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IPE special report May 2018

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BNY Mellon warns European pension funds on impact of Dodd-Frank

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  • BNY Mellon warns European pension funds on impact of Dodd-Frank

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GLOBAL – European pension funds and asset managers will have to determine what requirements they will have to meet under the upcoming Dodd-Frank Act depending on whether they deal with a US office or a non-US branch of a US swap dealer, BNY Mellon has warned.

In a report entitled 'Are You Ready? New Swap-Trading Requirements for Pension Plan Asset Managers', BNY Mellon urges asset managers working on behalf of pension funds to ascertain whether they should change their trading structure depending on the entity they trade with.

It said that if a pension fund were a "US person", or if it dealt with a US office of a US swap dealer, all swap-related requirements would apply.

"However," it added, "a pension plan that is not a US person may face fewer requirements when transacting with a non-US swap dealer, or with a non-US branch of a US swap dealer, than when facing the US home office of a US swap dealer."

BNY Mellon stressed that, under US law, the term "US person" generally refers to any company having its principal place of business in the US, or to any pension fund covering the pensions of US employees.

It also recommended pension funds and their asset managers determine whether the pension fund would be considered a "US person" and, if not, whether changes in trading structure might be of benefit.

Last year, a number of consultants advised European pension funds to suspend their derivatives trades with US companies until the Dodd-Frank rules were amended.

At the time, the US regulation ruled that every US bank, as well as its branches and/or overseas subsidiaries, would be subject to Dodd-Frank rules.

Last month, the Commodity Futures Trading Commission (CFTC) adopted the final guidance on Dodd-Frank in which it imposes similar requirements for US swap dealers.

However, the CFTC stresses that non-US branches of US swap dealers dealing with foreign pension funds can meet the criteria set under Dodd-Frank through "substituted compliance".

This means those market players will have to meet the requirements set in the jurisdiction where they make business, as long as those requirements are comparable with the ones designed under Dodd-Frank.

In Europe, for instance, similar central clearing rules are set under the European Market Infrastructure Regulation (EMIR).

However, unlike in the US, where those rules will prevail for pension funds as soon as the measures come into force on 9 September, pension schemes in Europe are temporarily exempt from the central clearing requirements.   

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