What you need to know?
- Clearing obligation for derivatives was introduced following the 2008 crisis to mitigate counterparty default risk. In the EU, this mandate was implemented under the European Market Infrastructure Regulation (EMIR) framework (for the most liquid Interest Rate Swaps and Credit Default Swaps). EU Pension Scheme Arrangements (PSA) are still temporarily exempted until June 2023.
- Post Brexit, UK PSA were subsequently no longer benefitting from this exemption under EU law but some EU national competent authorities provided a forbearance to temporarily maintain a bilateral trading relationship.
- A similar exemption for UK pension funds under on-shored UK EMIR rules is also set to expire in June 2023 but is likely to be extended by at least two more years.
The European Commission (EC) has released on 7th December 2022 their new Capital Markets Union (CMU) package including some measures to ‘make EU clearing services more attractive and resilient, supporting the EU’s open strategic autonomy and preserving financial stability’. This legislative proposal includes, among other things, amendments to the existing EMIR framework, so-called ‘EMIR 3’.
A welcome and long awaited solution
One key measure in this proposal is the introduction of an exemption from the clearing obligation that will benefit UK pension funds when trading with EU banks for as long as they remain also exempted under their own similar UK rules. This will avoid any detrimental commercial impacts for EU banks, which will be allowed to keep trading bilaterally with UK PSA, similarly to their non-EU peers not bound by EU rules.
”This EC proposal is fundamental to avoid market fragmentation, ensure level playing field for EU banks, strengthen our trading relationship with UK PSA clients and also increase their bilateral commercial offering especially in the light of the recent market turmoil,” commented Isabelle Paresys, Deputy Head of Regulatory and Public Affairs at BNP Paribas Global Markets.
This EC proposal is fundamental to avoid market fragmentation, ensure level playing field for EU banks, strengthen our trading relationship with UK PSA clients and also increase their bilateral commercial offering especially in the light of the recent market turmoil,Isabelle Paresys, Deputy Head of Regulatory and Public Affairs, BNP Paribas Global Markets
BNP Paribas welcomes this EC proposal that could ultimately allow the bank to best serve its UK PSA clients while still ensuring financial stability either through central clearing or margin requirements for bilateral trading when required by regulations. As long as UK PSA are still exempted from clearing requirements under UK law, BNP Paribas is delighted to still be able to maintain a trading relationship as they see fit, by balancing their cleared and uncleared activities according to their needs until the UK regulatory landscape eventually evolves. This will also benefit the bank’s EU PSA clients by ensuring it provides them the best services if the bank’s access to the full depth of liquidity is maintained.
“We are glad that UK pension funds could maintain a choice to execute bilaterally with EU banks, as long as they remain exempted from the clearing obligation under UK law,” commented Giorgio Cali, Head of Derivatives Execution & Clearing Institutional Sales EMEA at BNP Paribas. “BNP Paribas’ Derivatives Execution & Clearing (DEC) business has been partnering with a growing number of pension funds over the last five years who have decided to voluntary clear their over-the-counter derivatives, switching their activity from bilateral to cleared. The switch to clearing has been driven by a number of factors, including increasing operational efficiencies and the reduction of counterparty risk. Besides the benefits of clearing however, we do appreciate that pension funds may still prefer to maintain a mix of bilateral activities. Ultimately, this new proposal allows BNP Paribas to continue to support our UK pension funds clients across the bank whatever the way they choose to trade.”
Ultimately, this new proposal allows BNP Paribas to continue to support our UK pension funds clients across the bank whatever the way they choose to trade.Giorgio Cali, Head of Derivatives Execution & Clearing Institutional Sales EMEA, BNP Paribas
“BNP Paribas works with many UK pension clients across a lot of products and has been at the forefront of a number of technological innovations in recent years,” added Ben Harvey, Director, Senior Macro Rates & LDI Sales at BNP Paribas. “The proposals by the EC that allow UK pension funds to maintain the choice to face BNP Paribas bilaterally will allow us to continue to drive greater competition and better outcomes for our partner clients in the future. Whether is it using our market leading funding capacity, our award-winning derivatives franchise or leading ESG capabilities, we are thrilled to be able to continue to build for our clients future success.”
The proposals by the EC that allow UK pension funds to maintain the choice to face BNP Paribas bilaterally will allow us to continue to drive greater competition and better outcomes for our partner clients in the future.Ben Harvey, Director, Senior Macro Rates & LDI Sales, BNP Paribas
This proposal will now be subject to the ordinary EU legislative procedure, with negotiations expected to begin in the European Parliament and the Council of the European Union early 2023 but it might take some years to fully come into effect. Therefore, this topic will remain high on the agenda of discussions with national and EU competent authorities, to ensure that the EC proposal is actioned preemptively to bridge the time gap before its formal enforcement, and that BNP Paribas can continuously offer the best services to its UK PSA clients.
Looking ahead, BNP Paribas welcomes and supports this initiative to ensure alignment between an EU and a similar third country rule when dealing with a third country client. It might pave the way to similar approaches from the EU on other rules to ensure an overall consistency for global banks, and help resolve other competitiveness issues they may face in this ever-changing regulatory world, in order to better serve their clients and the economy in their respective regions.