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Institutions for occupational retirement provision (IORPs) that hold derivative instruments are exposed to substantial liquidity risks. In some EU member states, IORPS make considerable use of derivatives to reduce interest rate and foreign exchange risks. However, these hedging positions also make them vulnerable to rapid changes in interest rates and/or the value of foreign currencies, potentially triggering short-term margin calls that IORPs would need to meet.
These vulnerabilities underline the need for a thorough assessment of IORPs’ exposure to liquidity risks – including margin and collateral calls, early withdrawals and outgoing transfers – as well as their ability to manage these risks. This consultation paper sets out EIOPA’s draft Opinion on the supervision of IORPs’ liquidity risk management. Its objective is to enhance convergence in oversight to protect pension fund members and beneficiaries and to bolster the stability of IORPs and the wider financial system.
The draft Opinion encourages a risk-based, forward-looking and proportionate approach and expects supervisors: