Last week (4 May 2017), the European Commission published a legislative proposal to amend various provisions of the European Market Infrastructure Regulation (Regulation 648/2012) (EMIR).

The proposal was adopted following a general report on EMIR published by the Commission in November 2016. Although the report indicated that “no fundamental change should be made to the nature of the core requirements of EMIR”, there was the possibility to “eliminate disproportionate costs and burdens on certain derivatives counterparties”. Among other things, the proposal extends the transitional clearing exemption available to Pension Scheme Arrangements (PSAs), previously due to expire in August 2018, for a further three years on the grounds that no viable technical clearing solution for the transfer of non-cash collateral as variation margins currently exists. This is because Central Counterparties (CCPs) tend to only accept cash from their clients to meet variation margin calls, whereas PSAs typically limit their cash positions in order to yield higher returns for their policy holders. As a result, PSAs have to convert part of their assets into cash in order to centrally clear. This poses structural issues, results in significant additional costs and negatively impacts the retirement income of pensioners.

The extension has been welcomed by many and will give CCPs, clearing members and PSAs more time to explore technical solutions and measures to facilitate clearing, and work to develop a viable solution. It has also been estimated that PSAs, and policy holders indirectly, could avoid additional costs of up to €1.6 billion as a result of this extension.

The Commission considers it feasible to develop viable technical solutions within three years after the adoption of the proposal, and expects markets participants to work on the basis of that timeline. During the three year extension, the Commission (with assistance from the European Securities and Markets Authority (ESMA), the European Insurance and Occupational Pensions Authority (EIOPA), the European Banking Authority (EBA) and the European Systemic Risk Board (ESRB)) will strictly monitor, on an ongoing basis, related regulatory developments and the progress made by CCPs, clearing members and PSAs towards viable solutions facilitating the participation of PSAs in central clearing. In the unlikely event that there are some unforeseen developments of a significant nature, then the proposal provides a ‘last resort’ mechanism for the Commission to extend the exemption by a further two years. However the proposal is clear that this will only be granted if “carefully assessed circumstances justify this” (i.e. where no viable technical solution has been developed and the adverse effect of centrally clearing derivative contracts on the retirement benefits of future pensioners remains unchanged).

The Commission has reiterated that this extension is only temporary and that the ultimate goal is for PSAs to participate in central clearing as soon as feasible. A further extension seems unlikely at this stage and the Commission is of the view that current regulatory and market developments enable participants to develop suitable technical solutions within the three year time period.

Next steps?

Feedback on the legislative proposal is invited and the period for providing feedback will close 8 weeks after the proposal is made available in all EU languages. Currently the proposal is only available in English and there is no indication of when the proposal will be made universally available in all languages, and thus when the 8 week feedback period will commence.

After taking into account this feedback and conducting a further impact assessment, the Commission will then submit this proposal (with any subsequent modifications) in draft regulation form to the European Parliament and to the Council of the EU for their consideration.

Further EMIR changes in the pipeline?

The Commission has published a Communication on responding to challenges for critical financial market infrastructures and further developing the Capital Markets Union. This outlines an intention to present further legislative proposals to amend EMIR in June 2017.

Thomas Bowie contributed to this post.