FILE PHOTO: A ruler lies next to a Logo of the European Union during preparations for a family picture of the 8th ASEM Foreign Ministers meeting in Hamburg May 29, 2007. REUTERS/Christian Charisius (GERMANY)
February 1, 2022
By Huw Jones
LONDON (Reuters) – Mandatory clearing of derivatives contracts by pension funds in the European Union should start in June 2023, helping the bloc to cut reliance on London, the EU’s securities watchdog said on Tuesday.
Brussels wants to reduce reliance of EU financial services companies, including pension funds, on clearing euro denominated derivatives in London after Britain left the bloc’s regulatory framework.
The mandatory clearing by the pensions funds could help to build up EU capacity in derivatives clearing. London still dominates clearing, with the London unit of clearing house LCH handling about 90% of euro denominated interest rate swaps.
EU pension funds collectively hold trillions of euros in assets for savers and use derivatives, like interest rate swaps, to manage risk exposures as their liabilities are often linked to borrowing costs.
The pension funds were given a temporary exemption from mandatory clearing in 2012 and it has remained in place ever since. Mandatory clearing was introduced after the global financial crisis over a decade ago and ensures a trade is completed, even if one side goes bust.
The pension fund sector wanted extra time to prepare for the move to mandatory clearing, which involves finding cash or margin to post against swaps in case of default.
The European Securities and Markets Authority (ESMA) said in a letter on Tuesday to the EU’s financial services chief, Mairead McGuinness, that pension companies are now “largely operationally ready” for mandatory clearing from June 2023.
ESMA said a second clearing house inside the EU – LCH in Paris – along with Deutsche Boerse’s Eurex in Frankfurt, was now offering a service which helps pension funds to source cash for margins.
Some pension firms are voluntarily clearing trades at Eurex and the London unit of LCH, which is part of the London Stock Exchange, and most large firms can clear at both, ESMA said.
Making clearing mandatory for pension funds could be “one of the milestones in the plan to build EU clearing capacity, as it might contribute to bring client liquidity to the EU which could then in turn attract further buy-side activity,” ESMA said.
Brussels is due to set out “incentives” in coming weeks to persuade banks and asset managers to shift clearing business from the UK capital to the bloc.
(Reporting by Huw Jones. Editing by Jane Merriman)