EU law – current law
EMIR, as amended by EMIR Refit, provides that certain pension scheme arrangements are temporarily exempt from the clearing obligation until 18 June 2021 in respect of OTC derivative transactions that are objectively measurable as reducing investment risks that directly relate to the financial solvency of the pension scheme arrangement.
In addition, the European Commission may further extend the exemption twice for a period of one year each time, where the European Commission concludes that no viable technical solutions have been developed for the transfer by pension scheme arrangements of cash and non-cash collateral as variation margins and to avoid the adverse effect of centrally clearing derivative contracts on the retirement benefits of future pensioners.
EU law – proposals
The European Commission is consulting on a proposal to extend the temporary exemption by one year to 18 June 2022. It has also published a draft delegated regulation and requested feedback by 13 April 2021.
This follows the European Commission’s report in September 2020 which concluded that the key remaining challenge for pension scheme arrangements is the need to post variation margin in cash in case of market stress (when they may be required by CCPs to post significant amounts of variation margin). Similarly, ESMA’s report in December 2020 concluded that solutions to mitigate the challenges faced by pension schemes need to be further developed, or might need to be accompanied by some regulatory changes in certain cases, and noted that an extension of the exemption by one year is needed.
EU law – UK pension scheme arrangements
Importantly, following the end of the Brexit transition period, UK pension schemes are technically not able to benefit from the temporary clearing exemption under EMIR when transacting with EEA entities. This contrasts with the approach taken under UKMIR, as noted below. However, as the loss of the exemption has a significant impact on both UK pension schemes and the EEA entities facing them, national competent authorities are, reportedly, taking pragmatic approaches to enforcement.
Following the end of the Brexit transition period, the temporary exemption of certain pension scheme arrangements from the clearing obligation became part of UK retained law. However, amongst other changes, two key modifications were made to the temporary exemption by The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) (No. 2) Regulations 2019 – (i) the temporary exemption was extended to 18 June 2023, and (ii) the temporary exemption was broadened such that EEA pension scheme arrangements may also benefit from it. Therefore, in contrast to EMIR, both UK and EEA pension schemes may be able to benefit from the temporary exemption from clearing under UKMIR.
Please speak to your usual Macfarlanes contact if you have any questions.
The Commission, taking into account the report of ESMA, is of the opinion that it is indeed necessary to extend the transitional period by one year to allow the envisaged solutions to mature and be further refined.