European pension schemes could be faced with a legal gap surrounding the obligation to clear certain derivatives after their current exemption from the rule expires in August.

PensionsEurope has called for regulators to make clear that the obligation will not be enforced for pension funds if amendments to the European Markets Infrastructure Regulation (EMIR) are not effective until after the exemption runs out on 16 August.

Matthies Verstegen, senior policy adviser at the trade association, said an agreement between the EU’s law-making institutions could be reached relatively quickly, but it was now impossible for it to be in force by August.

“We hope co-legislators find an agreement as soon as possible,” he added.

The EU’s three bodies are due to commence negotiations on a proposal from the European Commission to amend aspects of EMIR. The Commission tabled this in May 2017 after a “regulatory fitness and performance” check of the regulation.

Negotiations between the Commission, the European Parliament and the EU council, the body for member states, could have started sooner but the parliament’s economic and monetary affairs committee decided to have the matter voted on in the plenary rather than going straight to the “trilogue” negotiations. 

Parliament adopts tougher proposal 

The EU council adopted its position in December, endorsing the Commission’s proposal, but the European Parliament has taken a tougher stance.

Under its proposal, pension schemes’ exemption from mandatory clearing would be extended by two years instead of the Commission’s and Council’s three.

The Commission also proposed that an additional two years’ extension be granted if a solution to the problem was “within reach”. The parliament’s proposal was for an additional one-year extension if stakeholders had agreed a solution and needed more time for implementation.

The parliament also stated that the next exemption period should be the last. If stakeholders had not agreed a solution, the Commission would need to propose a binding one, but it should not be another exemption.

The prospect of a legal gap arising was acknowledged in the parliament’s proposal for amendments to EMIR, as it stated that the exemption from clearing for pension schemes should apply retroactively to all over-the-counter derivative contracts executed after 16 August.

“The retroactive application of this provision is necessary to avoid a gap between the end of the application of the existing exemption and the new exemption, since both serve the same purpose,” said the proposal.

The solution quest

EMIR requires central counterparties and their clients to hold cash as collateral for the derivative contracts being traded. However, pension schemes – which use derivatives for hedging strategies and liability matching – prefer not to hold large allocations to cash because this eats into returns.

When EMIR was first introduced it was hoped that an exemption from central clearing for pension funds would allow the clearing houses and schemes to come up with a solution, but this has yet to materialise.

Last year Commission vice-president Valdis Dombrovskis, responsible for financial stability, financial services and the Capital Markets Union, began organising meetings to bring together central counterparties, pension funds, central banks and investment banks in an attempt to find a solution.

According to PensionsEurope’s Verstegen, the solution in the pension investors’ eyes is based on the central repurchase (repo) market, but with central banks acting as a liquidity backstop.

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