EUROPE - A European parliamentary committee has backed proposals to exempt pension funds from rules forcing them to clear over-the-counter derivative transactions through central counterparties.
The European Parliament's Economic Affairs Committee said yesterday there will be a "special regime" for pension funds, "provided that the national capital requirements provide a guarantee similar to cleared contracts" - backing earlier proposals by the European Commission.
Pension schemes had been concerned the lack of an exemption could make it much more difficult for them to make use of OTC derivatives in an efficient way for risk reduction or efficient portfolio management.
OTC derivatives, such as inflation or interest rate swaps, are used by UK occupational pension schemes to help reduce risk and investment managers have been increasingly allowed to make use of the instrument as part of the efficient management of their portfolios.
Sacker & Partners partner Andrew Bradshaw explained: "Our understanding of the Commission's proposal (which appears to have been accepted by the EAC) is that pension schemes will be exempt for three years from the requirement to clear OTC transactions through central counterparties if the transaction reduces risks directly related to the financial solvency of pension scheme investments.
He added: "EU pension schemes are already subject to prudential restrictions on the use of derivatives, so a number of bodies had suggested that pension schemes should be exempt from the new requirements."
The proposal will now go before the full European Parliament for clearance in July before it moves to the European Council, where there could be further negotiations and changes.
The law will be a directive, so each EU member state will then have to develop legislation to implement the law. National regulators and the new European Securities and Markets Authority will be responsible for developing the regulatory framework.
The proposed legislation came after fears had been raised about the safety and transparency of the OTC derivatives markets following the collapse of Lehman Brothers and the bailout of a number of other institutions including AIG.
At a summit in Pittsburgh in September 2009, the G20 leaders made a commitment that all standardised OTC derivatives should be cleared through central counterparties by the end of 2012 and that all OTC derivatives should be reported to trade repositories.
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