Following a call for evidence in November 2023 on the exemption pension funds currently have from the obligation to clear certain derivates contracts at a central counterparty, HM Treasury has published responses from industry stakeholders, and decided that the exemption should be maintained in the long-term.
The Government will proceed with legislation to ensure that the exemption does not expire on 18 June 2025 as currently scheduled, but will keep this policy under review with the UK regulators.
The responses suggested that:
- Pension schemes generally use gilts over derivatives for hedging purposes, but respondents implied that this could change in future;
- Most firms that are able to use the exemption to trade their derivatives bilaterally do so, and central counterparty margin requirements are the main reasons most schemes prefer to do so;
- Mandatory clearing would require pension schemes and asset managers to increase their cash holdings, reducing their ability to invest in higher growth assets;
- Removing the exemption could make market stress events worse by increasing liquidity pressures, which could increase the likelihood of financial instability; and
- There are key differences in market structure between the UK and comparable jurisdictions which do not have similar exemptions.
Overall, respondents supported the exemption and advocated for it to be permanent.