PensionsEurope has warned that the European Banking Authority’s consultation on draft regulatory technical standards for initial market model validation under the European Markets Infrastructure Regulation (EMIR) would introduce “new heavy and unjustified burdens”.

It stated that a “vast number” of counterparties would be burdened by the proposed standards regarding the adoption and governance of IM models, and that they would overshoot what is necessary to curb risks to the financial system from IM calculations.

PensionsEurope suggested that article 2, 2 of the proposed standards should be removed or, at least, provide clearer and more objective criteria for requiring section 3 compliance from counterparties above the €50bn threshold.

Article 2, 2 of the proposed standards stated that national competent authorities may decide that specific counterparties with a notional value of non-cleared derivative exceeding €50bn should be subject to section two requirements instead of section three.

“This will, in our view, allow competent authorities to make article 2, 2 decisions with little or unclear argumentation, and it will open to very different practices across Europe,” PensionsEurope said.

“In general, we don’t believe there is a need to request section three compliance from counterparties above the €50bn threshold. However, should the article 2, 2 option be upheld, we suggest that more specific and objective criteria for requiring section 3 compliance should be introduced.”

PensionsEurope also warned that the proposed standards do not adequately consider that IM is calculated and changes subject to the ISDA Standard IMM, which is the industry standard.

It argued that the proposed requirements should take this into account and more proportionate rules could be set for most counterparties without introducing any IM-related risks.

Pensions Europe continued: “We believe the proposed standards put too much emphasis on the role of senior management in relation to IM models.

“As IM calculation and settlement are typically considered middle or back-office tasks, they are typically handled under the counterparties’ general investment-related governance and risk management, rather than being subject to specific governance and or risk management.

“Pension funds and insurers are already subject to encompassing sectorial regulation which includes detailed requirements regarding governance and risk management of investments. This includes among other things internal audit and IT risk management.

“We believe the proposed article 28 should reflect the governance and risk management requirements already embedded in sectorial regulation.”

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