The EU financial markets watchdog has told the European Commission that pension schemes should have one more year before they have to start clearing their over-the-counter (OTC) derivatives.

In a letter to the Commission published yesterday, ESMA said pension schemes were “largely operationally ready” and that a mix of solutions were available to them, including sponsored cleared repo models.

In 2019 Dutch pension provider PGGM announced it would will start carrying out part of its repurchase agreement (repos) transactions through central clearing, via Eurex Clearing.

In ESMA’s opinion, the exemption from the clearing obligation, first introduced and always meant to be temporary, should therefore stop.

However, it said, pension schemes and the relevant market participants needed enough time to finalise clearing and collateral management arrangements in order to absorb the “important” additional clearing volume linked to pension funds’ OTC interest rate derivative trading activity that was not already voluntarily cleared.

“In addition, the start of the clearing obligation for [pension schemes] should be considered in the context of the broader plan to build clearing capacity in the EU and reduce reliance on UK central counterparties, to which the end of this exemption can also contribute,” ESMA said.

Overall, the watchdog said it recommended a final one-year extension of the exemption, for the clearing obligation for pension schemes to kick in on 19 June 2023.

ESMA also said the Commission should communicate its decision with sufficient lead time for pension schemes and others to adapt their implementation plans accordingly.

One more year ‘great news’

Many pension schemes have already started voluntarily clearing OTC derivatives, but at PensionsEurope in Brussels, chief economist Pekka Eskola told IPE that ESMA’s recommendation for a one-year extension of the exemption was positive news.


Pekka Eskola, PensionsEurope

For many pension funds, he noted, an integral part of their investment approach is to use OTC derivatives to manage their financial solvency risk as their liabilities are often long-dated, one-directional and linked to interest rates and/or inflation.

“Pension schemes have been exempted [from the clearing obligation] because of the liquidity risks arising from margin calls for cleared transactions, and as no solution is yet found for the possible large variation margin calls, it is still necessary to extend the exemption,” he told IPE.

“Pension schemes are concerned about the tighter capital rules for banks”

Pekka Eskola, chief economist at PensionsEurope

Asked about the final nature of the further exemption proposed by ESMA, Eskola said it had been clear that the exemption would come to an end, and that pension schemes had had time to prepare even though no long-term solution had been found.

“Pension schemes are concerned about the tighter capital rules for banks, which has dampened the liquidity of the repo markets and the envisaged negative impact of the pending CRR/CRD proposals on securities lending (particularly the treatment of unrated PSAs as counterparties),” Eskola said.

“It would be good if the European central clearing houses could provide (indirect) central bank liquidity to pension schemes in times of stress to convert high quality government bonds into cash.”

The current exemption from the clearing obligation runs until 18 June 2022. When the Commission last year consulted on the rules providing for a further exemption until that date, PensionsEurope said it expected another extension, until June 2023, would be necessary.

Eskola told IPE he hoped the Commission would start the process for introducing the next set of rules earlier, as last year at one point it was not clear if there would be a gap between the then exemption period and the current one.

“That created some uncertainty and I hope the Commission has learned from that,” he said.

In late 2020, Danish statutory pension fund ATP welcomed ESMA allowing  EU operators to continue to use major UK clearing houses after the end of the year, as the pension fund was continuing to move derivative contracts out of the country because of Brexit.

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