In line with last month’s speculation, Risk magazine reports an interview with Michel Barnier, the EC’s head of internal markets, in which he implies that his successor will extend the clearing exemption for pension funds-
“I don’t think all the conditions have been met yet to ensure a smooth transition to clearing for pension funds.”
Pension funds were initially granted a three year exemption form the clearing obligation; however, the clock started ticking from August 2012, not the December 2014 start of clearing under EMIR. With some justice, the industry has vociferously lobbied for an extension; pointing out that a three year exemption is pointless if it practically amounts to eight months. Article 85(2) EMIR enables the initial exemption to be extended by up to three years to August 2018.
In order to maximise return, pension funds must run at close to fully invested. They are therefore typically, asset-rich but cash poor. They need to access the swaps markets for hedging purposes. EMIR mandates clearing for swaps, but the CCPs are under no legal obligation to take variation margin in the form of securities. CCPs are unwilling to take the basis and operational risk of receiving variation margin collateral from one side and having to pay out cash to the other. The repo markets lack the liquidity to transform such large amounts, particularly in times of stress. Central banks are unwilling to step in and provide either liquidity lines or guarantee repo facilities for fear of engendering moral hazard.
The classic Mexican standoff is a simple structure, but simplicity does not aid solution. The European equivalent is no different, although with hopefully less fatal consequences. The problems are simple, the solutions far from obvious- Mr Barnier is probably right in signalling that there is no light gleaming at the end of this particular tunnel.
“I think my successor will analyse the situation and come up with any necessary additional measures”, is the sound of a large can of worms being kicked further down the road.