate thing is that the regulator is likely to decide on a black or white basis which types of firm will have to comply with the specified clearing model, rather than assessing the effectiveness of the chosen clearing model. If there is a resolute desire to have all OTC trades centrally cleared then some analysis should be done to figure out how to establish a revised clearing model to enable firms that don’t hold sufficient cash to comply. For example, looking into a clearing model that would allow less liquid assets to be posted as collateral; or reviewing contingent title transfer mechanisms; or looking at a different relationship between trade parties, clearing houses and custodians. There isn’t necessarily an easy solution, espeically in the available timeframe, but that certainly shouldn’t prevent sufficiently thorough analysis of the problem!

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