LDI: Pension fund clearing exemption will stay but is kept under review
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Pension schemes will become exempt from having to use clearing houses in the “longer term”, the government has said, but it will keep the policy under review and might change it depending on market conditions.
The Treasury has published a response to its call for evidence from November 2023 on whether a clearing exemption for pension funds – affecting those that have leveraged liability-driven investment programmes – should continue. The exemption had been extended until 18 June this year, but the government wanted to determine a long-term approach.
Today, the Treasury said it will remove the time limit after industry respondents warned against making pension funds use clearing houses, even though many schemes currently use gilts rather than derivatives for hedging.
Respondents had argued that mandatory clearing would require pension schemes and asset managers to increase their cash holdings, reducing their ability to invest in higher growth assets and amplifying market stress events by putting extra pressure on liquidity.
The call for evidence included questions on how removing the exemption might interact with aspects of the Mansion House reforms, and if an absence of the exemption would change anything if the 2022 gilts crisis were to happen again.
The government will now make regulations to remove any time limit on the clearing exemption but will keep this policy under review in coordination with regulators.
“If there are changes to market dynamics or structure or wider government reforms that have a material impact on the value of mandatory central clearing for pension schemes, the government may reassess this issue,” the document states.
Do you agree that pension funds should be exempt from clearing?
The Treasury has published a response to its call for evidence from November 2023 on whether a clearing exemption for pension funds – affecting those that have leveraged liability-driven investment programmes – should continue. The exemption had been extended until 18 June this year, but the government wanted to determine a long-term approach.
Today, the Treasury said it will remove the time limit after industry respondents warned against making pension funds use clearing houses, even though many schemes currently use gilts rather than derivatives for hedging.
Respondents had argued that mandatory clearing would require pension schemes and asset managers to increase their cash holdings, reducing their ability to invest in higher growth assets and amplifying market stress events by putting extra pressure on liquidity.
The call for evidence included questions on how removing the exemption might interact with aspects of the Mansion House reforms, and if an absence of the exemption would change anything if the 2022 gilts crisis were to happen again.
The government will now make regulations to remove any time limit on the clearing exemption but will keep this policy under review in coordination with regulators.
“If there are changes to market dynamics or structure or wider government reforms that have a material impact on the value of mandatory central clearing for pension schemes, the government may reassess this issue,” the document states.
Do you agree that pension funds should be exempt from clearing?
