On the 15 February 2016, the UK Financial Conduct Authority granted transitional relief from the EMIR clearing obligation for a number of UK pension scheme arrangements.  Details of those UK pension scheme arrangements which have been granted relief were published by the FCA today.[1]

The European Market Infrastructure Regulation[2] EMIR introduces the obligation on counterparties to clear certain classes of OTC derivatives through central counterparties that have been authorised or recognised under the EMIR framework. The counterparties subject to this clearing obligation include financial counterparties (such as institutions for occupational retirement provision registered in accordance with Directive 2003/41/EC (IORPs) and assurance undertakings authorised under Directive 2002/83/EC) as well as certain non-financial counterpartieswhose group wide non-hedging OTC derivatives contracts volume exceed specified clearing thresholds (see Definitions below). The classes  of OTC derivatives within scope of the clearing obligation are to be specified in regulatory technical standards from time to time developed by the European regulatory bodies. The first EU clearing obligation is due to come into force on 21 June 2016 with respect to certain interest rate derivative contracts (see Box 1) with phased implementation (see Box 2).

The European authorities acknowledged in EMIR that pension scheme arrangements, the primary purpose of which is to provide benefits upon retirement, might have difficulties complying with the clearing obligation, chiefly due to the requirement to post cash collateral which would lead to them divesting a significant proportion of their assets for cash. Accordingly there is transitional relief available in EMIR where a pension scheme arrangement falls within one of the sub paragraphs of Article 2(10) and enters into an OTC derivative contract for the purpose of hedging its investment risks (Article 89(1)). Pensions scheme arrangements referred to in Article 2(10)(c) and (d) must apply for this exemption whilst others referred to in Article 2(10)(a) and (b) automatically benefit from the transitional relief (see Definitions below).

How can pension scheme arrangements apply for transitional relief from the EMIR clearing obligation?

The steps for a pension scheme arrangement referred to in Article 2(10) (c) and (d) to benefit from the transitional relief from clearing are as follows:-  

  1. Make a request for relief to its national competent authority.  
  2. The NCA must then notify ESMA and EIOPA.  
  3. Within 30 days of receipt of the NCA notification ESMA must issue an opinion assessing compliance of the type of entities or the type of arrangements with Article 2(10)(c) or (d) as well as the reasons why an exemption is justified due to difficulties in meeting the variation margin requirements.  
  4. The NCA must adopt a decision within 10 working days of  receipt of the ESMA opinion taking due account of that opinion. It shall only grant an exemption where it is fully satisfied that the type of entities or the type of arrangements complies with Article 2(10)(c) or (d) and that they encounter difficulties in meeting the variation margin requirements. If the competent authority does not agree with ESMA’s opinion, it shall give full reasons in its decision and shall explain any significant deviation therefrom.

ESMA will publish a list of types of entities and types of arrangements referred to in Article 2(10)(c) and (d) which has been granted an exemption.

ESMA shall conduct a peer review of the entities included on the list every year.  

EMIR Article 2(10) ‘pension scheme arrangement’ means:

  1. institutions for occupational retirement provision within the meaning of Article 6(a) of Directive 2003/41/EC, including any authorised entity responsible for managing such an institution and acting on its behalf as referred to in Article 2(1) of that Directive as well as any legal entity set up for the purpose of investment of such institutions, acting solely and exclusively in their interest;  
  2. occupational retirement provision businesses of institutions referred to in Article 3 of Directive 2003/41/EC;  
  3. occupational retirement provision businesses of life insurance undertakings covered by Directive 2002/83/EC, provided that all assets and liabilities corresponding to the business are ring-fenced, managed and organised separately from the other activities of the insurance undertaking, without any possibility of transfer;  
  4. any other authorised and supervised entities, or arrangements, operating on a national basis, provided that:
    1. they are recognised under national law; and
    2. their primary purpose is to provide retirement benefits.

"non- hedging" means:

OTC derivatives contracts which are entered into by the non-financial counterparty or by other non-financial entities within the group to which the non-financial counterparty belongs, which are not objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of the non-financial counterparty or of that group. Further guidance on this is given in the relevant Regulatory Technical Standards - See Article 10 RTS 149/2013.  

"clearing threshold" means:  

  1. EUR 1 billion in gross notional value for OTC credit derivative contracts;          
  2. EUR 1 billion in gross notional value for OTC equity derivative contracts;  
  3. EUR 3 billion in gross notional value for OTC interest rate derivative contracts;  
  4. EUR 3 billion in gross notional value for OTC foreign exchange  derivative contracts;  
  5. EUR 3 billion in gross notional value for OTC commodity derivative contracts and other OTC derivative contracts not provided for under points (a) to (d).

See Article 11 Regulatory Technical Standards 149/2013.

BOX 1

Classes of IRS subject to the first clearing obligation

The fourteen classes of Interest Rate OTC derivatives subject to the clearing obligation are set out in Annex 1 to the IRS clearing RTS and in summary are:

  • Basis swaps - EUR settled EURIBOR and GBP and USD settled LIBOR transactions with maturities ranging from 28 days to 50 years and JPY settled LIBOR transactions with maturities ranging from 28 days to 30 years; which involve a single currency, constant or variable notional and are without optionality.  
  • Fixed-to-float interest rate swaps - EUR settled EURIBOR and GBP and USD settled LIBOR transactions with maturities ranging from 28 days to 50 years and JPY settled LIBOR transactions with maturities ranging from 28 days to 30 years; which involve a single currency, constant or variable notional and are without optionality.  
  • Forward rate agreements - EUR settled EURIBOR and GBP and USD settled LIBOR transactions with maturities ranging from 3 days to 3 years; which involve a single currency, constant or variable notional and are without optionality.  
  • Overnight index swaps - EUR settled EONIA, GBP settled SONIA and USD settled FedFunds transactions with maturities ranging from 7 days to 3 years; which involve a single currency, constant or variable notional and are without optionality.

BOX 2

Categories for Clearing and IRS Clearing Obligation Phase-in periods:

The clearing obligation for interest rate swaps in the G4 currencies shall take effect on:

  • 21 June 2016 for "Category 1 Counterparties" - i.e.  clearing members for at least one class of OTC derivatives set out in the RTS, of at least one CCP already authorised or recognised to clear at least one of those classes.  
  • 21 December 2016 for "Category 2 Counterparties" - i.e. financial counterparties and other alternative investment funds.  This category includes financial counterparties and alternative investment funds which are not included in Category 1 above which belong to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives is above €8 billion.    
  • 21 June 2017 for "Category 3 Counterparties" i.e. financial counterparties and other alternative investment funds with a low level of activity in un-cleared derivatives–  This category includes other financial counterparties and other alternative investment funds which are not included in Categories 1 or 2 above.  
  • 21 December 2018 for "Category 4 Counterparties" i.e. other NFC+.  This category includes non-financial counterparties above the EMIR clearing thresholds (NFC+) which are not included in Categories 1, 2 or 3 above. 

NB: If a contract is concluded between two counterparties included in different categories of counterparty the date from which the clearing obligation takes effect shall be the later date.