Thursday, August 16, 2012

EU OTC Derivatives Reforms Have Major Pension Players Worried

In their joint response to the European Securities and Markets Authority (ESMA) draft technical standards for the regulation on OTC derivatives, the Dutch Pension Federation, APG, MN, PGGM, Shell and Syntrus Achmea Asset Management, major players in the Dutch pension industry, were highly critical of the proposals, and said they could do more harm than good.  They note that the proposals have a high probability of increasing costs for pension funds and their administrators, costs that will ultimately be borne by pension beneficiaries.  While ESMA has said that the proposals aim to reduce risks via the use of central clearing and risk mitigation techniques and increase confidence with respect to margins, the joint response from the Pension Federation says that they are not convinced that the increase of the confidence level with regard to the margin will automatically lead to more safety.

Worried about front-running, the Pension Federation and their Dutch cohort also oppose the publishing information about so-called "intra-group trades."

For front-running risk (and alike) reasons, we are strongly opposed to any information on intra-group trades being made public. At least, such information should never include the identities of the counterparties involved in the relevant transactions.

Another concern the Federation enunciated was was the recycling of 'non-cash collateral' – such as bank guarantees, and want it prohibited.

In line with the utility-like character of CCPs we feel that as a matter of urgency ESMA should consider including in the technical standards a prohibition of re-use (or for that matter rehypothecation) by  the CCP of 'our' non-cash collateral. - According to us non-cash collateral should be held in a segregated account in the name of the end user with a security interest for the CCP. 

Finally, the Federation is concerned that the threshold for reporting disputes to regulators, currently proposed at EUR 15 million, is too low and is too much of a regulatory burden.

In our view the reporting threshold in relation to disputes as currently proposed is set far too low. A (far) higher threshold of e.g. EUR 500 million instead of the currently proposed EUR 15 million would in our view be more sufficient both in terms of offering sufficient insight to regulators and avoiding overburdening market parties with onerous reporting requirements.

The consultation period has revealed that a number of large players in the European OTC derivatives markets have major reservations about the ESMA proposals.  The issues expressed by the Dutch Pension Federation, APG, MN, PGGM, Shell and Syntrus Achmea Asset Management in their response are representative of the kind of reactions thus far: concerns about added costs of the new regime to OTC participants, end users, and in this case pensioners; areas where the new regulations may interfere with OTC users operationally and in regulatory burden; and questions regarding the costs versus the benefits in terms of safety in the OTC markets.