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Sunday 16 December 2018


Spring Conference

European commission announces three-year exemption from central clearing of OTC derivatives

Written by Talya Misiri

The European Commission has announced that a new three-year temporary exemption from central clearing of OTC derivatives for pension funds.

Following a public consultation looking at the effect of the new financial sector rules since the financial crisis, the Commission has proposed some targeted reforms to improve the functioning of the derivatives market in the EU.

The reforms look to provide simpler and more proportionate rules for over-the-counter derivates, to reduce costs and regulatory participation burdens, without compromising financial stability, it has said.

As pension funds do not normally have access to the necessary cash for central clearing to enter into OTC derivative transactions, the three year exemption will allow various counterparties involved, including pension funds, central counterparties and clearing members to develop a solution that enables pension funds to participate. This will permit funds to participate in central clearing without negatively impacting the revenues of future pensioners.

The Commission noted that the changes include measures that could save market participants, especially corporates such as energy companies or manufacturers up to €2.6bn in operational costs and up to €6.9bn in one off costs.

In addition, the proposal outlines its aim to improve the quality of reported data.

Financial Services and Capital Markets Union vice president responsible for financial stability Valdis Dombrovskis said: "The European Market Infrastructure Regulation is at the heart of the EU's financial reforms. Today's proposal ensures that EMIR achieves its objective of reducing systemic risk in the OTC derivatives market, while keeping costs to a minimum for the real economy. The proposal builds on the Commission's Call for Evidence and deepens our Capital Markets and our efforts to support investment, growth, and jobs."

European Commission vice president for jobs, growth, investment and competitiveness Jyrki Katainen, said: "Our aim is to simplify rules as well as to eliminate disproportionate costs and burdens to small companies in the financial sector, corporates and pension funds. The targeted changes will deliver real benefits for the industry, without endangering financial stability. Building on consultations with stakeholders, this is a prime example of better regulation."

PLSA policy lead: EU & International James Walsh said: “We are very pleased the European Commission (EC) has listened to arguments made by the PLSA and PensionsEurope and extended pension schemes’ exemption from central clearing of their OTC derivatives arrangements. This extension recognises that the market has not yet developed a practicable solution for clearing by pension schemes.

“Whilst this development removes the worrying prospect of compulsory clearing from August 2018, it does not present a solution to the underlying problem. Derivatives are an essential tool for pension funds, who use them to hedge their risks and ensure they can pay pensioners.”

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