PSA exemption from clearing obligation to be extended by four years

By Rebekah Tunstead | 9 January 2019

The exemption for pension scheme arrangements (PSAs) to clear over-the-counter (OTC) derivatives through central clearing houses under the European Markets Infrastructure Regulation (Emir) is to be extended for a further four years under the regulation’s Refit proposals, according to a European Commission spokesperson.

“There is an agreement now that the current exemption for pension funds to clear will be extended -informally, of course all of this needs to be confirmed - will be extended for a further four years, for a maximum of four years into the future,” said a Commission spokesperson.

The update to Emir was expected at the end of 2018, but according to the Commission spokesperson disagreement surrounding PSA derivatives clearing delayed the publication of the amendments.

“The main stumbling block on agreement is a requirement for pension funds to clear their derivatives transactions obligatory. So, no longer clear them through market arrangements, but to clear them centrally in clearing houses, in CCPs. Whether the extension that we gave the pension funds a couple of years ago should be extended or not, and if so how long the exemption would be extended for,” said the spokesperson.

“The objective was to streamline the European derivatives reporting and clearing requirements,” he said. “and I think broadly all of those commission proposals have been followed by the Council and the Parliament.”

Emir introduced two previous exemptions for PSAs from the central clearing obligation. This, according to the European Securities and Markets Authority (Esma) was to “allow time for suitable technical solution for the transfer of non-cash collateral as variation margins to be developed by CCPs.”

Esma declined to provide comment on the Emir Refit proposals for this article.

“There are two pieces of regulation that are dictating clearing behaviour - as in whether pension funds are clearing - one is the exemption for sure, but the other one that is not moving is the Uncleared Margin Rules (UMR), and they are on separate timelines,” says Peter Rippon, CEO of derivative analytics company, OpenGamma.

“It was a two-pronged approach that the regulators took in this area, one is to mandate clearing but the second one was to make it much more expensive to trade bi-laterally.”

In 2016, UMR began to be phased in for the largest market participants. In 2017, variation margin (VM) requirements were introduced, while initial margin (IM) requirements continue to be phased-in until September 2020.

In the UK, initial margin requirements for entities with a group notional amount above €0.75trn will be introduced in September of this year.

The extension of the exemption is only delaying the inevitable, says Rippon.

“The fact that the clearing deadlines have been delayed is very likely to be academic for most pension funds, because they are going to be caught by this second set of rules that will force them to post lots more margin anyway, which they are going to get around by clearing.

“It doesn’t make sense to me to spend so much effort lobbying for that change, when you are going to face this problem anyway.

“Many of the pension funds have been lobbying to extend the mandatory exemption to clearing timeline. The big pension funds are already clearing.”

Market resistance

There is resistance from some in the market which may be unaware of other regulations coming in the future, according to Rippon.

“It will be a small percentage of the market that don’t want to change: ‘the status-quo is good, and therefore, let’s try and maintain the status-quo.’ They may well even be unaware of the impact of these other changes which are going to hit them,” says Rippon.

“Basically, even if the mandatory clearing exemption is pushed out, there is still in place the timeline that is going to enforce the trades that don’t have to be cleared, to have to post a lot more margin on them.

“The overall destination [for EU regulators] is clear, which is, ‘we want everything in clearing houses, and we want people to post more and more margin’. That’s where the pain lies for these pension funds, for anyone who uses these products, because they make trading derivatives more expensive, but the benefit is they are safer for the market.

According to an EC source: “The final agreement [of the Emir Refit proposals] should be made public upon confirmation by the EU ambassadors of the member states at one of the next meetings of the Committee of permanent representatives in January.”

For Martijin Groot, vice president of product management at Asset Control, the update to Emir provides an opportunity for fintechs to assist with compliance.

“More broadly, we are seeing the scope of the regulation, in terms of which type of financial services organisations must report under Emir, steadily growing. While it used to consist primarily of banks and main broker dealers, it now also incorporates funds such as mutual funds (UCITs) and alternative investment funds (AIFs).”

“Fintechs can play a major role in ensuring firms have all the data they need to comply with Emir. The number of data fields that firms are having to report on has been steadily growing – and that is placing a larger premium on firms having counter-party data, identifications, product terms and conditions etc, to hand, to make the cost of reporting lower and to deal more efficiently with any kind of regulatory scrutiny or investigation into trade reporting,” said Groot.

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