Pension funds face cash drag as Emir looms

Pension funds around the world are facing pressure from the European Market Infrastructure Regulation (Emir) as they need greater levels of cash to comply with clearing rules. Jamie Gavin, a director of institutional sales in the prime services division of Societe Generale, said there are difficulties for pension funds to raise the required cash to meet ‘variation margins’ as Emir kicks in. Variation margin refers to collateral that has to be exchanged between counterparties daily if the price of an uncleared derivative changes. Collateral must be posted in cash format only, yet most pension schemes are used to dealing in government bonds. Speaking to Funds Europe on the sidelines of the FundForum conference, he said that the requirements were proving a drag on pension fund investment. Even trades that do not require cash for clearing – such as a bilateral interest rate swaps whereby bonds could be used – are now challenged by a lack of liquidity. “There’s a big move within the European pension fund industry to get ready for clearing,” said Gavin, despite the fact that they do not have to legally until 2017, although most expect this date to be pushed back a year at least.” Although the impact is felt most keenly in Europe, it has implications for institutions based in the Middle East and Asia, too. Gavin said organisations in these jurisdictions realise that if they execute with a European counterparty, they have to abide by European clearing laws despite not being based on the continent. Matthieu Maurier, global head of sales and relationship management at Societe Generale Securities Services, says most of the firm’s competitors have dropped the clearing component of their offering due to the associated difficulties. In general, Emir will require certain classes of over-the-counter derivatives to be centrally cleared as a financial stability measure. ©2016 funds europe

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