PensionsEurope has asked the European Commissioner, Mairead McGuiness, for an extension of the equivalence given to UK central clearing counterparties (CCPs) for European Pension Scheme Arrangements (PSAs).

In a letter to Mairead, who serves as the Commissioner for financial stability, financial services and capital markets, PensionsEurope CEO / Secretary General, Matti Leppälä, explains why, in his view, an extension to the equivalence of UK CCPs is necessary for pension schemes.

The European Commission has previously granted temporary and conditional equivalence to UK CCPS until 30 June 2022, to avoid “cliff edge risks” following the end of the Brexit transition period. It called for market participants to reduce their exposure to UK CCPs in this time and build up clearing capacities in the EU.

Leppälä said that despite PSAs following this advice, they are “afraid” that June 2022 does not allow enough time to fully switch to use only non-UK CCPs. Therefore, PensionsEurope is asking for the equivalence decision for UK CCPs to be extended by one year.

“The main concerns to PSAs to fully switch to clear only with the EU CCPs include the costs related to switching exposures and transition risks. Switching exposures can be costly, as the exposures in UK CCPs have different market values than in the EU CCPs. PSAs need to bear this transition risk when transferring exposure from UK CCPs to EU CCPs, and there are also fixed operational costs in doing transitions,” Leppälä wrote.

“Many PSAs are also worried that there is still no liquid market for interest rate swaps (IRS) in small currencies and other currencies denominated derivatives outside the UK. These derivatives are important for PSAs to manage interest rate risk and other risks, which are mainly in Member States outside the Eurozone.”

He said that in exchange for the extension, PSAs are willing to continue actively reducing their exposures to UK CCPs, and open and hold active accounts within the EU based CCPs.

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