The European Commission should offer pension funds an indefinite exemption from clearing derivatives, the UK’s industry body has argued.
According to the Pensions and Lifetime Savings Association (PLSA), pension funds should be offered more than time-limited exemption from central clearing, until such a point as the industry develops “satisfactory” ways to enable clearing.
Pension funds are currently exempt from clearing until 2017, the second exemption offered under the European Market Infrastructure Regulation (EMIR).
However, the wording of the law only allows for two exemptions, leading the PLSA to urge that the exemption be maintained indefinitely.
The European Commission is currently working on a number of ways to facilitate central clearing for pension funds but has yet to set out a definite solution.
The idea of an indefinite exemption is not shared by all pension funds, and the Dutch pension provider PGGM suggested recently that it was in favour of a “robust” central clearing framework that functioned well when markets were under stress.
The PLSA’s call for an indefinite exemption comes after the UK Investment Association urged further action around clearing for pension funds.
In its own response to the European Commission’s consultation on the current regulatory framework for financial services, which closed at the end of last month, the industry body for UK asset managers warned that if pension providers stopped using derivatives, they would end up increasing their risk exposure.
The association’s submission noted that pension funds needed to liquidate holdings to meet the margin calls, as they were not traditionally invested in cash.
“This would increase liquidity risk within the market, especially at times of stress, and could force pension funds to sell out of assets when asset prices are likely to be falling,” it said.
The submission also questioned the risk associated with the requirement that only half of collateral for non-cleared trades be from a single sovereign.
It argued that it left UK pension funds, and other non-euro member state investors, at a disadvantage, as they would be forced to employ collateral from a second currency.
The association said the arrangement would leave investors exposed to increased currency risk.