UK and EU pension funds are currently exempt from the clearing obligation under the European Market Infrastructure Regulation (EMIR) as a result of the transitional provisions in Article 89 EMIR, which provide that the clearing obligation does not apply to over-the-counter (OTC) derivative contracts that are objectively measurable as reducing investment risks directly relating to the financial solvency of pension scheme arrangements (PSAs) as defined in Article 2(10) EMIR.
The exemption has been extended several times. Most recently, on 9 June 2022, the European Commission published a Delegated Act exempting PSAs from the clearing obligation until 18 June 2023. In the UK, pursuant to The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) (No. 2) Regulations 2019, the temporary exemption was also extended in the UK to 18 June 2023 and broadened such that both UK and EEA PSAs may benefit from it. HM Treasury has the power to extend this exemption by up to two years at a time.
Recently HM Treasury has published guidance explaining its plans to extend the pension fund clearing exemption and the exemptions for intragroup transactions.
HM Treasury intends to lay a statutory instrument extending:
the exemption for pension funds from the clearing obligation by a period of two years to 18 June 2025, through amendments to Article 89(1) of onshored Regulation (EU) 648/2012 (UK EMIR); and
the temporary intragroup exemption regime by a further three years to 31 December 2026, by amending the relevant days set out in Articles 81(1)(b), 81(2)(b), 83(1)(b) and 83(2)(b) of The Over the Counter Derivatives, Central Counterparties and Trade Repositories (EU Exit) Regulations 2019.
A review of the pension fund exemption will be conducted ahead of its expiry in 2025, allowing time for consideration and implementation of a longer-term approach.
The guidance also notes that the government will consider reforming this area of legislation in due course as part of the ongoing process of building a smarter financial services framework for the UK.
In the Commission’s June 2022 report to the European Parliament and the Council calling for the current exemption it was also made clear that from 19 June 2023 PSAs would be required under EMIR to clear.
So far, the Commission has made no further announcements on the PSA exemption.
That said, the EMIR 3.0 proposal includes an amendment that would exempt from the clearing obligation those EU financial and non-financial counterparties, subject to the clearing obligation under EMIR, that enter into a transaction with a PSA established in a third country which is exempted from the clearing obligation under its national law:
To ensure a level playing field between Union and third-country credit institutions offering clearing services to pension scheme arrangements, an exemption from the clearing obligation under Article 4, point (iv), of Regulation (EU) No 648/2012 should be introduced where a Union financial counterparty or a non-financial counterparty that is subject to the clearing obligation enters into a transaction with a pension scheme arrangement established in a third country which is exempted from the clearing obligation under that third country’s national law
For those PSAs that will become subject to mandatory clearing under EU EMIR please reach out to your usual Norton Rose Fulbright financial services contact.