On 7 September PensionsEurope jointly submitted a paper with ISDA to the Financial Stability Board. The paper illustrates important issues that are likely to emerge as European pension funds start to clear derivatives in large volumes. Clearing will only start once the most important obstacle for clearing has been resolved, namely the requirement to post variation margin in cash. The pensions sector is working with other market participants and policy-makers to find a technical solution for this problem.
Nevertheless, there is the concern that, once European pension funds will start clearing, the market capacity for client clearing service providers will not meet the demand by pension funds. The paper estimates that this demand could require an increase in initial margin held in CCPs within a range of EUR 58 billion to EUR 111 billion. At the moment, initial margin corresponding to client-cleared trades held in CCPs amounts to EUR77 billion globally.
The paper makes policy recommendations to address these capacity issues.