The European Commission has proposed a further two-year exemption, starting from August 2015, for pension funds having to clear their derivatives trades through central counterparty clearing houses (CCPs).
In a report, the European executive said CCPs had failed to develop any infrastructure allowing pension funds to overcome the hurdles posed by clearing and that more time was required to devise solutions for the industry.
It added that, ultimately, the objective was for pension scheme arrangements (PSAs) to use central clearing for their derivatives transactions, as was the case for other financial institutions – a matter, it argued, imperative for financial stability.
However, the report accepted that the Gilt and Bund markets were unable to deal with demand, and that daily requirements would exceed the daily capacity of the UK Gilt repo market.
Under current arrangements, PSAs – which encompass all categories of pension funds – would have to source cash for central clearing.
Given that PSAs hold neither significant amounts of cash nor highly liquid assets, imposing such a requirement on them would require very far-reaching and costly changes to their business models, which could ultimately affect pensioners’ income, the document stated.
It estimated that shifting to a system of posting cash collateral – one of the alternatives in the absence of using high-grade bonds – would reduce retirement income by 3.66% across member states, with the UK seeing a reduction of 3.1% and the Netherlands a loss of 3.2% over 40 years.
Jonathan Hill, the financial services commissioner, said: “Today’s report sets out a number of potential ways to facilitate central clearing for pension funds. But none of them is straightforward, and it is sensible to take more time to develop a solution that is proportionate.”
The European Market Infrastructure Regulation (EMIR), which entered into force on 16 August 2012, was designed to improve the stability of the over-the-counter (OTC) derivatives markets throughout the EU.
The Regulation allowed for a three-year exemption for pension funds, until August 2015, with a further three-year exemption possible.
Pension funds told IPE last year they were of the view the Commission would continue to offer an exemption for the industry.
Last year, Hill also indicated that he would seek to propose a resolution mechanism for CCPs, which he saw as falling in the same ‘too big to fail’ category as banks.