Financial Market Regulation

On 16 August 2012, the Regulation on OTC derivatives, central counterparties and trade repositories (648/2012; EMIR) entered into force. The Regulation aims to increase the transparency in the financial markets by introducing a reporting obligation of OTC derivative transactions to trade repositories. EMIR also introduces certain mandatory risk-mitigation techniques. Additionally, some standardised OTC derivatives will also need to be cleared through central counterparties (CCPs).

EMIR establishes a temporary exemption from central clearing of derivative contracts managed by IORPs and similar schemes recognised for retirement planning. Moreover, ESMA is in process of determining margin requirements for non-centrally cleared derivatives

Pension funds make frequent use of OTC derivative instruments to mitigate the financial risks of their long-term investments such as interest rate risk, foreign exchange risk and inflation risk and to obtain an efficient portfolio management. It is PensionsEurope view that the special features of pension funds, such us being highly creditworthy counterparties, with low or practically no leverage, should be taken into account in this respect.

PensionsEurope, together with other 12 trade associations, backs a call for simplifying reporting rules

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In 2007, the Markets in Financial Instruments Directive (2004/39/EC; MiFID) entered into force – succeeding the Investment Services Directive (ISD). MiFID lays down regulations for investment firms, banks and regulated markets, which allow them to provide investment services throughout Europe using a single passport.

On 20 October 2011, the European Commission adopted proposals for (i) a Directive on on Markets in Financial Instruments repealing Directive 2004/39/EC (MiFID II) and (ii) a Regulation on Markets in Financial Instruments (MiFIR). The proposals, inter alia, aim to bring a new type of trading venue into the MiFID regulatory framework: the Organised Trading Facility (OTF). The proposals also aim to introduce new safeguards for algorithmic and high frequency trading activities. Pre- and post-trade transparency provisions in respect of both equities and non-equities are to be enhanced and the role of supervisors is to be strengthened.

MiFID recognises pension funds as professional investors, because they have the in-house expertise or the resources to hire independent investment advisers. Moreover, pension funds make extensive use of external investment services, such as investment consultancy, asset management, fiduciary management and trading and brokerage services. Some pension funds have internal investment departments, but others outsource their investment management.

PensionsEurope has been actively involved in the MiFID review and will remain active in the adoption process of its “Level II” implementing legislation.

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Basel III and CRDIV

The "CRD IV" legislative package, adopted in 2013, transposes the global agreement on capital requirements reached by the Basel Committee on Banking Supervision (“Basel III”) – with some variations to take the specificities of the European banking sector into account. The new rules address some of the weaknesses shown by the banking sector during the financial crisis, in particular the insufficient level but also quality of capital and liquidity held by banks.

In 2016, the European Commission open a consultation on the Net Stable Funding Ratio (NSFR) rules.

PensionsEurope answered to this consultation to call on the Commission to adapt the rules, as the NSFR requirements lead to the cash preferences of banks which are detrimental for pension funds and their service providers.

In fact, certain elements of the CRDIV bank capital rules have strong opposing incentives for banks to only receive variation margin in cash to support non-cleared OTC derivatives positions. More precisely, the leverage ratio and net stable funding ratio (NSFR) rules could force pension funds to post Variation Margin in cash only, and not permit other assets for collateralizing non-cleared derivative trades. This directly contradicts the EMIR policymakers’ objective and would force pension schemes to have to post variation margin in cash for non-cleared trades as well. It would introduce disproportionate cost and risk to EU pensioners.

In addition the leverage ratio and NSFR rules only allow cash Variation Margin (VM) to offset any positive mark-to-market exposures borne by a bank on OTC derivatives positions. Non-cash VM, even high quality government bonds, are not permitted to offset the mark-to-market exposures. As a result, many banks are now restricting OTC derivatives trades to those that are collateralised with cash VM only, where previously banks would also accept high quality government bonds as VM.

The Capital requirements for banks, imposed by Basel III and CRDIV rules, have had also a negative impact on market liquidity, especially in the repo market. In fact, CRDIV and CRR restrict the liquidity on the repo market.

We suggest policymakers to consider allowing high-quality government bonds with appropriate haircuts to offset the mark-to-market exposures of OTC derivatives in leverage ratio and NSFR calculations and to exempt pension funds from posting collateral in non-cleared transactions until non-cash solutions for posting collateral are developed.

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In 1985, the first European regulatory framework for investment funds was adopted under the name of the UCITS Directive (Undertakings for Collective Investment in Transferrable Securities Directive). Investment funds authorized as such receive a UCITS passport by means of which their units may also be distributed in other EU Member States. UCITS are subject to disclosure and investment rules to ensure investor protection.

In 2011, a recast of the UCITS Directive (2009/EC/65) took effect (UCITS IV). The revised regime aimed to enhance the efficiency, flexibility and transparency of the investment funds industry. UCITS IV aimed at facilitating mergers and asset pooling by investment funds. It also introduced a "management company passport", now allowing a management company to be located in a country different from that of the investment fund. Further, to increase transparancy, investment funds now had to provide investors with a concise document containing 'Key Investor Information (KII)".

On 3 July 2012, the Commission adopted a legislative proposal amending Directive 2009/65/EC. The legislative proposal strengthens the functions of the UCITS depositaries, introduces more transparency as regards manager remuneration policies and also seeks to harmonize the sanctions regimes across Europe.

UCITS are important for pension funds having UCITS under their structure or, indirectly, investing therein. PensionsEurope has been supportive of the UCITS Directive and closely monitors the UCITS amendment processes. 

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