EUROPEAN COMMISSION Brussels, 9.6.2022 COM(2022) 254 final REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL





under Article 85(2) of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, as amended by Regulation (EU) No 834/2019, assessing whether viable technical solutions have been developed for the transfer by pension scheme arrangements of cash and non-cash collateral as variation margins and the need for any measures to facilitate those viable technical solutions















REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL under Article 85(2) of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, as amended by Regulation (EU) No 834/2019, assessing whether viable technical solutions have been developed for the transfer by pension scheme arrangements of cash and non-cash collateral as variation margins and the need for any measures to facilitate those viable technical solutions 1.Introduction The European Market Infrastructures Regulation (EMIR) contains a temporary exemption from the central clearing obligation for entities operating Pension Scheme Arrangements (PSAs), in relation to certain types of over-the-counter (OTC) derivatives. The exemption has been extended several times since 2012. Currently, it runs until 18 June 2022. The Commission may adopt a delegated act, extending the exemption for the last time until June 2023. Requiring PSAs to clear OTC derivative contracts at a Central Clearing Party (CCP) could lead them to transform a significant amount of their assets for cash or other highly liquid assets, such as bank deposits, money market fund shares, repurchase agreements or credit lines, in order to be able to provide ‘margin’ to CCPs. The obligation to clear and the associated requirement to provide margin relates in particular to the need to ensure sufficient cash for variation margin that needs to be covered regularly and at short notice. As such, there is a risk that prematurely requiring PSAs to clear OTC derivative contracts centrally may lead to PSAs divesting a significant proportion of their assets for cash to build up capital buffers in order to meet possible margin requirements of CCPs, thus reducing resources allocated to investment that generates income to cover future pensions. Nevertheless, the ultimate aim of the Regulation remains central clearing for PSAs as soon as possible. Article 85 (2) of EMIR requires the Commission to prepare annual reports assessing if viable technical solutions have been developed for the transfer by pension scheme arrangements of cash and non-cash collateral as variation margin and the need for measures to facilitate their uptake. This is the third Commission Report and it presents the progress made to date. 2.Input received Since the entry into force of EMIR REFIT on 17 June 2019, work has been going on in various fora monitoring the progress towards central clearing by PSAs. Input has been received from the European Securities and Markets Authority (ESMA), European Banking Agency (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and the European Systemic Risk Board (ESRB), as well as from market participants via the PSA expert group. ESMA, in cooperation with EBA, EIOPA and the ESRB, submitted annual reports to the Commission assessing the issue, as required by EMIR. The first report was received by the Commission in April 2020. A second report was submitted to the Commission in December 2020. The latest ESMA report was sent to the Commission in January 2022. Taking into account the input received, the Commission has published two reports, so far assessing the liquidity conditions as well as exploring various clearing arrangements for pension funds. These reports laid out the arguments relating to the subsequent prolongations of the exemption. In the report of January 2022, ESMA concluded that the description, analysis and findings detailed in the extensive second report were still valid. It considered unlikely that, despite the efforts of stakeholders and regulators, there is a unique solution to address PSAs concerns. Rather a mix of solutions facilitating access to liquidity or easing the pressure of carrying out clearing should be pursued. The focus of the latest report was therefore on assessing the level of operational readiness of PSAs to clear their OTC interest rate derivatives. ESMA concluded that PSAs are largely ready from an operational perspective, noting a mix of solutions available to PSAs, such that ESMA believed there was less reason to treat PSAs differently compared to other market participants. Furthermore, ESMA pointed out that the prolongation of the clearing exemption should be seen in the wider context of building clearing capacity in the EU and increasing the attractiveness of EU CCPs, to which the end of this exemption can also contribute. Nevertheless, according to ESMA, a number of operational considerations would justify granting PSAs more time before subjecting them to the clearing obligation. In particular, ESMA underlined that PSAs and the relevant market participants need time to finalise their clearing and collateral management arrangements. It also added that the Commission’s decision must be communicated with sufficient notice allowing all affected parties to adapt their implementation plans. Taking the above into account, ESMA recommended a further prolongation of the clearing exemption until 19 June 2023. Since the last Commission report in May 2021, the expert group on PSAs has met three times. Participants confirmed that PSAs are largely ready to clear, have clearing arrangements in place and clear some trades voluntarily. At the same time, PSAs underlined that the underlying issue of access to cash remains. To address this, in particular the cleared repo has been discussed by the expert group on PSAs as a potential liquidity solution. PSAs however noted that while this is a step in the right direction, over-reliance on the cleared repo market would leave them vulnerable to a residual liquidity risk in extreme market circumstances. 3.Political context The UK is a key hub for central clearing of derivatives and remains an important location for clearing by EU market players, which over the years have built up a significant amount of positions at the UK CCPs. Many EU PSAs currently have clearing arrangements both in the EU and the UK, but analysis shows that they tend to clear in larger proportions in the UK. In order to avoid financial stability risks for the EU, in September 2020 the Commission adopted a temporary equivalence decision covering the UK regulatory and supervisory framework for CCPs, running initially until June 2022, and subsequently prolonged until 30 June 2025. In the meantime, EU market participants were urged to reduce their exposures to the UK CCPs, as the extent of such exposures may make it challenging for EU authorities to manage financial stability in case of stress. In January 2021, the Commission set up a working group including the ESAs, the ESRB, the ECB and the SSM to assess the opportunities and challenges of transferring derivatives clearing from the UK to the EU CCPs. The group also reached out to a range of stakeholders to collect views and input. The discussions in the group confirmed the risks for the EU stemming from the exposures to UK CCPs. Such risks were also highlighted in the assessment of systemic third-country CCPs carried out by the ESMA under the framework of EMIR 2.2, finalised in December last year. Therefore, in order to support efficient and competitive clearing services, the Commission will come forward in the second half of 2022 with measures to make EU CCPs more attractive to market participants; by making the EU a more attractive and cost-efficient clearing hub and by strengthening the EU’s supervisory framework for CCPs to better manage associated risks. In this context, bringing an end to the PSA exemption could help develop the EU liquidity pool, potentially attracting further clearing in the EU. 4.Evolution since the initial Commission Reports