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Pensions speedbrief: Derivatives - New rules on posting collateral from 1 March 2017 and proposed extension to central clearing exemption

  • United Kingdom
  • Pensions


New EU rules relating to the posting of collateral in connection with over the counter (OTC) derivatives transactions that are not cleared by a central counterparty come into force on 1 March 2017. Pension plans that are party to an ISDA Master Agreement either directly or through an investment manager need to take steps to ensure compliance with the new rules before they apply.

The new rules only need to be applied to uncleared OTC derivatives transactions entered into on or after 1 March 2017, but if an existing transaction is materially amended on or after this date counterparties will need to consider whether the new rules will apply as a result of the amendment.

There are a variety of ways in which the necessary documentation can be put in place or existing documentation amended. There is an ISDA published protocol that can be used or an agreement can be negotiated with the counterparty.

How can we help?

We can advise you on:

  • whether to adhere to the ISDA protocol or use a bespoke agreement.
  • the process for adherence to the protocol
  • negotiation of bespoke agreements with your counterparties and ensuring that these are compliant with the new rules
  • whether you should seek to apply the new rules to your back book of transactions or just future transactions
  • whether proposed changes go beyond the regulatory requirements - we are seeing some counterparties use this as an opportunity to seek to renegotiate other terms, and
  • updating investment management agreements to ensure that responsibility for meeting these new requirements is allocated appropriately.

Central clearing exemption

Separately, the European Commission has adopted a Delegated Regulation, which would extend the transitional exemption for pension plans from central clearing for their OTC derivative transactions (as required under the European Market Infrastructure Regulation (EMIR)) until 16 August 2018.

The Council of the EU and the European Parliament must now consider the Delegated Regulation. If, as expected, neither of them objects, the Delegated Regulation will enter into force the day after it is published in the Official Journal of the EU.

Assuming the extension comes into force, it will be the second time that the Commission has made use of its power under EMIR to extend the temporary clearing exemption for pension plans.

Without the extension, pension plans would have to source cash for central clearing. As pension plans do not hold significant amounts of cash or highly liquid assets, imposing central clearing requirements could cause significant difficulties. It is hoped that the extension will provide central counterparties sufficient time to develop appropriate technical solutions for the transfer of non-cash collateral by pension plans.

In addition, as part of its review into how EMIR is functioning, the European Commission has recommended that an assessment be made as to whether the current exemption from central clearing for pension plans should be prolonged or made permanent without compromising on EMIR’s objective of reducing systemic risk.