LONDON, May 9 (IFR) - The European Parliament will push to
exempt pension funds from mandatory central clearing for
over-the-counter swaps on a permanent basis, according to Kay
Swinburne, vice chair of the European Parliament's Economic and
Monetary Affairs Committee.
Speaking to reporters at ISDA's Annual General Meeting in
Lisbon today, Swinburne said that recent European Commission
proposals for a three-year exemption as part of the European
Commission's review of European Market Infrastructure Regulation
would likely be extended following negotiations with the
European Parliament and European Council.
"I'm convinced it will be a permanent exemption," the member
of the European Parliament for Wales told reporters. "I don't
think there's a benefit of including pension funds. Almost all
of them are using these instruments under their statute for
hedging risk so it's an underlying hedge and for me they should
be permanently excluded."
The European Parliament originally called for a permanent
exemption for pension funds in its 2010 paper on the issue, but
the final EMIR text opted for a two-year exemption on the
assumption that a solution would be found to address collateral
concerns that the funds face when clearing their OTC swaps.
Pension funds face structural difficulties in centrally
clearing their OTC derivatives as clearinghouses only accept
cash from clients to meet variation margin calls. In order to
yield higher returns for policy holders, pension funds typically
limit their cash positions. If subjected to the clearing
obligation, pension funds would have to shift part of their
assets into cash. The European Commission estimates that pension
funds and their members face an additional €1.6bn cost
associated with mandatory derivatives clearing.
"This would have a negative impact on the revenue of future
pensioners," the commission said in a communication in
conjunction with the EMIR review.
Despite leaving the door open for an additional two-year
extension, subject to certain requirements and a solution not
being found, the commission reiterated its intention to see
pension funds ultimately caught in the regulatory net.
"Since PSAs [Pension Scheme Arrangements] are active users
of derivatives, the proposal makes sure that the ultimate goal
is that they participate in central clearing. It therefore
establishes strict criteria to assess progress in developing
clearing solutions for PSAs," the commission said in its
communication last week.
Possible solutions could see clearinghouses extend the range
of collateral that buyside firms can post to meet their
variation margin requirements, but legislators are concerned
about exposing clearinghouses to greater risk given their status
as systemically significant institutions.
"The more work I do on recovery and resolution, the more I
don't want them to hold anything that isn't the highest
quality, most liquid collateral," said Swinburne. "Would I
prefer to see them outside of it completely? Absolutely, rather
than putting more risk into the CCP."
According to Swinburne, the European Parliament will push
for a compete exemption, but she believes that a rolling
exemption would be an acceptable compromise following
"I think it's more likely to be a rolling exemption and a
rolling exemption, with no sunset clause, I can just about live
with," said Swinburne.
She said that proposals in the EMIR review are closely
aligned with the original European Parliament text that was
voted through in 2010 and that the issue stems in part from a
small cohort of member states in the European Council that were
affected by pension fund exemptions in 2010.
"If you look at the number of countries with pre-funded
pension funds, it's a small handful. When the UK leaves the
dominant pension fund industry loses its voice at the table,"
Aside from the UK, Europe's pension fund industry is
dominated by small Scandinavian markets, the Netherlands and
small German property funds that get caught by the PSA
"This is about compromise," said Swinburne. "Ultimately if
the draft text is where you want to end up they're [the
Commission] likely to be pulled to the parliament position of a
"I expect they'll reset their position so that a compromise
can be reached."
(Reporting by Helen Bartholomew)