Pension Schemes’ Clearing Exemption: An End in Sight

Pension scheme arrangements (“PSAs”) have been relying on time-limited exemptions from the EMIR clearing obligation since it was first introduced (see previous briefings, the most recent of which is accessible here, with earlier briefings accessible through that). The European Securities and Markets Authority (“ESMA”) has now recommended to the European Commission (“EC”) a final extension of that exemption until 19 June 2023, with the clearing obligation applying to PSAs in full from that date.

ESMA’s recommendation is based on a conclusion that PSAs are operationally ready to clear their OTC interest rate derivatives which, in turn, derives from:

  • ESMA surveys of EMIR national competent authorities for Ireland, Denmark and the Netherlands (as key member states for PSAs);
  • ESMA surveys of Eurex and LCH Ltd (as key CCPs for OTC interest rate derivatives clearing);
  • an analysis of information gleaned by ESMA from trade repositories;
  • a consideration of the range of the liquidity management solutions now available to PSAs to support variation margin calls for their cleared OTC interest rate derivatives; and
  • assurances received from PSA representatives at the EC’s Expert Group meetings in June and December 2021.

ESMA also concluded that a further year is required to ensure sufficient implementation time for PSAs, taking into account factors such as:

  • the need for PSAs to implement liquidity management solutions to facilitate meeting variation margin calls on their cleared derivatives;
  • the EU’s ambition to build EU clearing capacity post-Brexit (see here);
  • the upcoming final phase-in date applicable to the mandatory initial margin requirement for uncleared OTC derivatives (1 September 2022) which may incentivise in scope PSAs to clear their trades; and
  • an anticipated extension to the operating hours of TARGET2 and T2S by November 2022 which could facilitate the provision of euro cash as variation margin for cleared derivatives as well as accessing liquidity management solutions, thereby contributing to the attractiveness of clearing in the EU.

The recommended cut-off for the exemption is unlikely to come as a surprise to PSAs as Level 1 legislative change would have been required for any further extension.

Whether this final extension will be granted is a decision for the EC and ESMA has recommended that the EC decision should be communicated with sufficient lead time to enable PSAs and relevant market participants to adapt their implementation plans accordingly.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.