Pension funds in the European Union are facing the dilemma of whether to transfer their interest rate swap contracts with UK-domiciled banks to the EU.
When the Brexit transition period ends on 1 January 2021, new
contracts can, in the absence of a comprehensive trade deal, only be
concluded with counterparties on the European mainland.
European pension funds will be allowed to continue using London-based
clearing houses until at least June 2022, following decisions last week
by the European Commission and European regulator European Securities
and Markets Authority (ESMA) to grant them temporary equivalence.
But the equivalence decision does not cover bilateral contracts
between pension funds and UK-based banks. While existing contracts for
interest rate swaps can keep running after the end of the Brexit
transition period, new contracts can only be concluded with banks based
in the EU.
This mostly affects countries with large guaranteed pension systems,
such as the Netherlands and Denmark, whose pension funds use swaps to
protect their portfolios against falling interest rates.
More efficient
Most Dutch pension schemes are readying up to move all or part of
their existing swap contracts with UK counterparties to newly
established EU entities.
“It’s more efficient if you’re able to net positions with just one
counterparty. If you conclude new contracts with for example JP Morgan
[a US bank that used to passport its services into the EU through
London] in Frankfurt and keep existing transactions in London, there is
counterparty risk at both the JP Morgan entity in Frankfurt and the one
in London,” explained Max Verheijen, director financial markets at
pensions consultant Cardano, which manages pension funds’
liability-driven investment (LDI) portfolios.
Cardano is currently in the process of moving all its existing contracts to EU entities.
The Netherlands’ largest pension asset manager APG is taking a
similar stance. “We are also in a transition phase to move contracts to
European entities because of the uncertainty about a no-deal Brexit,”
said its head of treasury and trading Jan Mark van Mill.
Achmea Investment Management, the fiduciary manager of many small and
medium-sized Dutch pension funds, has recently advised all its clients
to also move UK contracts to European mainland. Though the firm already
started preparing this transition in 2017, it has only recently started
the migration.
PGGM is the only large Dutch asset manager that is planning to keep
at least some of its existing contracts in the UK. “We will decide on a
party-by-party basis whether existing UK contracts will remain in the
UK,” a spokesperson said.
IPE
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