The European Commission has further extended transitional relief for pension scheme arrangements (PSAs) from central clearing for their over-the-counter (OTC) derivative contracts until 16 August 2018.
EMIR requires specified standard OTC derivative contracts to be cleared through an authorised or recognised central counterparty (CCP) when traded by two in-scope entities.
The European authorities acknowledged in EMIR that PSAs, 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 to CCPs which would lead to them divesting a significant proportion of their assets for cash. Accordingly there is transitional relief available in EMIR where a PSA enters into an OTC derivative contract which is objectively measurable as reducing investment risks directly relating to the financial solvency of the pension scheme arrangement.
Originally this transitional relief was granted for three years to enable CCPs to develop a suitable technical solution for the transfer of non-cash collateral by PSAs to CCP as variation margin. The Commission has concluded that CCPs need additional time to find solutions for pension funds. This is the second time that the Commission has used its power under EMIR to extend the temporary clearing exemption for PSAs which now runs until 16th August 2018. The European Commission's 2017 work programme involves a review of EMIR when this issue will be looked at in depth.
See previous Client Alert for further detail: Sixteen UK pension schemes receive temporary exemption from EMIR clearing obligation (2nd March 2016)
EMIR variation margin for non-cleared OTC derivatives apply from 1st March 2017
Despite having transitional relief from the clearing obligation, PSAs nonetheless have to comply with the EMIR margin requirements with respect to non-cleared OTC derivatives. The variation margin requirements in the rules will begin to apply to the bulk of the derivatives market from 1st March 2017.
See our related Client Memorandum: What you need to know about the latest EMIR rules for margining of non-cleared OTC derivatives (January 2017)