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EC drops pension fund concentration limit from final EMIR rules

The European Commission has disregarded objections from the European Supervisory Authorities (ESAs) about the removal of a sovereign concentration limit for pension schemes from rules on non-cleared over-the-counter (OTC) derivatives.

Under final rules adopted earlier this week, pension schemes posting more than €1bn in collateral with a single counterparty will no longer face a requirement to diversify that collateral so that no more than half is in government bonds from a single country or issuer.

This requirement, which pension schemes have fought against, was in draft regulatory technical standards (RTS) the ESAs submitted to the Commission.

In late July, however, the Commission called for these to be amended, including by scrapping the concentration limit provision for pension schemes, as this would make them take on foreign currency risk.

The technical standards are part of the European Market Infrastructure Regulation (EMIR).

A spokeswoman for ESMA, one of the ESAs, explained that, under the inter-institutional process for rule making in the EU, if the Commission decides to ask for amendments to technical standards, the ESAs must produce an opinion, stating their views on the desired amendments.

Several weeks later, the supervisory authorities did so, rejecting the Commission’s position and leaving the pensions industry with some uncertainty as to the final outcome.

After receiving the ESAs’ opinion, the Commission decides on a final text without consulting them further. In this case, it disregarded the authorities’ objections.

A spokeswoman for the Commission told IPE the main areas of change to the draft RTS “relate to a number of improvements to the legislative drafting of the standards and the element related to the requirements applying to pension scheme arrangements for which the European Commission retains the text proposed at the end of July”.

In relation specifically on the latter, the Commission said: “While the Commission supports the ESA intention, taking into consideration the costs and risks of foreign-currency mismatches and additional counterparty risks that the application of such concentration limits would entail, the Commission deems it more appropriate to replace the concentration limits by specific management risk tools to monitor and address potential risks, which application should be reviewed after three years of their implementation.”

Under the final regulation, collateral of more than €1bn posted by a pension scheme with a single counterparty must be “adequately diversified” (the list of eligible collateral includes a mix of member state sovereign and agency debt).

The Commission’s adoption of the rules this week takes the form of a Delegated Regulation and is subject to an objection period by the European Parliament and the Council.

It will then be published in the Official Journal, which marks its entry into force.

Implementation begins one month later. 

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