Clearing – potential one-year extension to pension schemes exemption, but further extensions unlikely

02 February 2022

The European Securities and Markets Authority (ESMA) has sent a letter to the European Commission (EC) recommending that the temporary clearing exemption for pension scheme arrangements should be extended by one year until 19 June 2023; however, the letter also suggests that this should be the final extension and that the clearing obligation should apply to pension scheme arrangements in full from 19 June 2023.

Following its assessment, ESMA has highlighted that pension scheme arrangements are, in its view, largely operationally ready to clear their over-the-counter derivatives, but they should be given sufficient time before the clearing obligation takes effect. As highlighted in our recent article regarding the extension to UK clearing house temporary equivalence, there is also a wider dynamic at play, with the EU authorities keen to build clearing capacity within the EU and to reduce reliance on UK clearing houses, to which ending the exemption can contribute.

It is noteworthy that, pursuant to article 85(2) of EU EMIR (as amended by EMIR Refit), the EC is only mandated to extend the temporary exemption until June 2023 and that, under the existing legislation, further extensions beyond 2023 are not provided for. However, some pension schemes may have been hoping for continued extensions to the temporary exemption, which now appear to be unlikely to occur.

In respect of UK EMIR, pursuant to The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) (No. 2) Regulations 2019, the temporary exemption has already been extended to 18 June 2023 and broadened such that both UK and EEA pension scheme arrangements may benefit from it. HM Treasury has the power to extend this exemption by up to two years at a time. The types of pension scheme arrangements that have been granted a temporary exemption are set out on the FCA website.

Please speak to your usual Macfarlanes contact if you have any questions.

Taking all of the above into account, and provided that this date would fit with the broader EU clearing strategy, ESMA would recommend a final one-year extension of the exemption to start applying the clearing obligation to PSAs on 19 June 2023