EUROPE - Pension funds could see legislation regulating their use of over-the-counter (OTC) derivatives introduced prior to the end of the three-year reprieve, a partner of law firm Sackers has said.

Speaking after the European Parliament's Economic and Monetary Affairs Committee last week passed an amendment that would see pension funds exempt from the new derivatives legislation for up to three years, Andrew Bradshaw said the directive could have otherwise caused a "real headache" for UK lawmakers.

"In theory, sooner than in three years they could say they are going to put this new special regime in," he warned. "We'll have to wait and see what it is."

Bradshaw credited the European Union for listening to industry concerns and accepting that they had potentially acted rashly.

"We've got the legislation in place already," Bradshaw said of the legal situation in the UK.

"There are already some provisions in some investment regulations that are pretty clear that you can only use these type of derivatives for efficient portfolio management, or if it's to reduce risk, and if it is, you've got to divert the risk with a variety of counterparties."

He cited inflation-rate swaps and longevity hedges as two areas where legislation would otherwise immediately impact on pension schemes.

The amended regulation is due to be signed off by the European Parliament in a plenary session in early July.