European Market Infrastructure Regulation (EMIR) is the EU regulation on over-the-counter derivative transactions, central counterparties and trade repositories which imposes a number of requirements on counterparties to swaps. The initial three-year exemption for pension schemes from the EMIR clearing requirement was set to expire in August 2015. Following publication of a recent draft report, the European Commission has recommended this exemption is extended for a further two years.

One of EMIR's central purposes is to increase transparency around derivatives trading by requiring over-the-counter (OTC) derivative contracts to be reported and, when entered into by “financial counterparties”, including pension funds, with other relevant market participants, to be centrally cleared.

EMIR will require higher collateral requirements for these contracts, and is likely to result in increased transactional and compliance costs compared to the previous position, making hedging less efficient. Liability-driven investment strategies will need to take these costs into account.

An exemption was provided to occupational pension funds from the main central clearing requirement until August 2015, with a potential extension for a further three years if certain conditions are met. Separate collateral requirements will apply to non-centrally-cleared contracts.

The pension scheme exemption only relates to the clearing requirement. Other EMIR obligations around reporting and risk mitigation apply at the same time as they apply to other financial or non-financial counterparties under EMIR with no additional time delay.

The EC has now stated its intention to propose a two-year extension of the exemption, and it will continue to observe developments in order to assess whether this exemption period should be extended by a further one year.