The European Market Infrastructure Regulation (EMIR) places reporting and risk mitigation requirements on pension scheme trustees entering into derivative contracts. It is important that trustees entering into relevant contracts understand their obligations and, where appropriate, ensure that responsibility for compliance is properly delegated to their fund managers.
The risk mitigation requirements apply only to "over the counter" (OTC) derivatives. In our experience pension scheme trustees are more likely to be involved in bespoke derivative contracts, which will generally be OTCs. Trustees therefore need to be aware of the requirements and include relevant provisions in fund management agreements with the responsibility for complying with EMIR being expressly delegated to the fund manager where appropriate. The key risk mitigation requirements at this stage are:
- All transaction must be confirmed in writing by each counterparty and key terms reconciled.
- Consideration must be given to "compressing" transactions with the same counterparty (depending on the number of arrangements with that counterparty). Compressing involves reducing the number of outstanding transactions without changing the risk profile or value of the portfolio.
- Dispute resolution procedures must be in place. This can be achieved by adhering to an industry protocol.
New reporting requirements apply to both OTC and exchange traded derivative contracts. Information on each derivative trade must be reported to a trade repository (TR). Trustees should either expressly delegate this obligation to their fund manager or report directly to a TR. If delegating, trustees should make sure the delegate is willing to accept the delegation and have processes in place to ensure that reports submitted are timely and accurate. A third option would be to rely on the counterparty to report but trustees would need to be certain that reports are submitted to the required standard.
Trustees investing in derivative contracts should, if they have not already done so, discuss the issues with their fund managers. Fund management agreements may need amending to properly document any delegations and ensure that the trustees comply with their obligations under EMIR.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.