EU Seeks Swap Rule Changes as Collateral Deadlines Slip Globally

  • Pensions would get exemption from sovereign-bond restrictions
  • EU market regulators get six weeks to respond to requests

European Union policy makers called for the speedy adoption of revisions to collateral rules for swaps as they try to contain the threat that their failure to meet a global regulatory deadline may fracture the $493 trillion market.

The European Commission, the bloc’s executive arm, said in a letter to regulators on Thursday that pension funds should get an exemption from requirements forcing firms to have a broad pool of collateral and preventing them concentrating their holdings among a few sovereign issuers. The change was one of a handful of requests the commission sought from the markets, banking and pension regulators, who now have six weeks to respond before the European Parliament and Council review the measure.

The commission said in the letter that the concentration limits would introduce costs and additional risks to pension plans and should be changed “to avoid excessive burden on the retirement income of future pensioners.” Pension liabilities to retirees are typically denominated in local currencies and their investments must normally be in the same currency, the commission said.

The concentration limits risk forcing pension funds “to enter into foreign currency transactions,” the commission said. In turn, that would introduce “the costs and risks of foreign currency mismatches,” it said.

The commission has faced criticism from U.S., Japanese and even the EU market regulators because it will miss the global deadline of Sept. 1 for setting rules governing derivative trades done by the world’s largest banks, including JPMorgan Chase & Co., Barclays Plc and Deutsche Bank AG. The standards were sought by regulators after the 2008 crisis to ensure firms have collateral backstopping trades they do directly with each other instead of being settled at third-party clearinghouses.

The timing gap threatens to raise competitive pressures, since U.S. banks will need to comply with the requirements earlier than European rivals. The delay could discourage trading between U.S. and European banks in the interim and make it more expensive for U.S. banks.

The commission said in the letter that the global implementation dates “are not viable” and that more time is necessary to ease the transition to the new regulations. While the commission didn’t lay out specific new deadlines, the standards should take effect in the market one month after they officially enter into force under EU law.

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