Almost four years since the EU Over-the-Counter (OTC) Derivatives, Central Counterparties and Trade Repositories Regulation (648/2012) (EMIR) came into force, one of its main requirements – to clear certain OTC derivative trades through a central counterparty – is now coming into effect. EMIR is Europe's response to the G20's commitment to implement measures to increase transparency and reduce counterparty credit risk and operational risk in the derivatives market.

The clearing obligation will affect many derivatives users, including EU and non-EU funds, asset managers, pension schemes and insurers.

State of play

On December 1 2015 the final regulatory technical standards relating to the clearing of specified interest rate products were published in the Official Journal, and entered into force on December 21 2015. This starts the clock for the clearing obligation under EMIR to apply to these interest rate derivatives and means that certain counterparties will need to start clearing interest rate swaps through a central counterparty from June 21 2016.

This obligation will be phased in over a three-year period, starting with clearing members, which will need to comply from June 21 2016, to non-financial counterparties with derivatives activity over certain thresholds, which will need to comply from December 2018.

The following classes of interest rate swap will need to be cleared:

  • basis swaps denominated in euros, pounds sterling, Japanese yen and US dollars;
  • fixed-to-floating swaps denominated in euros, pounds sterling, Japanese yen and US dollars;
  • forward rate agreements denominated in euros, pounds sterling and US dollars; and
  • overnight index swaps denominated in euros, pounds sterling and US dollars.

In addition, on March 1 2016 the European Commission adopted a delegated regulation in respect of the clearing obligation for certain credit default swaps. The delegated regulation is still subject to scrutiny by the European Parliament and the European Council. Once in force, the clearing obligation will be phased in over three years.


The clearing obligation under EMIR will apply only to financial counterparties, which are broadly banks, insurers, investment firms, pension schemes, certain alternative investment funds and undertakings for collective investments in transferable securities funds established in the European Union and non-financial counterparties established in the European Union whose aggregate notional positions in derivatives exceed certain thresholds (NFC+s).

Available exemptions

Entities such as the European Central Bank, national EU public debt management bodies, specified multilateral development banks and certain guaranteed public entities benefit from exemptions from EMIR.

Certain pension schemes are exempt from the clearing obligation until August 16 2017 due to the difficulties in meeting the cash variation margin requirements (ie, in order to clear trades pension schemes, they would need to divest assets in order to meet the requirement to post cash as collateral). This exemption is widely expected to be extended until 2018 as the market is no closer to resolving this issue. In order to benefit from this exemption, some pension schemes will need to apply to their competent authority. On February 15 2016 the Financial Conduct Authority (FCA) published a list of the types of pension scheme entity and arrangement for which it has granted an exemption from the clearing obligation.

Pension scheme exemptions

Most funded occupational pension schemes established by an employer or group of employers for the purpose of providing retirement benefits to their employees will automatically benefit from the exemption subject to one important proviso – the exemption is only in respect of "OTC derivative contracts that are objectively measurable as reducing investment risks directly relating to the financial solvency of pension scheme arrangements". As the test applies at transaction level rather than at scheme level, it is possible that not all OTC derivative contracts entered into by such occupational pension schemes will benefit from the exemption. Pension schemes will need to take advice on whether their derivative contracts meet the test set out above.

Pension schemes that will need to apply for an exemption are those that fall within Article 2(10)(c) and (d) of EMIR – namely:

  • occupational retirement provision businesses of life insurance undertakings covered by the EU Life Assurance Directive (2002/83/EC); and
  • other authorised and supervised entities or arrangements operating on a national basis, recognised under national law and whose primary purpose is to provide retirement benefits.

The FCA has stated that before using an exemption, pension schemes should carry out a self-assessment to ensure compliance with one of the approved types of pension scheme arrangement in the FCA list. Any such assessments should be:

  • properly documented;
  • made available to the competent authority on request; and
  • reviewed on an ongoing basis to ensure that they are updated to reflect any changes in circumstances.

Pension scheme arrangements and entities should, in addition to notifying their counterparties of the eligibility of a transaction for the clearing exemption under EMIR, also notify their counterparties of any changes to their exemption status.

Impact on pension schemes

Although the transitional exemption for pension schemes is likely to be extended until August 2018, pension schemes may find that uncleared swaps will become more expensive, forcing them to clear some trades before the exemption expires, so they may want to start putting in place clearing arrangements well in advance.

In any event, a counterparty is likely to ask a pension scheme to confirm its status under EMIR in order to assist with compliance with EMIR, so pension schemes will need to have satisfied themselves that they fall within the exemption. Further, some investment managers are asking their pension scheme clients to sign up to clearing documentation now, as they expect that some exempt schemes will want to clear because it is more cost effective; and there is also a concern that banks will have limited capacity to process applications, so it is better to be at the front of the queue.

Permanent exemption for pension schemes

Although certain entities such as the European Parliament and the FCA have called on the European Commission to consider a permanent exemption for pension schemes, there are mixed views about this among market participants. The view held by some in the industry is that the focus should remain on solving the cash variation margin problem, rather than on granting a permanent exemption, as this would have a number of downsides for pension schemes – for example, increased costs without any of the benefits of clearing.


A counterparty is likely to ask a pension scheme to confirm its status under EMIR either by completing the International Swaps and Derivatives Association, Inc Classification Letter (which allows derivatives users to notify their counterparties bilaterally of their EMIR clearing classification and EMIR counterparty classification) or other similar formats. A pensions scheme should expect to receive a similar confirmation from its counterparty confirming which counterparty category it belongs to so that the clearing obligation can be correctly applied.

In order to provide this confirmation, a pension scheme should consider the liability issues involved and might consider putting in place measures internally in order to monitor its status under EMIR and facilitate notifying counterparties in the event of any changes of status.

Next steps

Existing OTC derivatives documentation may need to be amended.

Putting in place new clearing documentation can take anywhere from six to 12 months so pension schemes may want to start negotiations as early as possible. They should also check that the clearing arrangements fit with any investment management agreements that they have in place as these may not have been drafted with the clearing obligation in mind.

The European Commission is expected to endorse further classes of derivatives in the coming months, so more derivatives will become subject to the clearing obligation.

For further information on this topic please contact James Doyle, Faye Jarvis or Isobel Wright at Hogan Lovells International LLP by telephone (+44 20 7296 2000) or email (, or Hogan Lovells International LLP website can be accessed at

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