8 July 2018




On 3 July 2018, the European Securities and Markets Authority (ESMA) confirmed the market expectation that it is unlikely the Refit amendments to EMIR will be implemented by 16 August 2018.  This means the transitional clearing exemption that has been in place for Pension Scheme Arrangements (PSAs) since 16 August 2012 will expire on 16 August 2018.  ESMA further confirmed that neither ESMA itself nor the competent authorities have the powers to extend the exemption for a third time without a formal amendment to EMIR.


However, ESMA has attempted to give some reassurance to the industry by stating that (in light of the positions adopted respectively by the European Parliament and the Council on the Refit proposal) it is expected to be a relatively short time gap before the exemption will be effective again and that, in this intervening period, it expects competent authorities not to prioritise their supervisory actions towards affected PSAs, but “generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner”.


The UK Financial Conduct Authority (FCA) has expressed its support to this approach: in its statement of 6 July 2018, the FCA confirmed that it “will not require PSAs and their counterparties to start putting processes in place to clear derivatives for which they are currently exempt from clearing under EMIR during such timing gap”.  The FCA warned, however, that this approach was subject to any further statements that may be issued by ESMA or the FCA and that, in any event, it continued “to recognise that the clearing of derivatives is a prudent risk management tool”.




The European Markets Infrastructure Regulation on OTC derivatives, central counterparties and trade repositories (EMIR) introduced mandatory clearing for certain classes of OTC derivatives transactions and market counterparties.


PSAs would typically be classified as ‘financial counterparties’ under EMIR and as such would prima facie be caught by the clearing obligation.  However, EMIR recognised that central clearing, in particular, the provision of cash collateral as variation margin, would present certain challenges to PSAs as they typically seek to minimise their cash allocations in order to achieve the required returns for the scheme beneficiaries (ie. to provide the retirement benefits of future pensioners).  In other words, the mandatory imposition of central clearing could have a negative impact if PSAs were forced to divest their assets in order to meet their cash margin obligations for their cleared OTC derivatives trades.


This is why EMIR provided a temporary clearing exemption for PSAs, but only to the extent that the underlying trades were objectively measurable as reducing investment risks directly relating to their financial solvency.  The exemption was initially granted for a three year transitional period (expiring on 16 August 2015), but with the possibility of two further extensions (thereby providing for a potential transitional period of up to 6 years in total, expiring 16 August 2018).  The expectation by the European regulators was that the CCPs would collectively develop an appropriate technical solution for the transfer by PSAs of non-cash collateral as variation margins during this transitional period.


While each of the two permitted extensions has now been exercised, such an industry solution has not yet been found, and so (pending a formal amendment to EMIR resulting from the Refit negotiations), PSAs will technically become subject to mandatory clearing from 17 August 2018.


For more information please contact John Delamere.