The UK Treasury has indefinitely extended the exemption from mandatory clearing for UK pension schemes using derivatives to manage investment risks that relate to the solvency of the scheme.
Pension scheme trustees using derivatives as part of their investment strategy will be aware that since the introduction of the European Markets Infrastructure Regulation (EMIR) in 2012, pension schemes have largely been exempt from a requirement to clear their derivatives transactions through a central counterparty, provided those derivatives transactions are used to hedge investment risks that relate to the solvency of the scheme.
The original exemption was time-limited and was extended several times by the EU Commission. Since Brexit it has also been extended for UK pension schemes by the Treasury. The EU exemption expired without further extension in June 2023 - the Commission taking the view at the time that EU pension schemes were largely operationally ready to clear their derivatives.
Meanwhile, the current exemption applying to UK schemes was due to expire on 18 June 2025. Many market participants and trade associations have repeatedly highlighted the difficulties posed to schemes in managing the cash collateral requirements applicable when clearing through a central counterparty - particularly during stressed market conditions such as those prevailing in the gilt markets following the "mini-budget" in September 2022.
The Treasury has now confirmed that the government has decided that the exemption should be maintained "for the longer term". The government has accepted that removal of the exemption would reduce the ability of schemes to invest in growth assets, and that there are no existing means for pension schemes to access cash collateral without potential adverse impact on the benefits provided to members.
This decision also means that UK pension schemes will be able to trade on an uncleared basis with EU bank counterparties following the coming into force of EMIR 3.0 in the EU on 24 December 2024. EMIR 3.0 introduced a permanent exemption from clearing for EU counterparties where they enter transactions with third country pension schemes which are authorised and supervised under national law and benefit from a clearing exemption in their home jurisdiction. UK schemes previously unable to transact bilaterally with EU banks following the removal of the EU exemption may now consider doing so.
The continued availability of the clearing exemption in the long term will no doubt be welcomed by pension scheme trustees and their investment managers. If you have any questions, please do get in touch with any of the contacts below, or your usual Travers Smith contact.
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