GLOBAL – The final guidelines set by the Basel Committee on Banking Supervision (BCBS) and the Board of the International Organisation of Securities Commissions (IOSCO) for non-cleared over-the-counter (OTC) derivatives could be less restrictive for pension funds than originally thought, consultants have said.

Earlier this month, the BCBS-IOSCO Committee published its final paper on margin rules for non-cleared OTC derivatives, which will complement the European EMIR standards for centrally cleared OTC contracts.

Under the final set of rules, the BCBS-IOSCO Committee recommends a €50m threshold for non-cleared OTC derivatives, or, in other terms, the maximum amount of exposure the two parties entering into a trade can have to each other before collateral need be called.

Pension funds across Europe and other trade bodies have voiced concerns regarding the initial-margin requirements the BCBS-IOSCO Committee intended to introduce for non-cleared derivatives.

However, according to Martin Higgs, independent consultant and managing director at Derivatives Consultancy Services, few pension schemes would hit the €50m threshold, as their exposure to any one bank would probably be less than this amount.

“However, the largest pension funds in the UK and Europe could certainly be impacted by this threshold, as they would likely be the ones having higher exposure than the €50m threshold amount,” he said.

“Having said that, we have to bear in mind that those guidelines come on top of the EMIR standards for centrally cleared requirements, which already impose significant margin costs on pension funds and other derivatives market players.”

Kenny Nicoll, director and manager of research Redington, also stressed that only larger pension schemes could be impacted by the BCBS-IOSCO guidelines.

He said more actively trading schemes and those with relatively high exposure to swaps might also be affected.

Nicoll recommended pension funds “compress” trades, with the view to reducing their counterparty exposure and operational burdens by removing redundant transactions from their books.

He added that pension schemes should trade non-clearable OTC derivatives – such as inflation swaps – with a large number of banks rather than a few.

“Having a larger banking group rather than a small concentrated one will help spread the initial margin needed more evenly and hence increase the chance of staying below the €50m threshold,” he said.

The European Commission will now have to transpose the BCBS-IOSCO guidelines into the European context by producing its own text for non-cleared OTC derivatives.

Once published, the EU proposal will then be submitted to a round of consultation by market stakeholders before Brussels releases its final version of the legislative proposal.

The final proposal will then be submitted to vote to the European Parliament and Council, probably some time next year.

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