When the European Markets Infrastructure Regulation (EMIR) originally introduced a clearing obligation for OTC derivatives in 2012, pension scheme arrangements (PSAs) were granted a temporary exemption from the obligation in light of the difficulties they would face in sourcing cash to meet the variation margin requirements of central counterparties (CCPs). This exemption has been extended several times since 2012 and is currently due to expire in June 2022. On 25 January 2022, the European Securities and Markets Association (ESMA) sent a letter to the European Commission (EC), providing its views on the clearing obligation for PSAs and recommending the end of the current exemption from the clearing obligation with a one-year implementation period.
In its letter, ESMA states that PSAs are, to a large extent, operationally ready to clear their OTC derivatives, but that they should be given sufficient time before a clearing obligation takes effect. Therefore, ESMA recommends starting to apply the clearing obligation to PSAs from 19 June 2023.
The letter, which reflects input from various other EU financial regulators, refers back to a report published by ESMA in December 2020 which highlighted a number of key operational challenges that remained for PSAs wishing to clear their derivatives trades. While the letter acknowledges that much of that analysis remains relevant today, it also notes that significant progress has been made towards PSAs' becoming operationally ready to clear. This conclusion is based in part on surveys undertaken of Irish, Danish and Dutch regulators in the summer of 2021, as well as on ESMA's own analysis of the data provided by trade repositories. That analysis highlighted that Ireland is among the top three EU jurisdictions for PSAs.
One key point raised in the letter is the link between the clearing obligations for PSAs and EU regulators' ongoing work to build EU clearing capacity post-Brexit. In November 2021 the EC proposed a temporary extension to the equivalence granted to UK CCPs. The letter also notes that a second EU CCP has now gone live with a sponsored clearing repo model, broadening the tools available to PSAs to source cash to meet variation margin calls for their cleared OTC interest rate derivative trades.
Next steps
The EC will now decide on whether to grant the suggested extension of the exemption until June 2023. ESMA is of the opinion that the decision of the EC should be communicated with sufficient lead time for PSAs and other market participants to adapt their implementation plans accordingly.
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