Report from the Commission to the European Parliament and the Council under Article 85(2) of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, assessing the progress and effort made by CCPs in developing technical solutions for the transfer by pension scheme arrangements of non cash collateral as variation margins, as well as the need for any measures to facilitate such solution

Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR) entered into force on 16 August 2012. Under EMIR, OTC derivatives that are standardised (i.e. that have met predefined eligibility criteria), including a high level of liquidity, will be subject to a mandatory central clearing obligation and must be cleared through central counterparties (CCPs).

CCPs are entities that interpose themselves between the two counterparties to a transaction and thus become the 'buyer to every seller', as well as the 'seller to every buyer'. As a counterparty to every position, the CCP bears counterparty credit risk in the event that one of its counterparties fails. CCPs are designed to withstand the default of a clearing member or client principally through the use of frequent and conservative collateral – or ‘margin’ – requirements, calculated to cover any potential losses upon a default. CCPs accept only highly liquid assets, generally cash, as collateral to meet variation margin (VM) calls in order to allow for a rapid liquidation in the event of a default.

Pension Scheme Arrangements (PSAs) in many Member States are active participants in the OTC derivatives markets. However, PSAs generally minimise their cash positions, instead holding higher yielding investments such as securities in order to ensure strong returns for their beneficiaries - retirees. The inability of CCPs to accept non-cash assets as collateral to meet VM calls means PSAs would need to generate cash on a short term basis either by borrowing cash or selling other assets in order to meet the CCP margin calls. This is not currently the case in the framework of bilateral relationships, where PSAs are able to post non-cash assets to their bilateral counterparties, to the extent that margin is required. Such a maintenance of cash reserves leads to high opportunity costs for PSAs because of the low level of interest that is earned on cash collateral. The costs of central clearing would therefore ultimately reduce the retirement income of the relevant pensioners if PSAs were required to post cash to meet VM calls.

The Commission, the Council and the Parliament therefore agreed a three-year temporary exemption from the clearing obligation for PSAs meeting certain criteria. The exemption can be extended by up to a further three years in total. This transition period was explicitly provided for under EMIR in order to provide further time for CCPs to develop technical solutions for the transfer of non-cash collateral to meet VM calls.

The objective of this report is to present an assessment of the progress and effort made by CCPs in developing technical solutions for the transfer by PSAs of non-cash collateral as VM, as well as the need for any measures to facilitate such solution.

• Primary Source

EUR-Lex: COM(2015)39: Follow the progress of this report through the decision-making procedure http://eur-lex.europa.eu/legal-content/EN/HIS/?uri=COM:2015:039:FIN

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