The Dutch Pension Federation [Pensioenfederatie] is opposing a proposal by European regulator European Securities and Markets Authority (ESMA) to lower the threshold for mandatory central clearing from €3bn to €1.8bn. The lower ceiling would require more pension funds to move to central clearing for their interest rate swaps, leading to increased costs.
According to the Pensioenfederatie, the lower threshold would force “more than a dozen” additional Dutch pension funds to move to central clearing by the end of 2025.
These funds currently use bilateral swaps to hedge their interest rate risk, using banks as counterparties. The main benefit of bilateral clearing is that bonds can be used as collateral, whereas with central clearing, this must be cash.
The pension federation underlines in its official response to an ESMA consultation on its proposal that many funds will have reduced clearing needs after moving to a new defined contribution-based pension arrangement over the next couple of years, and as a result would have to clear centrally just for a short period of time.
This is not in line with the European Commission’s intention to reduce the administrative burden through regulations by 25%, according to the federation.
Inevitable
Jasper Valstar, an LDI manager at fiduciary manager Achmea Investment Management, noted in a response that the market has already been moving towards central clearing for a decade.
“I therefore don’t think ESMA will abandon this new rule,” he said.
Achmea IM engages in central clearing for all its customers, large and small alike, according to Valstar.
“Most LDI managers have fully set up the processes for central clearing. It has become a fairly standard service,” he said, adding that “some costs are indeed involved”.
Size
Valstar estimates that the change will bring a maximum of 20 additional pension funds under the central clearing obligation. The question, however, is for how many funds this really matters.
There may be funds that have already opted for central clearing below the current limit. Many small funds also arrange their interest rate hedge through LDI funds, said Valstar. “In those cases, pension funds do not trade in swaps in their own name.”
Concerns
Pensioenfederatie does not have exact data on how many funds have really been affected. “However, some members have approached us with concerns about this theme,” a spokesperson confirmed.
The federation has acknowledged that the market is moving towards central clearing. “At the same time, there is still a group of pension funds that make use of bilateral swaps. That saves costs compared to central clearing, which weighs proportionally more heavily on small pension funds,” the spokesperson said.
In addition, the federation points to the cash requirement for collateral in central clearing.
“By being allowed to continue to use bonds as collateral in bilateral swaps, these pension funds do not have to expand their risk management in this area. That makes a difference, especially for those funds that are currently busy with all the preparations associated with moving to the new pension system.”
This article was first published on Pensioen Pro, IPE’s Dutch sister publication. It was translated and adapted for IPE by Tjibbe Hoekstra
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