The Pensioenfederatie is opposing a proposal by the European Commission to compel pension funds to clear at least a part of their derivative transactions inside the EU. The umbrella organisation of Dutch pension funds fears this will force pension schemes to clear at Eurex in Frankfurt.
The European Commission made a proposal last December to reform the European Market Infrastructure Regulation (EMIR) in order to make EU clearing more attractive.
The reform proposal included a demand by the Commission that market participants such as pension funds maintain an active account with a central counterparty (CCP) registered in the EU. In practice, this is Frankfurt-based Eurex. The other main CCP in Europe is London-based LCH.
While four European associations criticised this demand back in February, the Pensioenfederatie said in its response to the proposal that it “understands” the requirement for pension funds and other market participants to be able to clear at an EU-registered CCP.
“Having multiple accounts, which is already common among larger Dutch pension funds, contributes to risk diversification,” it added.
However, the advocacy group for Dutch pension funds resists the Commission’s plan to require pension funds to clear a certain portion of their transactions at an EU CCP. The Commission wants regulator European Securities and Markets Authority (ESMA) to determine a minimum percentage of swap transactions this should apply to.
According to the Pensioenfederatie, the requirement would in practice force pension funds to clear with Frankfurt-based Eurex, depriving funds from being able to choose the best market conditions.
“This is at odds with the principle of best execution. If pension funds are forced to take out derivatives with a less attractive swap rate, for example because of reduced liquidity, this could lead to poorer investment results and lower pensions,” the Pensioenfederatie warned.
The Dutch umbrella organisation also fears there will no longer be a level playing field between European financial institutions that are required to clear a certain percentage at Eurex and non-European financial parties that do not have to do this.
Referring to the fact that smaller funds carry out only a few derivatives transactions per year, the Pensioenfederatie added that having to clear a minimum percentage at an EU-based CCP could lead to “a situation where they have very little flexibility.”
Exemption to expire in June
Pension funds are exempted from central clearing until 19 June 2023. After that, funds with derivative positions above a certain threshold must clear their transactions centrally. According to the Pension Federation, that threshold for interest rate swaps is €3 bn.
According to an ESMA report, in 2021 about 40% of the number of derivatives transactions by pension funds in the EU were cleared centrally. That is a quarter of the total value of derivatives transactions.
This article appeared originally in Pensioen Pro, IPE’s Dutch sister publication.