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EMIR directive will increase collateral costs for pension funds, PGGM warns

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  • EMIR directive will increase collateral costs for pension funds, PGGM warns

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EUROPE - The new European Market Infrastructure Regulation (EMIR) directive on over-the-counter derivative (OTC) trades will oblige pension funds to post more collateral at a much higher cost, PGGM has warned.

Speaking at the World Pension Summit in Amsterdam, Niels Kortleve, innovation manager at the €105bn Dutch pensions provider, argued that, even though pension funds have been exempted from the EMIR directive for the next three years, it could deeply impact European schemes in the future.

"The regulation on OTCs is putting pressure on banks, asking them to comply with higher capital requirements," Kortleve said. "Clearly, banks will need to ask their clients to contribute to this effort, which could lead to a price increase in the future.

"This will therefore represent an extra cost for pension funds both in terms of payment of fees and posted collateral."

However, Kortleve conceded that the new directive could give European pension schemes an opportunity to export their experience on derivatives, as well as show the relevance and impact of such instruments on the pension sector.

"But at the moment, it seems like the threat caused by the new regulation on OTCs will be greater than the potential pipeline of opportunities," he said.

The EMIR directive proposal, which was adopted by the Council of the European Union in May, previously required pension funds to comply with the same capital requirements as banks and hedge funds.

After negotiation, the European Commission agreed to exempt pension institutions for a period of three years.

Yet Robert Gardner, co-founder and chief executive at consultancy Redington Partners, pointed to the risk that, after that, pension funds would have to comply with the EMIR proposal.

"If the regulation falls away, it will require a lot of planning," he said. "Pension schemes will be required to use a prime broker to be able to post and manage those trades.

"The problem is that there are a lot of regulatory documents that need to be set up, so only big global banks will be able to play the role of prime broker."

According to Gardner, the smart move to make for pension funds would be to start talking to prime brokers immediately and not wait for 3-4 years until the exemption runs out.

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