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Pension funds doubt EMIR will reduce derivatives risk

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EUROPE – Most UK pension funds see no evidence of protection enhancement within the European Market Infrastructure Regulation (EMIR) and believe they will remain exposed to risk occurring in derivatives markets, according to a poll conducted by Redington.

Tom McCartan, manager of the consultancy's research team, said three-quarters of schemes attending a recent Redington event conceded that they were 'underprepared' for the imminent regulation, while 12.5% were 'not prepared at all'.

He added that all the pension funds taking part in the straw poll felt an 'urgent' or 'relatively urgent' need to address issues raised by the implementation of EMIR.

Further, almost 90% said they could not decide whether to take advantage of the pension fund exemption from the legislation, or begin clearing over-the-counter derivatives deals ahead of the deadline.

In March 2012, the European Parliament agreed to a temporary exemption for pension funds from the EMIR framework.

The exemption runs for three years, or at least until central counterparties develop a "suitable technical solution" for the transfer of non-cash collateral for variation margin.

Brussels has suggested that the exemption period could be extended by another 2-3 years, subject to "proper justification", but many consultants have recommended pension funds prepare for central clearing requirements now by appointing clearing members and getting their legal documentation in order.

Meanwhile, almost 90% of respondents to Redington's poll said they believed the EMIR would increase costs for pension funds, while three-quarters said the most significant aspect of the regulation was the requirement to post cash as variation margin for cleared trades.

Under a cleared transaction, the central clearinghouse will require pension funds to post both variation and initial margin.

While variation margin represents collateral exchanged by counterparties to reflect current exposures, which can change the value of the transaction made, initial margin is provided to cover potential future exposures that can arise between the last exchange of margins and the liquidation of the relevant positions.

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