ESMA endorses clearing exemption to 16 UK pension funds

The majority of buy-side firms, including pension funds, are expected to begin clearing of derivatives from the second half of 2017.

Europe’s regulatory authority has endorsed an exemption to mandatory swaps clearing for 16 UK-based pension funds due to concerns over costs.

On Tuesday the European Securities and Markets Authority (ESMA) published a list of opinions on the exemption for pension funds, in which arguments for the exemption is “justified” due to difficulties faced with meeting the variation margin requirements.

The clearing mandate for category 3 firms, which include pension funds, sovereign wealth funds and the majority of buy-side firms, is set to come into force in the second half of 2017 after a two-year exemption was granted by the European Commission.

Pension funds frequently use interest rate and inflation swaps to hedge their long-term liabilities. However, the mandate would require them to clear trades and post collateral for the first time.

Following concerns raised by the UK Financial Conduct Authority (FCA), the disclosed pension funds would face difficulties due to limited holdings of cash, higher transaction costs, and “risks of inefficiencies as a result of converting assets into cash.”

After an exemption is granted by the FCA, ESMA will then publish a full list of the types of firms that have are fully exempt from the EMIR clearing mandate. 

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