MNI: EU Looks At Collateral, Holds Course On Clearing-Sources

The European Union is looking at recalibrating repo market collateral requirements but will stick to its June 2023 central clearing deadline for pension funds trading over-the-counter derivatives despite a cascade of margin calls causing UK financial market chaos, industry and regulatory sources told MNI.

“Given the strong pressure from G20 to move to clearing houses, a U-turn seems improbable,” said one source following discussions among financial regulators in the wake of the UK turmoil.

But, while the EU will push on with the clearing deadline, another EU financial regulatory source said that the UK crash has prompted a “bigger conversation” about the interlinkages between pension funds and shadow banking. Recalibrations of collateral requirements are already being discussed, with rising gas prices leading to margin calls on many of the EU’s national electricity suppliers.

One possibility would be a shift to bank guarantees from cash.

“On pension funds there is rather a linked conversation involving repo and how cash VM (variable margin) payments can be made in exchange for highly liquid securities,” the regulatory source said.

CITY OF LONDON

Despite the UK’s being the focus of global financial stability concerns, sources in the City of London said that in the longer-term a post-Brexit UK could provide more flexible options to make the pension industry more resilient.

“We can be flexible over the options we offer pension funds - either inside CCPs or outside. Additionally, we can push for a different regime in collateral rules,” one source in the City of London said.

“It could be a theme in upcoming changes to the Financial Services bill,” he said.

That said, the recent crash has handed ammunition to opponents of the UK’s regulatory reform agenda, making it likely that British regulators will tread carefully when it comes to pension funds.

An EU industry consultation in the first half of 2022 showed the vast majority of respondents favoured central clearing for pension funds from June 2023, and another regulatory source in the bloc pointed out that the commitment to insist on central clearing was key to G20 reforms following the 2008 Lehman Brothers crash, and has already been implemented by many other jurisdictions.