On 3 February 2015, the European Commission (Commission) published a draft version of a report concerning the central clearing exemption for pension scheme arrangements (PSAs) under the European Market Infrastructure Regulation (EMIR). In that report, the Commission is proposing to adopt a Delegated Act granting PSAs a further two year exemption from the central clearing obligation.
EMIR requires standardised over the counter (OTC) derivatives to be cleared through central counterparties (CCPs). In order to offset counterparty credit risk, CCPs use margin requirements which are calculated to cover any potential losses upon a default. CCPs generally accept only highly liquid assets, such as cash, as collateral to meet variation margin calls.
PSAs participate actively in the OTC derivatives market but generally have minimal cash positions, preferring to hold higher yielding but less liquid investments such as government bonds. Subjecting PSAs to the clearing obligation would effectively force them to hold more cash reserves, ultimately reducing retirement income. Consequently, EMIR provides for a three year exemption from the clearing obligation for PSAs, which can be extended by a further period of three years in total.
CCPs are expected to use the PSA exemption period to develop technical solutions for the transfer of non-cash collateral to meet variation margin calls. In its draft Report, the Commission reviews the progress made by CPPs in developing such technical solutions and concludes that this has been insufficient, meaning that “the adverse effect of centrally clearing derivative contracts on the retirement benefits of future pensioners remain unchanged.”
As the existing exemption for PSAs will expire on 16 August 2015, three years after EMIR’s entry into force, the Commission is proposing to adopt a Delegated Act extending by a further two years the exemption for PSAs from the central clearing obligation. The Commission will also monitor the situation in order to assess whether this period should be extended by a further year.