The European Commission is to consider prolonging or making permanent pension funds’ exemption from a clearing obligation under EMIR, the EU derivatives regulation.

It announced the plan in connection with its response to the results of a consultation – “call for evidence” – it carried out on the cumulative effect of regulation put in place in the wake of the financial crisis.

Valdis Dombrovskis, the commissioner for financial stability, financial services and the Capital Markets Union, said: “The Call for Evidence responses show that the rules put in place after the crisis are sound but could be made more proportionate. 

“We will make adjustments to get the balance right and increase funding for the wider economy. We want legislation that commands respect and underpins a safe but dynamic financial services sector.”

The Commission said it would consider “adjusting the scope of EMIR clearing and margin requirements to address the diverse challenges faced by non-financial corporations, pension funds and small financial counterparties”.

Pension funds benefit from a temporary exemption from the EMIR clearing obligation until the middle of August 2017, with a one-year extension possible through a delegated act by the Commission.

The Commission said “an assessment should be made as to whether the current exemption could be prolonged or made permanent without compromising on EMIR’s objective of reducing systemic risk, as pension scheme arrangements would still be subject to bilateral margin requirements for OTC transactions that are not centrally cleared that mitigate systemic risks”.

The exemption for pension scheme arrangements reflects difficulties that central clearing counterparties (CCPs) have in accepting collateral besides cash as margin, and the fact pension funds typically have minimal cash holdings.

In a report on its review of EMIR, the Commission referred to progress made in developing solutions to allow pension schemes to post non-cash collateral but said “clearing solutions for pension scheme arrangements to post non-cash assets as variation margin are, however, unlikely to be available in the foreseeable future”.

The options likely to be available to pension schemes once the temporary exemption expires – relying on repo markets for collateral transformation or increasing cash holdings – would not really work and/or would have negative impacts, according to the Commission. 

It said its “REFIT” (regulatory fitness and performance) revision of EMIR was planned for early 2017, as a result of which the Commission may make “targeted amendments”.

The Commission also said the EMIR review would look at ways to reduce reporting requirements for pension funds, non-financial corporations and small financial corporations “given their lower systemic risk”.

It also said it was addressing unintended consequences of some of the EU’s post-crisis regulatory framework, giving as an example “the interaction between the bank leverage ratio and EMIR clearing obligation”.

Best solution unclear

PensionsEurope has previously warned of unintended negative consequences for pension schemes from EU bank capital rules, saying they incentive banks to accept only cash as collateral for non-cleared OTC derivative trades.

Matti Leppälä, secretary general at PensionsEurope, said the association “welcomes the European Commission’s initiative to look for good solutions for pension funds in EMIR clearing obligations and margin requirements”.

He added: “We call on the European Commission to keep this clearing exemption in place until a suitable clearing obligation has been found.

“We need to develop together a feasible long-term solution. It isn’t clear at the moment what the best solution could be and whether or not, [for example], a permanent exemption for pension would be it, but it is essential that right incentives are identified and implemented for different market participants.”

A “robust solution” needs to be found for the cash variation margin issue in cleared and non-cleared markets.

“Otherwise,” Leppälä said, “applying EMIR for pensions will not increase the stability of the financial system but will affect their long-term investments and increase the costs of pensions.”

The UK’s Pensions and Lifetime Savings Association (PLSA) has previously called for pension funds to be granted an indefinite exemption from the EMIR clearing obligation.

James Walsh, EU and international policy lead at the PLSA, said the Commission’s fresh statements were encouraging. 

“They recognise that pension funds pose only a low systemic risk to the economy, and they acknowledge the difficulties caused for pension funds by banks’ increasing insistence on cash as variation margin.

“Action on this front would be very helpful.”

The Commission’s review of European financial-services regulation is also leading it to propose steps to lower barriers to long-term investment, mainly via changes to bank capital and insurance solvency rules.