The European Commission (EC) has proposed a further two-year extension beyond the three-year exemption from mandatory clearing of over-the-counter derivatives granted to qualifying pension scheme arrangements (PSAs) under Articles 89(1) and (2) of the European Market Infrastructure Directive (EMIR). This exemption was included in EMIR on the basis that PSAs generally do not hold substantial cash assets, which would pose significant challenges for PSAs to meet variation margin (VM) calls from central counterparties (CCPs), which are generally required to be made in cash. CCPs were expected to use this three-year exemption period to identify and bring to market viable solutions to permit PSAs to transfer non-cash collateral as VM.

Article 85(2) of EMIR obliges the EC to consult with the European Markets and Securities Authority and the European Insurance and Occupational Pensions Authority to assess the progress made by CCPs during this period. The report, a draft of which was published on February 3, identifies a series of potential solutions under consideration by CCPs, including the use of repurchase (repo) agreements, agency stock lending, secured lending by corporate entities with large cash reserves, and pass-through of non-cash assets (with or without a security interest) to VM receivers. Despite the variety of potential solutions under consideration, the draft report concludes that, other than in respect of repos, “no sufficient progress appears to have been made by CCPs” to identify a viable solution for PSAs.

Accordingly, the EC has indicated its intention to propose a two-year extension to the exemption from mandatory clearing for PSAs, during which time the EC will engage with CCPs to facilitate bringing one or more viable solutions to market. Article 85(2) of EMIR permits the EC to grant a further one-year extension. However, in the absence of CCPs identifying a solution by August 2018, PSAs will be required to post cash to meet VM calls.

A copy of the EC’s draft report can be found here. 

The EC’s press release accompanying the report can be found here.