Lack of competition within the clearing market could expose pension funds to unmanageable risks and higher than necessary costs, according to PensionsEurope.
The European industry group also argued that the European Market Infrastructure Regulation (EMIR), which currently offers the pensions sector a time-limited exemption from centrally clearing derivatives trades, should be amended to allow the exemption to continue indefinitely.
Responding to a consultation by the European Securities and Markets Authority (ESMA) on recommended changes to the EMIR framework, PensionsEurope argued the regulation risked not achieving its goal of increasing financial stability, while leading to higher costs for the pensions sector if no further consideration was given to the use of cash as collateral.
The industry group raised concerns about the number of clearing members in the market, arguing it was “not healthy and competitive”, damaging the ability of smaller pension funds to negotiate good deals.
“Some [pension funds] experience difficulty finding clearing members that are willing to offer services on reasonable terms, or at all. This may force [pension funds] and other end users to accept unmanageable risks and higher cost levels.”
The response noted the current pension fund exemption from clearing, set to expire in August 2017, should be extended until viable alternatives to posting cash as collateral were in place.
It also said that as pension funds were usually fully invested, they would need to access the repo market or other methods of collateral transformation to post variation margins – but warned the markets may not be fully liquid at times of market stress, when the collateral would be most needed.
“PensionsEurope’s calls on the Commission to maintain the exemption for [pension funds] from the central clearing obligation until a suitable clearing solution has been found,” the organisation said.
It added: “The market has not yet developed a practicable and efficient process for central clearing of pension scheme’s over-the-counter (OTC) derivative transactions.
“In addition to this, the existing exemption has not delivered a relief from mandatory clearing for three to six years as originally envisaged, as the clearing obligation is still not effective.”
Extending pension funds’ exemption to the EMIR regulation beyond 2017 would require amendments to existing legislation, something that would need ratifying by the European Parliament.