01 October 2013

Insurance Europe: Letter to ESMA and EIOPA on central clearing exemption for retirement schemes under EMIR

Derivatives are a key component of insurers’ long-term risk management. Derivatives are often a key part of insurers’ risk management strategies, especially for long-term  business where derivatives are used to hedge risk exposures by matching the profile of liabilities or  securing a pay-off promise made to policyholders.

Preparation for central clearing has significant asset allocation

Current practice in the central clearing environment indicates that central counterparties (CCPs) will only accept cash as collateral and there is no indication that they will expand the acceptable collateral to other highly liquid assets, as allowed by EMIR. At the same time, EMIR appropriately recognises that retirement scheme arrangements “typically minimise their allocation to cash in order to maximise the efficiency and the return for their policyholders".

European insurers providing pensions products that will not be eligible for the central clearing obligation risk being forced either to hold unnecessary amounts of cash (to the detriment of long-term investments), to perform forced asset sales when cash is needed or to monetise assets via the repo market. Hence, the central clearing obligation would have important implications for insurers’ investment decisions. In addition, the forced sales of assets encourage pro-cyclicality and threaten the significant countercyclical role of insurers in periods of market stress.

European insurers are concerned about delays in the implementation of the pension scheme arrangements exemption. In cases where pension scheme arrangements are covered by Solvency I/II, the exemption for the  relevant type of entity or arrangement must be granted by the NCA, which has to receive ESMA’s  opinion as well. Insurance Europe understands that ESMA is proposing to receive notifications from NCAs regarding the  exemption of pension scheme arrangements from central clearing only after the first CCP is authorised,  which is currently estimated to be in March 2014. Such a delay causes uncertainty for non-IORP schemes providing retirement products, as they will not know in advance of CCPs being approved  whether they will qualify for the exemption or not. In addition, if ESMA plans to accept notifications from  NCAs only after the authorisation of the first CCP, this means that more than half of the three-year  exemption (started in August 2012) will have elapsed before its scope has been clarified.

Insurance Europe believes that ESMA should make every effort to minimise uncertainty around central clearing for non-IORPS. Against this background, it is difficult to see how a pension scheme arrangement could enter into an OTC derivative contract that is potentially subject to frontloading obligations without certainty that it will benefit from the exemption. Given the uncertainty and significant costs generated by a potential clearing obligation, pension scheme arrangements would basically have to either: 1) hedge risks with centrally cleared derivatives — and implicitly hold cash to the detriment of long-term assets (which is actually against EMIR’s intention) or 2) remain un-hedged until certainty is received around central clearing obligations.

Full letter

© InsuranceEurope