European Union member states have endorsed another extension of the exemption from central clearing for pension funds.
The European Council adopted this position in the week of 18 December, going along with the proposal made by the European Commission in May.
The European Parliament still has to decide its position on the proposed amendments to the European Market Infrastructure Regulation (EMIR). Politicians in its Economic and Monetary Affairs Committee (ECON) are due to vote on the matter in April, according to Matthies Verstegen, policy adviser at PensionsEurope.
He said this schedule means it will be challenging for the Commission’s proposals to formally become law by August, when pension schemes’ current exemption from the central clearing requirement expires.
PensionsEurope hopes the European Parliament will consider granting an open-ended exemption rather than the time-limited one proposed by the Commission and endorsed by the Council, even though this was helpful.
An open-ended exemption, to be revoked once a solution is found to the problems facing pension funds in the context of EMIR’s central clearing obligation, “would provide better incentives for all actors”, said Verstegen.
“Pension funds are absolutely committed to solving this problem, because liquidity is shifting from the bilateral to the cleared markets, but central counterparties might assume that business will come their way once the exemption runs out,” he said.
Currently, central counterparties (CCPs) require market participants to post collateral in cash, which pension funds tend not to hold much of because of their low liquidity needs and their long-term investment horizon. They argue that having to post cash as collateral for centrally cleared derivative transactions would hurt their returns, and that they should be allowed to post government bonds as collateral.
In May last year the Commission proposed that the exemption from central clearing be prolonged by three years because a solution allowing pension schemes to post assets other than cash as collateral had not yet been developed.
Pension funds were first granted an exemption from the obligation to centrally clear over-the-counter derivatives in 2012. This exemption was due to expire in August 2017, but a decision in December 2016 pushed this back by one year.
The Commission’s proposal for amendments to EMIR were made in the context of its Regulatory Fitness and Performance (REFIT) programme.
Werner Langen, a member of the European Parliament’s Christian Democrats party grouping, was appointed the ECON rapporteur for the EMIR amendment proposals in July.