The European Commission (EC) has been urged to extend the exemption for pension scheme arrangements (PSAs) to clear their over-the-counter (OTC) derivative transactions until 2023.

The European Securities and Markets Authority (ESMA) recently recommended the postponement in a letter to the commission, with the Dutch Pension Federation also now backing the recommendation.

Current exemptions for pension funds are expected to expire in June 2022, although European Markets and Infrastructure Regulation (EMIR) legislation gives the option to extend this for another year.

The ESMA letter suggested that PSA’s are "largely operationally ready", expressing support for the continuing efforts to further improve PSAs’ ability to source cash to meet variation margin calls in all possible scenarios.

In particular, it suggested that in stressed market conditions, a mix of solutions is available to PSAs, including sponsored cleared repo models, meaning that there are less reasons to treat PSAs differently than other funds.

The ESMA also emphasised that the exception for PSAs was meant to be temporary when it was first introduced in 2012, arguing that it should therefore stop.

However, it acknowledged that sufficient time should be given before the clearing obligation would start applying, as PSAs and market participants need time to finalise their clearing and collateral management arrangements.

The ESMA also argued that the start of the clearing obligation for PSAs should be considered in the context of the broader plan to build clearing capacity in the EU and reduce reliance on UK CCPs, to which the end of this exemption can also contribute.

In light of this, it recommended that the European Commission grant a final one-year extension of the exemption to start applying the clearing obligation to PSAs on 19 June 2023.

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