European supervisors reject clearing changes over lack of evidence

European supervisors have rejected attempts to relax clearing regulations for pension funds, arguing the European Commission failed to offer any evidence to support its requested changes.

A joint statement by the three European Supervisory Authorities (ESA) dismissed attempts to remove concentration limits requiring no more than half of bonds posted as collateral to be from any one single issuer or sovereign.

In its statement, the ESAs, which include the European Insurance and Occupational Pensions Authority, said the limits were “crucial for mitigating potential risks pension funds and their counterparties might be exposed to”.

Under the rules proposed by the ESAs, pension funds based outside of the euro-zone posting collateral in excess of €1bn with a single counterparty would be required to diversify the bonds used as collateral.

In a letter to the ESAs in August, the Commission insisted new evidence had come to light showing the rule was not required.

In its response, the supervisors noted the supposed evidence had not been included alongside last month’s correspondence.

“Subsequently,” the ESAs said, “following a specific request of such new evidence, the Commission did not provide any data or supporting material substantiating that the draft [regulatory technical standards] submitted by the ESAs were disproportionate.”

The supervisors added that any pension funds concerned with the concentration limit could simply “diversify” derivatives contracts and use two counterparties when collateral posted exceeds €1bn, avoiding any costs that could be incurred by a fund needing to buy bonds issued in a foreign currency.

“Moreover,” they add, “the ESAs are concerned the alternative requirement proposed by the Commission is rather unspecific when referring to ‘adequate’ diversification in case counterparties collect sovereign debt securities from a pension scheme arrangement, and this could result in a non-harmonised application of the rules within the Union.”

The UK’s Pensions and Lifetime Savings Association is among those to have questioned the sovereign concentration rule.