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Pension scheme arrangements clearing exemption extended to 2022

The temporary clearing exemption for pension scheme arrangements, set out in article 89(1) of EU EMIR (as amended by EMIR Refit), has been extended by one year until 18 June 2022.

The temporary exemption provides that the clearing obligation set out in article 4 of EU EMIR does not apply “to OTC derivative contracts that are objectively measurable as reducing investment risks that directly relate to the financial solvency of pension scheme arrangements, and to entities established to provide compensation to members of such arrangements in case of default”.

Importantly, as previously noted, UK pension schemes are technically not able to benefit from the temporary exemption under EU EMIR when transacting with EEA entities. However, as the loss of the temporary 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.

It is noteworthy that, pursuant to article 85(2) of EU EMIR (as amended by EMIR Refit), the European Commission may extend the temporary exemption twice for a period of one year each time “where it concludes that no viable technical solution has been developed and that the adverse effect of centrally clearing derivative contracts on the retirement benefits of future pensioners remains unchanged”. The latest extension is the first of the two possible extensions and, therefore, the European Commission may, in 2022, extend the temporary exemption further until 18 June 2023. However, following any such further extension, additional extensions are not mandated by EU law.

In respect of UK EMIR, pursuant to The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) (No. 2) Regulations 2019, the temporary exemption has been extended to 18 June 2023 and broadened such that both UK and EEA pension scheme arrangements may benefit from it. The types of pension scheme arrangements that have been granted a temporary exemption are set out on the FCA website.

Please speak to your usual Macfarlanes contact if you have any questions.

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.

Tags

derivatives and trading, pensions, financial services, finance, investment management

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