14 August 2015

PensionsEurope’s answer to the EC consultation on regulation EU No 648/2012 on OTC derivatives, CCPs and trade repositories

A robust solution needs to be found for the cash variation margin (VM) issue. Otherwise, applying EMIR towards PSAs will not increase the stability of the financial system, but will affect long term investments by PSAs and hence will increase the costs of pensions.

PSAs use OTC derivative contracts for risk management purposes. PSAs use OTC derivatives to manage their risks in their balance sheet and liabilities by hedging – among others – their interest rate, inflation or currency risks. The IORP Directive explicitly allows pension funds to use derivatives for mitigating investment risks or and for efficient portfolio management.

PSAs are long-term investors who engage in long dated derivative instruments to hedge their long-term liabilities in order to limit their investment risk. It is furthermore important to note that PSAs are not leveraged or only to a very limited extent and exclusively for liquidity purposes on a temporary basis in line with the requirements of the IORP Directive. Moreover, both at EU and national level, regulations impose the management of the PSA in a prudential basis and set out an extensive set of rules regarding their solvency and liability coverage ratios. Among others for these reasons PSAs are highly creditworthy, and the probability of a PSA bankruptcy is very low. The PSA would however be able to further mitigate such risk by, for instance, the funding and/or backing from its sponsor company and other available tools such as pension protection funds and benefit reduction mechanisms.

As the undesired consequences for PSAs are not yet solved, we call on the Commission to reconsider whether the market can propose fit for purpose clearing solutions meeting the needs of PSAs and to require that CCPs accept among others non-cash assets as collateral to meet Variation Margins.

PensionsEurope’s calls on the Commission to maintain the exemption for PSAs from the central clearing obligation in place until a suitable clearing solution has been found. The market has not yet developed a practicable and efficient process for central clearing of pension scheme’s 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.

At the same time, PensionsEurope urges the Commission to review every three years whether a suitable central clearing process has been developed during the maintenance of the exemption in case a solution has not been found by 2018. If a review found that a satisfactory process was available, then the exemption could fall away at that point, however not before.

Full response

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