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These rules stipulate that any pension scheme that enters into an agreement with a US-based organisation or any of its global subsidiaries will be required to use central clearing for derivatives trading. While the European Parliament last month agreed to exempt pension funds from the EMIR Directive on over-the-counter (OTC) derivatives for a period of three years, the Dodd-Frank regulation in the US could jeopardise part of this exemption.
The initial EMIR text said the clearing obligation should not apply to pension schemes until central counterparties develop a "suitable technical solution" for the transfer of non-cash collateral for variation margin. Under the US Directive, however, pension funds and banks that enter into a non-centrally cleared trade will have to post additional margin. Along the same lines, if a trade is clearable, the two parties will have to enter into central clearing.
In addition, the US regulation states that every US bank, as well as its branches and/or overseas subsidiaries, is subject to Dodd-Frank rules.
European pension funds entering into swap agreements with US banks located in Europe will therefore be subject to the same central clearing requirements. As a result, a number of consultants are now advising pension schemes in the UK and on the Continent to suspend their derivatives trades with US entities until the Dodd-Frank rules are changed.
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