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EU bodies agree extension of derivatives clearing waiver

The European Parliament and EU member states have reached an agreement on extending pension schemes’ exemption from an obligation to centrally clear derivatives.

This means large pension schemes will be exempt from the requirement for another two years, with the possibility of two one-year extensions if insufficient progress is deemed to have been made on solutions to deal with what is sometimes referred to as “the cash collateral problem”.

To centrally clear derivatives, pension funds would need to hold cash to post as collateral, but they typically do not do so because this eats into returns. Exemptions from the central clearing obligation have been granted to allow time for the market to implement solutions to allow the transfer of non-cash collateral to use as “variation margin”.

The European Commission said progress towards these clearing solutions would be “carefully monitored”. 

Aside from some further technical work to be done, the political agreement wraps up a process that started in 2017, when the Commission proposed amendments to the European Market Infrastructure Regulation (EMIR), rules introduced in 2012 in response to the 2007-08 financial crisis.

Eugen Teodorovici, Romania’s finance minister, said: “In the aftermath of the financial crisis, the EU put in place a solid and effective framework for bringing more transparency and reducing systemic risk in the derivative markets.

“Today, we agreed targeted adjustments that will preserve all the core elements of the reform, while simplifying the rules and making them more proportionate.”

In December 2017 EU member states endorsed the proposal put forward by the Commission, but the European Parliament took a different stance on the length of the extension of the exemption.

The timing of the start of negotiations between the EU institutions led to concerns that pension schemes would face a legal gap surrounding their central clearing obligations. The so-called trialogue started in the summer, which did not leave enough time for any pending agreement to enter into force before the exemption was due to expire in August.

The European securities markets regulator intervened to tell national supervisors not to prioritise enforcing EMIR rules on pension funds during the temporary gap in the exemption’s applicability. The pension industry has expressed hope that the final legal text would make clear that any trades carried out after the August deadline would be retroactively exempt from having to be centrally cleared. 

Last month the €215bn Dutch asset manager PGGM said it would start carrying out part of its repurchase agreement transactions through central clearing. It said it had picked Eurex Clearing as central counterparty for its derivatives, providing it with an additional channel for cash as collateral for interest rate swaps.

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