European authorities block collateral respite for pension funds

The regulatory bodies have rejected the EC's proposed amendment for pension funds posting initial margin.

Three of Europe’s biggest regulatory bodies have rejected a proposed relaxation of collateral rules for pension funds.

The three regulators rejected a proposal from the European Commission to remove concentration limits when posting initial margin for uncleared OTC derivatives.

The regulators included the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and the European Security and Markets Authority (ESMA).

“These [concentration limits] are crucial for mitigating potential risks pension funds and their counterparties might be exposed to,” stated the regulators.

The concentration limits require pension funds to hold a broader pool of sovereign government bonds and currencies when posting collateral.

The EC proposed to remove these limits as it would increase costs and force pension funds to enter into riskier “foreign currency transactions.”

The amendment from the EC comes six months after a group of Europe’s largest fund managers urged the Commission to review the implications the rules will have on pension funds.

However, the ESAs maintain that, with reference to covered bonds, conditions listed in the EC’s guidelines would lead to ranking of derivatives counterparties after bond holders.

They also stated that more clarity should be brought to the application of the rules for transactions concluded with third party and non-financial counterparties.