Investing in derivatives: new requirements for occupational pension schemes (EMIR)

It is increasingly common for trustees of pension schemes to enter into derivatives, such as interest rate and inflation swaps. Such arrangements are attractive to trustees as they allow them to hedge risk and manage their portfolios efficiently. Trustees using derivatives should be aware of new clearing, reporting and risk management requirements applicable to some derivative transactions.

  • A new European regulation on over-the-counter (OTC) derivatives, commonly known as the European Market Infrastructure Regulation (EMIR), has introduced new requirements including:
      - an obligation to clear trades through a central counterparty
      - risk mitigation techniques for uncleared trades (see glossary below): and
      - trade reporting (see below) for all OTC derivatives. 
  • Simultaneously, in the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank) deals with similar issues in relation to derivatives markets.
  • Both EMIR and Dodd Frank arise from the G20 commitment to increase transparency and reduce risk in derivatives markets, following the financial crisis of 2007/08.

Trustees of occupational pension schemes who have invested in OTC derivatives (see box below) should ensure that they comply with these new requirements. In practice, trustees will usually delegate compliance with the EMIR requirements to their investment managers.

Where trustees are exposed to derivatives through investment in a pooled fund or collective investment scheme, it is the responsibility of the manager of the fund or collective investment scheme to comply with EMIR.

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