EUROPE – Clearinghouse CME Clearing Europe has launched an industry group looking into the impact of the European Markets Infrastructure Regulation's (EMIR) Article 47.3, arguing that the rules could "deeply" impact end-user clients of derivatives such as pension funds.

Andrew Lamb, chief executive at CME Clearing Europe – a subsidiary of US clearinghouse CME Group – told IPE the industry group, which comprises around 30 derivatives market participants including pension funds, would seek "representation" in Brussels to convince the European Securities and Markets Authority (ESMA) to soften its approach.

In Article 47.3 of its technical guidelines on EMIR, ESMA recommends that initial margins for derivatives trades be held with securities settlement systems – also known as central securities depository (CSD) – that ensure the "full protection" of those financial instruments.

Under the new EMIR rules, market players using derivatives will be required to centrally clear their trades, at least those for which clearinghouses have put in place clearing platforms such as interest rate swaps and credit default swaps (CDS).

Additionally, clearinghouses are likely to allow initial margins to be posted as cash and securities.

However, pension funds have voiced concerns over the risk of losing their non-cash instruments if a clearing member – usually a bank – defaults and they would rather place their collateral into segregate accounts.

While a large majority of pension funds already have segregated accounts with custodian banks, others have yet to put in place such accounts.

Clearinghouses have therefore launched similar segregated accounts to offer the possibility to hold the positions and the collaterals of their clients in the event of a default.

According to Lamb, one of the industry's biggest concerns is that ESMA may take a "strong view" on this in Article 47.3.

He argued that, if ESMA requires custodian banks to register as a CSD and prevent clearinghouses from offering segregated accounts to their clients, it could have a direct impact on pension funds.

Additionally, not all custodian banks would wish to obtain a CSD status, he said.

"Article 47 is fine, but we are aware some people could read this article in a narrower sense, meaning clearinghouses do not have the discretion and would be prevented in any circumstance from using collateral safe-keeping arrangements unless those collateral arrangements are provided by CSDs," he said.

"Many [pension funds] have a preference for using the custodian services from banks that are not currently organised and don't have authorisation and designation as CSD."

Mark Higgins, managing director of clearing and collateral management at BNY Mellon, echoed those thoughts, pointing out that, depending on the stance ESMA takes on Article 47.3, custodian banks unregistered as a CSD might be unable to offer segregated accounts to their clients any longer.  

"If an asset manager, on behalf of a pension fund, wanted to pursue full segregation of collateral with its traditional custodian, it might have no other option but to revise its position if the latter was not registered as a CSD," he said.

A number of large custodian banks are currently looking to register as a CSD.

BNY Mellon launched a CSD business line in January, while JP Morgan is reportedly looking to launch a similar business.