Three of Europe’s largest pension managers have warned the European Commission about the unintended consequences of bank capital requirements on the sector’s ability to access derivatives clearing.
APG, PGGM and Mn, jointly responsible for more than €700bn in Dutch pension assets, said bank capital requirements were increasing costs associated with repo markets, in turn impacting the bond market as a whole.
In a joint letter with Insight Investment to the financial services commissioner Jonathan Hill, coming as part of the European executive’s consultation on the regulatory framework for financial services that concluded at the end of January, the investors called for recognition of the repo market’s importance, as the current regulatory approach risks reducing financial stability and triggering a liquidity crisis.
The coalition of investors also backed the idea of central clearing for pension funds as long as suitable mechanisms for clearing could be developed.
It noted that many of the mechanisms being considered to allow pension funds to access central clearing were not yet fully developed and would likely only work when markets were functioning normally.
“At a time, when the repo markets are coming under significant pressure, as explained above, it is unlikely a solution devised by the industry alone, and based on the repo markets, can be relied upon in stressed market conditions,” it added.
“We would need policymakers’ support to ensure any collateral transformation service can be relied.”
PGGM has previously warned of the risk associated with markets becoming illiquid, proposing a guaranteed repo facility for pension investors in instances of market stress.
A number of submissions from pension funds and industry associations have focused on the importance of the Commission ensuring the clearing market works for pension investors.
ATP said it agreed with the notion of central clearing but urged it be done in such a way that did not undermine financial stability.
The Pensions and Lifetime Savings Association, the UK’s industry body, meanwhile urged an indefinite exemption from central clearing, rather than the time-limited one proposed under the European Markets Infrastructure Regulation.
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