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.

Importantly, standardised OTC derivatives will also need to be cleared through central counterparties (CCPs). EMIR established a temporary exemption from central clearing of derivative contracts managed by IORPs and similar schemes recognised for retirement planning. The purpose of the temporary exemption is to provide time for market participants to find a solution for the main challenge that pension funds face when clear: posting cash variation margin. Pension funds want to be fully invested and would face significant opportunity costs when holding cash buffers to meet variation margin calls.  With EMIR under review, it is important that the temporary exemption is maintained until a robust solution for this problem is found.


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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The European Union is reviewing the European System of Financial Supervision and the mandates of the three European Supervisory Authorities (ESAs): the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA). Set up in the wake of the financial crisis, these authorities play a significant part in developing EU regulation that is relevant for occupational pensions.

The role of EIOPA in directly overseeing European occupational pensions has been limited to date, because pension funds are governed by a minimum harmonisation framework at the European level. They are built on the foundation of first pillar pensions, closely linked to Member States’ social security systems and embedded in domestic labour and social law. PensionsEurope therefore questions the need for supervisory convergence in the area of occupational pensions. Other areas of concern are the governance structures of the ESAs and the funding model.

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