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IPE special report May 2018

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Derivatives clearing diverts capital from long-term investing – PensionsEurope

Mandating central clearing of derivatives trades would only serve to increase profits for clearinghouses and could increase risk, PensionsEurope has warned. 

In a discussion paper on the Capital Markets Union (CMU), published to coincide with the industry group’s annual conference in Brussels, the association warned that a more coherent capital market could be undermined by regulatory requirements diverting funds away from investment opportunities.

It said the CMU would only be a success if it truly facilitated long-term investment by pension funds, and the sector were not hampered by existing prudential regulation that “excessively” limits exposure to long-term projects.

The association said it accepted that central clearing of derivatives, from which the sector recently won a further two-year exemption, was an important piece of the financial reform decided upon by G20 nations in the wake of the financial crisis.

But it argued that the resulting European Markets Infrastructure Regulation (EMIR) was not based around the risk of default.

“Without a fundamental review, pensioners (European tax payers) are expected to pay for a system that facilitates highly profitable private institutions to benefit substantially from mandatory clearing,” it said. 

“But this system puts pensioners’ money at risk, and pension funds may even become less safe as a result of EMIR.”

It also said the proposed financial transaction tax (FTT) should distinguish between short-term speculative investments and long-term, buy-and-hold investors.

Separately, PensionsEurope threw its weight behind the idea that the Commission should reduce the political risks associated with long-term investments such as infrastructure.

The Institutional Investors Group on Climate Change previously suggested EU-level guarantees could be offered to insulate investors from retroactive policy changes affecting renewable energy projects.

Joanne Segars, chair of PensionsEurope, said the Commission should address any barriers holding back pension funds from being long-term investors.

“This PensionsEurope discussion paper calls on policymakers to refrain from imposing inappropriate quantitative measures or capital requirements on pension funds, which would have negative effects on their investment capabilities – and, consequently, on the goals of the CMU,” she said. 

Segars warned that the European Insurance and Occupational Pensions Authority’s (EIOPA) proposed holistic balance sheet would be “disastrous” for all affected IORPs and the goals the Commission hoped to achieve by launching the CMU.

She also questioned the need for EIOPA’s current stress tests and said the supervisor had yet to make the case for enhanced solvency rules that could follow on.

Her comments come after Jonathan Hill, commissioner for financial stability, said he was “not opposed” to further solvency rules being introduced.

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