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Credit default swaps: Pension funds make last stand to avert clearing

April deadline for regulation; Margin requirements could be prohibitive

On April 20 the Economic Affairs Committee of the European Parliament (ECON) is due to vote on amendments tabled on OTC derivative legislation. The vote could spell trouble for the pension fund industry, which has found itself ensnared in the wider drive to push the OTC derivatives market on to central clearing.

In September 2010 it was announced that pension funds were to be treated as financial counterparties in swap transactions – which means they are required to clear certain OTC derivative transactions and report all such deals to a trade repository (similar proposals have been made in the Dodd-Frank reforms in the US).

"It came as something of a shock when pension funds were wrapped into these regulations – September 15 was the first time it was mentioned that they would be," says Ed Parker, global co-head of Mayer Brown’s derivatives and structured products practice. "The pension fund industry was caught out by this."

Cost considerations

The move is of concern to pension funds for cost reasons. If they are classified as financial counterparties they will have to post initial margin against all derivative trades. For large pension funds running liability-driven investment strategies and using long-dated interest rate and inflation swaps this will have big implications.

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