12 September 2014

RiskNet: Barnier hints at longer pensions clearing exemption

Pension funds may have to clear their OTC derivatives as early as August 2015, but Barnier says he does not believe the clearing system is ready for pension funds to clear their OTC derivatives trades. "I don't think all the conditions have been met yet to ensure a smooth transition to clearing for pension funds. And if all the measures are not enough to ensure access to clearing for all market participants, I think my successor will analyse the situation and come up with any necessary additional measures," says Barnier.

While pension funds could in theory use the repurchase agreement market to transform assets into cash, many have expressed concerns about whether they would be able to rely on the repo market during times of market stress, especially given the volume of assets needing to be transformed into cash. The net stable funding ratio proposals put out by the Basel Committee on Banking Supervision in January 2014 have also raised concerns about banks' abilities to provide repo services.

Article 85(2) of the European Market Infrastructure Regulation (EMIR) leaves open the possibility of two further extensions of this exemption – the EC has the ability to extend the exemption once by two years and once by one year, culminating in a possible further three-year extension to August 2018 if the market has not found a way for funds to post non-cash assets as variation margin.

A London-based clearing member at one large bank says that pension funds will automatically benefit from the full exemption simply because there is no solution to the non-cash variation margin issue. "The problem is that a CCP cannot take securities as variation margin because it has to pass the cash onto the other side. In that case, pension funds will need to repo their securities but the repo market is only liquid for a very limited period of time. For a client repoing at, say, 1% over three months, if a new crisis hits and repo rates skyrocket, then they incur a huge refinancing risk," says the clearing member. In such situation, pension funds will need to gain access to emergency liquidity lines only a central bank can provide. "But since pension funds are not directly regulated by those institutions, the argument is that the central bank should instead provide cheap liquidity to CCPs directly. The only issue is that central banks do not want to commit to that as they don't want to encourage moral hazard," the clearing member adds.

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