EUROPE – The Dutch pension provider PGGM has advised pension funds to forego clearing of derivatives trades as long as they are exempt because the clearing industry is not yet ready to meet their requirements.
Speaking at the TSAM conference on over-the-counter (OTC) derivative trades in London earlier this week, the €130bn pension provider's head of treasury and client portfolio manager, Ido de Geus, argued that it is not currently economic for pension funds to clear their derivatives trades due to the requirements imposed by clearing houses and clearing members.
The comments made by de Geus directly contradict views of other pension asset managers and consultants, who have urged their clients to start preparing for clearing as soon as possible in order to be ready when their exemption from the European Market Infrastructure Regulation (EMIR) ends.
Under EMIR, which came into force last week, derivatives market participants will be required to process their trades through a clearing house – also called central counterparty (CCP) – as opposed to bilaterally as it is currently the case.
Many end users such as pension funds will access clearing through a member of a CCP – as opposed to becoming a so-called clearing member themselves. Those clearing members will usually be large international banks.
However, De Geus said the pension industry should not rush into clearing. He argued that the issues surrounding collateral stemmed from the margin requirements imposed by CCPs and the clearing members.
As part of their clearing process, CCPs require their clients to post both initial margins for which they accept cash and highly-liquid securities such as government bonds and variation margins for which they require cash only.
De Geus said it was "pretty shocking" to find out that clearing members were asking for additional collateral on top of the already "high" initial margins.
"What they ask for is not even 20-30% on top but 200-300% on top of initial margins and within five days' notice," he said.
"So even when clearing members do not trust the clearing model of the CCPs, why should we trust them? This situation is not viable for the long-term."
De Geus concluded that the current central clearing system was dedicated to the inter-bank community and not to end-user clients such as pension funds.
"My advice for the short-term is: don't clear if you don't have to," he said.
The obligation for central clearing resulted from an agreement during the 2009 G20 meeting in Pittsburgh, following the collapse of Lehman Brothers in September 2008. Its aim was to avoid the potential risk of default of one market player in the derivatives chain.
In March last year, the European Parliament nonetheless granted pension funds a temporary exemption from the central clearing requirements under EMIR.
With the exemption, Brussels sought to grant CCPs more time to adapt their platform to deal with new parties such as pension funds, not traditionally primary users of central clearing services.
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