EUROPE - The European Securities and Markets Authority (ESMA) has reiterated its intention to exclude pension funds from new rules on short selling and credit default swaps (CDS), as pension funds' activities are not "primarily" related to securities business.

In its final report on the regulation 236/2012 on short selling and CDS, ESMA rejected proposals made by a number of respondents to a previous consultation paper, which argued that Article 8 of the draft regulation on implementing technical standards (ITS) should refer to other types of entities such as pension funds.

Article 8 refers to the third parties with which short selling and credit default swaps are made.

In its regulatory paper, the European Commission drew up a list of several market participants, including investment firms, central counterparties, central banks and national debt management entities.

In a final report, ESMA said it was "legitimate" to refer specifically to investment firms as a specific type of third party with which arrangements could be made, given the activities they carry out.

However, it added that it was "not necessary" to make specific references to other entities such as insurances companies, credit institutions or pension funds, since their activities are "not necessarily primarily related to securities business".

ESMA conceded that those entities would fall under article 8(1)(f) of the ITS - which refers to "any person who is subject to authorisation or registration requirements in accordance with union law by a member of the European System of Financial Supervision" - as "they fulfil the criteria specified in that article".

The final report on short selling and certain aspects of CDS was submitted to the European Commission on 31 March.

The Commission has three months to decide whether to endorse ESMA's draft technical standards.

In October last year, several market experts said the regulation on short selling and CDS was unlikely to affect pension schemes, but they warned that it could cause significant volatility in the CDS market.

At the time, Robert Gardner, co-founder and chief executive at consultancy Redington Partners, told IPE: "The consequences on UK pension schemes will be limited, as they have not used sovereign CDS, and the new measures will more likely impact banks and hedge funds.

"Nonetheless, the implication for pension funds will depend on how this ban impacts the market and how the new regulation fits into their direct holdings, or into their holdings in stocks such as bank paper, bank equity or bank debt."

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