U.K. EMIR (the onshored European Market Infrastructure Regulation) generally requires the clearing at a central counterparty of all interest rate swaps and credit default swaps. As announced earlier this year, HM Treasury has launched a review of an applicable exemption for pension funds, with the publication of a call for evidence. Currently, pension schemes meeting certain requirements are exempt from the clearing obligation for a temporary period. The exemption was included in EMIR due to the difficulty that pension funds would find in funding margin calls; nominally, to provide CCPs with time to develop solutions for the transfer of non-cash collateral by pension schemes to meet variation margin calls. CCPs require highly liquid collateral, mostly cash, as variation margin, but pension schemes are not set up to hold large amounts of cash and would have to amend their business model at high costs to do so. In June, the Pension Fund Clearing Obligation Exemption and Intragroup Transaction Transitional Clearing and Risk-Management Obligation Exemptions (Extension and Amendment) Regulations 2023 extended the temporary exemption for pension schemes to June 18, 2025.

HM Treasury's call for evidence seeks views on:

• How pension funds currently hedge their risks and the extent to which they make use of the clearing exemption to manage their risks.
• The use of the bilateral OTC derivatives markets and the potential benefits compared to clearing derivatives.
• How pension funds can access clearing and how they could meet CCP variation margin requirements.
• Whether the exemption for pension funds impacted the LDI (Liability-driven investment) crisis in 2022 and whether the situation would have taken a different turn if the exemption did not exist.
• Whether removing the exemption would impact pension schemes.

Responses to the call for evidence may be submitted until January 5, 2024.

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