EU ropes in pension funds to increase post-Brexit clearing capacity | Investment News

LONDON (Reuters) – Mandatory clearing of derivatives contracts by European Union pension funds is set to begin in June 2023, helping the bloc reduce its dependence on London, the European Union’s securities watchdog said on Tuesday. EU.

Brussels wants to reduce the reliance of EU financial services companies, including pension funds, on clearing euro-denominated derivatives in London after Britain left the bloc’s regulatory framework.

Mandatory clearing by pension funds could help strengthen the EU’s capacity to clear derivatives. London still dominates clearing, with the London unit of the LCH clearing house handling around 90% of euro-denominated interest rate swaps.

EU pension funds collectively hold trillions of euros in assets for savers and use derivatives, such as interest rate swaps, to manage risk exposures, as their liabilities are often linked to borrowing costs.

Pension funds benefited from a temporary exemption from the clearing obligation in 2012 and this has remained in place ever since. Mandatory clearing was introduced after the global financial crisis over a decade ago and ensures that a transaction is completed, even if one party goes bankrupt.

The pension fund industry wanted more time to prepare for the move to mandatory netting, which involves finding cash or margin to deposit against swaps in the event of default.

The European Securities and Markets Authority (ESMA) said in a letter to EU financial services chief Mairead McGuinness on Tuesday that pension companies are now “largely operationally ready” for the mandatory compensation from June 2023.

ESMA said a second clearing house within the EU – LCH in Paris – as well as Deutsche Boerse’s Eurex in Frankfurt, now offer a service that helps pension funds find liquidity for margins.

Some pension companies voluntarily clear trades at Eurex and the London unit of LCH, which is part of the London Stock Exchange, and most large firms can clear both, ESMA said.

Making clearing mandatory for pension funds could be “one of the steps in the plan to strengthen the clearing capacity of the EU, as it could help bring liquidity to EU customers, which could in turn attract new buying activity,” ESMA said.

Brussels is to put in place “incentives” in the coming weeks to persuade banks and asset managers to transfer the UK capital’s clearing business to the bloc.

(Reporting by Huw Jones. Editing by Jane Merriman)

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