EU proposes respite for pension funds on collateral rules

The European Commission has told regulators pension funds should be exempt from collateral rules.

By Joe Parsons

The European Commission (EC) has called on regulators to exempt pension funds from incoming rules requiring them to post a broader pool of collateral for OTC derivatives trades.

In a letter to European regulatory bodies, Olivier Guersent, director general of the EC, stated pension funds should not be required to diversify their assets used for collateral and prevent them concentrating their holdings among a few sovereign issuers.

The EC said in the letter the proposed ‘concentration limit’ rule would introduce costs and additional risks to large pension funds, forcing them “to enter into foreign currency transactions.”

“It recognises the concern that pension funds have liabilities denominated in local currencies and therefore should be allowed to post domestic government bonds denominated in the local currency as collateral for OTC derivatives,” says Vanaja Indra, market and regulatory reform director, Insight Investment.

“This is indeed a positive development, particularly for large pension schemes which might otherwise have been forced to take unnecessary foreign exchange risk.”

The request from the EC comes six months after a group of Europe’s largest fund managers urged the Commission to review the implications the rules will have on pension funds.

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