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EC heeds pension concerns on EMIR sovereign-bond collateral rule

Pension schemes could be exempt from a diversification requirement relating to the use of sovereign bonds as collateral for non-centrally cleared derivatives, after the European Commission said the obligation should be scrapped.

The change concerns a provision in draft regulatory technical standards (RTS) on “risk-mitigation techniques for over-the-counter (OTC) derivatives not cleared by a central counterparty” under the European Markets Infrastructure Regulation (EMIR).

Under the existing provision, which the Commission wants to amend, pension funds posting more than €1bn in collateral with a single counterparty cannot have more than half of that collateral in government bonds from a single country or issuer.

The Commission, writing to European regulators last week, said it was necessary to change this provision.

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“This amendment is based on new evidence received following the submission of the draft RTS by the ESAs [European Supervisory Authorities], which the Commission believes should be taken into account to ensure the proportionate application of those requirements,” it said.

More specifically, it said: “Given the fact the application of such concentration limits to certain pension scheme arrangements would require them to enter into foreign currency transactions introducing the costs and risks of foreign currency mismatches, it would be disproportionate to apply the concentration limits in the same manner as other counterparties.”

The Commission proposes removing the limit “in line with the co-legislators’ intention to avoid excessive burden on the retirement income of future pensioners as reflected in Recital 26 of EMIR”.

The sovereign-issuer concentration provision was one of the derivative rules some of Europe’s largest pension managers raised concerns about in a letter to the Commission earlier this year.

APG, the €417bn Dutch asset manager, was one of the key signatories.

An APG spokesperson told IPE the pension fund was pleased with the amendments to the draft RTS.

“APG has expressed worries multiple times that the concentration limits would cause enormous operational complexity and are more likely to increase, rather than decrease, liquidity risk,” said the spokesperson.

“APG has argued for removing the limits, especially for government bonds.”

Insight Investment also put its name to the letter to the Commission, and Vanaja Indra, market and regulatory reform director at the investment manager, said the Commission’s decision was “a positive development, particularly for large pension schemes that might otherwise have been forced to take unnecessary foreign exchange risk”.

She added: “It recognises the concern that pension funds have liabilities denominated in local currencies and therefore should be allowed to post domestic government bonds denominated in the local currency as collateral for OTC derivatives.”

The dis-application of the rule will be reviewed in three years.

Sebastian Reger, a partner at law firm Sackers, said the rule change relating to the diversification for pensions schemes was positive but, in practice, would not mean much for UK schemes.

“It’s good, but it’s not revolutionary,” he told IPE.

“The previous draft provisions already weren’t that bad for most UK schemes, which also typically aren’t big enough for the diversification requirement to be an issue.”

The Commission endorsed the draft RTS, including the scrapping of the aforementioned requirement for pension schemes, on 28 July.

The ESAs, which adopted the technical standards in March, have six weeks to respond to the Commission’s amendments. 

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