The pensions industry should expect the European Commission to draft new regulation on derivatives clearing, after the European Supervisory Authorities (ESAs) rejected a relaxation of rules governing trades above €1bn.

James Walsh, EU policy lead at the UK’s Pensions and Lifetime Savings Association (PLSA), said it was “quite difficult” to predict the outcome of the struggle between the European executive and the ESAs, which saw the supervisors reject changes to its regulatory technical standards (RTS) on clearing due to a lack of evidence.

In a joint statement last week, the three ESAs argued that the disputed sovereign concentration limit – which requires non-euro-zone pension funds posting more than €1bn in collateral with a single counterparty to ensure that no more than half of the employed bonds come from any one issuer – was “crucial” for mitigating risks.

The Commission previously called for the rule to be scrapped.

According to the ESAs, however, it proposed the changes without demonstrating that the rule was “disproportionate”.

Walsh said he now expected the Commission to re-work the disputed RTS with regards to non-centrally cleared derivatives trades.

“But I wouldn’t expect [the Commission] to completely ignore the advice received from the ESAs,” he said.

“There’s a challenge here for policymakers, who clearly disagree, and there’s a challenge for people like ourselves and our members, who clearly are affected by this [and need to] ensure we get a workable solution.”

Henrik Munck, senior consultant at the Danish Insurance Association (F&P), said it fully supported attempts by the Commission to relax the proposed RTS.

“From a Danish perspective,” Munck said, “it wouldn’t really make that much sense to impose this concentration limit.”

He said he was fairly sure Danish pension providers would deposit Danish government bonds as collateral for initial margins.

“The actual reason why we think the Commission’s proposal is sound is that, in essence, it wouldn’t really make a difference for the [stability of the] financial system as a whole,” he said.

Walsh said the rules backed by the ESAs affected a “significant number of larger schemes” but argued that the problem could not be solved solely by changing the RTS.

“The real problem, the central problem, is the bank’s increasing determination to accept only cash collateral – whereas, the age-old problem is that pension funds don’t hold large amounts of cash.”

Because this stems from bank capital rules, rather than EMIR, he said, addressing the problem involves “a whole set of more complex challenges” in convincing the Basel Committee on Banking Supervision of the need to amend the rules. 

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