EUROPE – The temporary exemption granted to pension funds from central clearing requirements under the European Market Infrastructure Regulation (EMIR) means many schemes have wrongly assumed they will be exempt from other requirements, law firm Mayer Brown has warned.

Edmund Parker, global co-head of the derivatives and structured products group at Mayer Brown, told IPE the uncertainty surrounding the new requirements under EMIR, as well as the short timeframe in which pension funds have had to comply, mean many are unprepared for today's introduction of the new regulation.

Among EMIR's requirements – which meet the G20 commitments agreed in Pittsburgh in 2009 on reducing systemic risk and bringing more transparency to OTC and listed derivatives markets – one aims to pull all trading in over-the-counter derivatives (OTCs) through central clearing.

Although pension funds have been granted a temporary exemption from that requirement, they will still have to comply with other obligations.

"The real issue lie in the technical standards from which pension funds are not exempt and which include risk mitigation and reporting obligations," Parker said.

The risk-mitigation techniques mean pension funds must put in place processes to ensure timely confirmations of transactions by electronic means, as well as introduce processes for robust, resilient, auditable and reconcile portfolios.

Pension funds will also have to mark-to-market outstanding contracts on a daily basis while segregating their collateral, and have sufficient amounts of capital to ensure their collateral exchange.

"These requirements for bilateral derivatives trades will be of significant importance for pensions funds, as they are going to enter into a lot of non-centrally cleared contracts over the coming months since they are temporary exempt from clearing," Parker added.

The EMIR requirements set under the technical standards will be phased in.

While the risk-mitigation obligations are effective from today, other rules such as reporting requirements will be delayed until July, while dispute resolution will come into force in September.

Parker urged pension funds to check whether their asset managers were ready to comply with the EMIR requirements.

"A lot of the managers have already been doing all the preparation required for EMIR, but it is worth checking," he said.

Earlier this year, a poll conducted during a pension fund event held by consultancy Redington showed that three-quarters of attendees were 'underprepared' for the imminent regulation, while 12.5% were 'not prepared at all'.

Tom McCartan, manager of Redington's research team, said at the time that all pension funds taking part in the straw poll felt an 'urgent' or 'relatively urgent' need to address issues raised by the implementation of EMIR.

EMIR was approved by both the European Parliament and the European Council on 4 July 2012 and came into force on 16 August last year, while technical standards designed to implement the requirements were completed on 23 February this year.

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