UK regulator heeds ESMA call for discretion over clearing obligation

Europe’s top financial regulator has suggested to national supervisors that they do not force pension funds to abide by derivative clearing rules when an exemption expires next month.

The European Securities and Markets Authority (ESMA) told regulators to “not prioritise” enforcing the rules introduced as part of EMIR. 

An extension of pension schemes’ temporary exemption from clearing rules – which would require them to hold cash against derivative positions – is under discussion as part of so-called “Refit” negotiations between the EU Council and the European Parliament.

However, it is too late for an agreement on this to enter into force by the time the current reprieve runs out in mid-August.

In a statement published yesterday, ESMA guided regulators “to not prioritise their supervisory actions towards entities that are expected to be exempted again in a relatively short period of time and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner”.

The UK’s Financial Conduct Authority (FCA) today said it would not require pension schemes or their counterparties to start putting processes in place to clear derivatives in line with EMIR.

“This approach is subject to any further statements that may be issued by ESMA or the FCA,” the UK regulator added. “We, in any event, continue to recognise that the clearing of derivatives is a prudent risk management tool.”

ESMA cannot disapply a directly applicable EU legal text or delay the start of some of its obligations.

PensionsEurope last month called for regulators to make clear that the clearing obligation would not be enforced for pension funds in the expected intermission between the exemption and any extension.

“It is clear that both the Council and the European Parliament want to extend the clearing exemption and we expect them to wrap up negotiations pretty quickly,” said Matthies Verstegen, senior policy adviser at the association.

“In the meantime, ESMA’s statement should be sufficient ground for national supervisors to allow pension funds to continue accessing the bilateral market. This is very reassuring as it would be difficult to deal with an unforeseen clearing obligation at the eleventh hour.”

Both the EU Council and the Parliament have backed further exemptions for pension schemes, albeit for different lengths of time. The Parliament’s version proposed retroactively exempting derivative contracts executed during the gap between the EMIR exemption expiring and any new exemption kicking in.