Pension Scheme Arrangements (PSAs) Exemption from the Central Clearing Obligation for OTC Derivatives Explained
Pension Scheme Arrangements (PSAs) play an important role in financial markets by managing long-term retirement savings. Their investment profile primarily consists of illiquid assets such as bonds and equities, so PSAs often face unique challenges in meeting cash margin requirements imposed by CCPs.
Understanding the PSA Exemption from the EMIR Clearing Obligation
Under the European Market Infrastructure Regulation (EMIR), most financial counterparties are required to centrally clear their OTC derivative transactions to enhance market stability and reduce systemic risk. PSAs have been granted a temporary exemption from this clearing obligation mainly due to concerns over their ability to post cash collateral without disrupting their investment portfolios.
This exemption was extended several times while regulators assessed whether PSAs were ready to participate in central clearing and tried to find a long-term solution. The European Securities and Markets Authority (ESMA) and the UK Financial Conduct Authority (FCA) have both played key roles in reviewing and assessing the impact of this exemption while setting compliance expectations.
Current Status of the PSA Exemption
In a letter to the European Commission in January 2022, ESMA assessed PSA readiness for clearing and recommended a final one-year extension. While progress had been made, ESMA highlighted the ongoing operational and structural barriers that prevented PSAs from fully participating in central clearing. In this letter, ESMA concluded that from June 2023, PSAs would be operationally ready to meet clearing obligations and so the exemption was kept in place until 18 June 2023, and after that the exemption was lifted.
The FCA has outlined specific criteria that determine whether UK-based PSAs qualify for the clearing exemption. PSAs must conduct self-assessments to ensure they meet these conditions and maintain the relevant documentation to support their exemption status. The UK EMIR framework has further extended the clearing exemption for PSAs until 18 June 2025.
Future Outlook and Implications for PSAs
The regulatory landscape for PSAs under EMIR is evolving differently across jurisdictions, most notably between the EU and the UK. The termination of the PSA clearing exemption under EU EMIR signifies a pivotal shift, compelling EU-based PSAs to adapt their operational frameworks, systems and processes to align with clearing obligations. The UK’s extension of the clearing exemption will be reviewed prior to its expiry date in 2025.
The divergence between the EU and UK approaches presents challenges for PSAs who will need to make operational adjustments to integrate clearing processes and strategic planning for UK-based PSAs to take advantage of the extension period to prepare for eventual compliance.
