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EMIR: mandatory clearing poses difficulties for PSA

02/05/2021Topics:  Tag CACEIS EMIR Tag CACEIS Pension Fund

© Santiago Silver

On 17th December 2020, the European Securities and Markets Authority (ESMA) issued its second report on the clearing solutions for Pension Scheme Arrangements under EMIR.

From the very early days of the EMIR Regulation on OTC derivatives, central counterparties and trade repositories "EMIR" the enormous difficulties that mandatory clearing would pose in respect of pension scheme arrangements ("PSA") were obvious. It surprised no one that pursuant to Article 89 (1) of EMIR, pension scheme arrangements were eventually excluded from the clearing obligation and were subject to a transitional period of three years.

The problem with Pension scheme arrangements and mandatory clearing

EMIR makes clearing mandatory for certain types of counterparties and in respect of certain types of derivatives. In addition, financial counterparties and non-financial counterparties are subject to risk mitigation measures, which include the posting of variation margin. Variation margin means the cash collateral posted or collected by a counterparty to reflect the results of the daily marking-to-market.

As EMIR recognises, the main challenge to make clearing mandatory for entities operating pension scheme arrangements is that requiring such entities to clear OTC derivative contracts would lead to their divesting a significant proportion of their assets for cash in order to meet the ongoing margin requirements of CCPs which require cash for variation margin postings. They must meet the ongoing margin requirements of Central Counterparties (CCP) that require cash to deposit variation margin. This contrasts with investment preferences of many Pension scheme arrangements. In the present situation cash holdings are obviously not the preferred investment category.

Position of Dutch Pension scheme arrangements

Dutch PSAs constitute a good proxy for the EU pension fund sector as at the end of March 2020, since figures indicate that they were accounting for 70-80% of the notional amount of derivatives of all EU pension funds. Structurally speaking, the liabilities of EEA PSAs are long dated: 50 years and longer with an average maturity at around 25-30 years (longer than US pension funds for instance), linked to interest rates and/or inflation. To hedge their liability risks, PSAs typically invest in high-quality government bonds. The most commonly mentioned reason for the use of OTC derivatives by PSAs is the insufficient number of issuances of long dated high-quality bonds restricting the ability of EU pension schemes to manage the interest rate risks adequately. Both sovereign and corporate, lacks scale and availability in several key sectors.


Regulation (EU) 2019/834 (hereinafter ‘EMIR REFIT’) entered into force on 17 June 2019 and introduced a number of amendments to EMIR, one of them being a further extension of the exemption from the clearing obligation for pension scheme arrangements (PSAs). As mentioned this extension was introduced because of the challenges that PSAs would face to provide cash for the variation margin calls related to cleared OTC derivative contracts.

Last year, EMIR REFIT further extended the temporary exemption from the clearing obligation for Pension schemes until June 2021. To monitor the progress made by the different actors involved towards possible clearing solutions for Pension schemes by that date, ESMA has been mandated to draft an annual report as input to the European Commission’s report on the clearing solutions for PSAs. The second report will serve as input to the next report of the Commission.

This extension however goes hand in hand with the EMIR REFIT objective of also ensuring that progress is made by the relevant stakeholders in addressing these challenges and for PSAs to clear their contracts as soon as possible. As part of this latter objective, EMIR Refit provides that ESMA, in cooperation with the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Systemic Risk Board (ESRB), should prepare a report every year as long as the exemption still applies, as input for the Commission’s own report, assessing whether viable technical solutions have been developed for the transfer by pension scheme arrangements of cash and non-cash collateral as variation margins and the need for any measures to facilitate those technical solutions.

CACEIS is a Global player with an international Global Coverage: connection to more than 60 cash and derivative markets, and coverage of 85 countries for asset custody

  • Multi-Asset Class Offering: all futures and options on Equity, Index, Fixed Income, Commodities, etc.
  • Global Clearing Member (GCM) on the leading markets (Eurex, LCH, ICE, etc.)
  • Follow-the-Sun set-up enables us to provide round-the-clock client support

We offer adapted collateral management services:

  • Financing solutions, including transformation of securities collateral into cash collateral via securities lending, REPOs or credit lines
  • Collateral management for both cleared and non-cleared OTC products
  • For non-cleared OTC products, intraday initial margin and daily variation margin management, including FX management. Possibility to open segregated accounts by client/fund in our books for collateralization
  • For cleared OTC products, processing of initial margin and margin calls from CCPs/clearing brokers