HM Treasury has announced that they will extend the exemption for pension schemes from the mandatory clearing obligation under UK EMIR by two years until 18 June 2025. UK pension schemes will therefore not be required to clear derivatives under UK EMIR if those derivatives are objectively measurable as reducing investment risks that directly relate to the financial solvency of pension scheme arrangements.
Whilst the existing exemption applies to both UK and EEA pension scheme arrangements, in practice the extension is unlikely to be relevant to EEA pension schemes as the equivalent exemption under EU EMIR for EEA pension schemes will expire on 18 June 2023, so (unless the pension scheme is a “small FC”) they will need to clear transactions within the scope of mandatory clearing under EMIR, even where the counterparty is a UK financial counterparty.
As regards transactions between UK pension schemes and EU counterparties, in-scope derivatives between such parties may be subject to the mandatory clearing obligation under EU EMIR. The current exemption from the EU mandatory clearing obligation for derivatives entered into by pension schemes is technically only available to EU pension schemes, although we understand that, post-Brexit, the French and German regulators confirmed that they would not expect French and German market participants to clear in-scope derivatives entered into with UK pension schemes (on the basis that trades with UK pension schemes did benefit from the exemption at the point it was introduced in 2012).
It is expected that, when the pension scheme exemption under EU EMIR expires on 18 June 2023, any forbearance for derivatives with UK pension schemes will also fall away and all EU financial counterparties will be required to clear in-scope derivatives they enter into with UK pension schemes, unless the pension scheme is a “small FC”.
The EU has put forward plans to introduce an exemption from clearing for any third country pension schemes (which will include UK pension schemes) who trade with EU financial counterparties, provided that pension scheme benefits from an exemption from mandatory clearing in its own jurisdiction. If this proposal comes into force, UK pension schemes will, while the UK exemption from clearing remains in force, be exempt from the mandatory clearing obligation under EU EMIR (as well as under UK EMIR) in respect of in-scope derivatives they enter into with EU financial counterparties (such as EU banks), provided those derivatives are objectively measurable as reducing investment risks that directly relate to the financial solvency of pension scheme arrangements. However, this proposal is still at an early stage and, whilst the EU regulatory authorities may apply forbearance in the meantime, this is not guaranteed. The prudent approach remains for UK pension schemes to be prepared for mandatory clearing of trades entered into with their EU bank counterparties from June 2023 onwards.
If you may be subject to mandatory clearing under EU EMIR or are unsure, please do reach out to your usual pensions contact to discuss so we can help you to ensure you are in a position to comply with the regulations, if required.
