GUEST COMMENT: Derivatives market in Europe

Written by PLSA policy lead for EU and international James Walsh

Lobbying the EU is always a challenge at the best of times. Sometimes months of effort appear to lead to nowhere. However, on this occasion the combined efforts of PLSA and our European body, Pensions Europe, not only led somewhere but also led to somewhere we wanted to go.

I refer to the European Commission’s (EC’s) recent announcement on regulation of the derivatives markets. Pension schemes have an exemption from central clearing of their over-the-counter derivatives trades. This saves them from converting their assets (principally bonds) into the cash that would be required as collateral for a central clearing process. Even the market’s greatest minds haven’t yet devised a straightforward way of doing this, so central clearing would be expensive and cumbersome.

It was this impracticality that led the EC to extend the pensions exemption to 2017 and then August 2018. Now the EC has announced an extra three-year extension, with a potential further two years beyond that. The news came in a package of reforms of the European Market Infrastructure Regulation (EMIR), which sets the framework for the EU derivatives markets.

This gives pension schemes some certainty for the medium term at least, although we should be in no doubt that central clearing is still the long-term goal. Of course, it is not a permanent solution, but it is one that takes the issue away to beyond the date when the UK will have left the EU.

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