Pension schemes will not be required to trade derivatives through central counterparties after the government extended a regulatory exemption indefinitely.
Under European Union (EU) rules, derivatives must be traded through clearing houses to ensure regulatory transparency. However, pension schemes have received temporary exemptions to this rule on a regular basis since 2012.
The rules were copied over into the UK’s rulebook when the country left the EU, and the current exemption was due to expire on 18 June 2025.
In a document published last week, HM Treasury stated that the exemption would be extended indefinitely but kept under review.
It means that pension schemes using derivatives – including those with liability-driven investment (LDI) strategies – will not be required to hold large amounts of cash as collateral when trading the contracts.
Vanaja Indra, head of public policy at Insight Investment – a major provider of LDI strategies – said: “This shift from a temporary to a long-term solution provides greater certainty for schemes. Insight has been vocal about the benefits of a long-term solution since 2012. We believe it to be in the best interests of both schemes and the UK economy.
“Mandatory clearing would have forced schemes to hold more in cash to enable them to clear, rather than to allocate their investments prudently and in pursuit of their objectives. Greater freedom to invest also retains the opportunity to boost the economy.”
Wyn Francis, chief investment officer at Brightwell, which manages the £38.7bn BT Pension Scheme, said: “The industry has consistently made the case for a permanent exemption and having greater certainty is good news.
“An expiration of the exemption would have required pension schemes to hold more cash which would have reduced pension schemes’ investment options and impacted investment returns. It would also have increased costs due to the direct costs involved in clearing trades.”
