Exemptions for Pensions and Intragroup Transactions Extended Under UK EMIR in Further Divergence from EU EMIR

Pension funds and entities with in-scope intragroup OTC derivative transactions will be able to continue to rely on the temporary exemptions from clearing and/or margining requirements under UK EMIR, following the publication of a new statutory instrument that will come into force on 12 June 2023. This will extend:

• the temporary exemption from clearing obligations in respect of certain OTC derivative contracts for pension scheme arrangements (PSAs) pursuant to Article 89(1) of UK EMIR, to 18 June 2025; and
• the temporary exemption from clearing and margining obligations for certain intragroup transactions, to 31 December 2026.

A number of divergences have emerged in respect of when the clearing and/or margining obligations will start applying to the relevant entities that currently enjoy temporary exemptions under UK EMIR compared to EU EMIR.

The following table sets out the date from which the current derogations will expire and the relevant clearing and margining requirements under EU EMIR and UK EMIR (taking into account the extensions in the UK mentioned above) will begin to apply. For these purposes, a “third-country counterparty” refers to a counterparty established outside the UK (in respect of UK EMIR) or outside the EU (in respect of EU EMIR).

* Art. 3(2) of the Commission Delegated Regulation (EU) 2016/1178 (for clearing obligations) and Art. 36(2) of Commission Delegated Regulation (EU) 2016/2251 (for margining obligations) does not clearly state that it is the earlier of such dates, although presumably this should be the case.  

Clearing obligation for PSAs

Given the challenges the PSAs could face in having to divest their assets for cash in order to meet a central counterparty’s (CCP) cash variation margin calls, contrary to how PSAs would typically allocate their assets to ensure maximum return for their policy holders, a temporary exemption from clearing obligations for PSAs was initially introduced under EMIR to allow time for CCPs to develop viable technical solutions for PSAs to transfer non-cash collateral as variation margin for clearing their OTC derivatives. This temporary exemption has been extended a number of times since EMIR came into force in 2012. In its letter to the European Commission (EC), the European Securities and Markets Authority (ESMA) concluded that the PSAs were now operationally ready to meet their clearing obligations, and this temporary exemption was extended for a final time until 18 June 2023 in order to allow PSAs sufficient time to finalise operational arrangements. The clearing obligation under EU EMIR will therefore start applying to the EU PSAs from 19 June 2023.

This temporary exemption was retained in UK EMIR and initially extended to 18 June 2023 prior to the current extension to 18 June 2025.  Unlike under EU EMIR:

• the temporary exemption under Article 89(1) of UK EMIR also covers EEA PSAs (whereas UK PSAs are not covered by EU EMIR, although if the EMIR 3 proposal is enacted in its current form, then this exemption could in the future apply to an EU FC or NFC+ entering into an OTC derivative transaction with a third-country PSA that is itself exempted from the clearing obligation under its national law); and
• there is no definitive end date to this temporary extension. In its Guidance, HM Treasury stated that it will review this exemption before its expiry in 2025 in order to allow time for consideration and implementation of a longer-term approach. This will be done in consultation with industry stakeholders.

Pursuant to Article 89(2) of EMIR, both ESMA and the Financial Conduct Authority (FCA) have published a list of PSAs that are exempted from the clearing obligation thereunder.

Temporary exemptions for clearing and margining obligations for intragroup transactions

It is important for UK or EU entities that have OTC derivative contracts with a third-country counterparty in the same group and in respect of which the HM Treasury or ESMA (as applicable) has not yet made an equivalence determination, where such transactions would otherwise be subject to the clearing obligations (in respect of certain classes of interest rate/credit default OTC derivatives) and margining obligations under EMIR, to ensure that they are aware of when the temporary exemption will end and the relevant clearing and margining obligations will start to apply, and to be aware of any equivalence decisions that the HM Treasury or ESMA (as applicable) may make in respect of any relevant third-country jurisdiction.

There is no permanent exemption from clearing/margining obligations under EU EMIR available in respect of in-scope OTC derivative transactions between an EU entity and a non-EU entity that is not established in an equivalent third country in the same group, although the application of these requirements has been deferred for these transactions through various Commission Delegated Regulations. These requirements will start to apply to the relevant intragroup transactions from 30 June 2025, given the latest round of extensions introduced in October 2022,[1] however, if an equivalence decision is made by ESMA pursuant to Article 13(2) of EU EMIR before the end date of the exemption period, then the applicable clearing/margining obligations under EU EMIR will start to apply to the in-scope transactions on the earlier of that date and:

• (in respect of clearing obligations) 60 days after the date of entry into force of the relevant equivalence decision; and
• (in respect of margining obligations) four months after the date of entry into force of the relevant equivalence decision.

The position under UK EMIR is largely similar and was on-shored in the UK under the Temporary Intragroup Exemption Regime (TIGER). The temporary exemption under TIGER will continue to apply until 31 December 2026, unless an equivalence decision in respect of the third country where the non-UK counterparty is established is made by HM Treasury before then, in which case the requirements will begin to apply two months (clearing requirements) and four months (margining requirements) after the date of the relevant equivalence decision.

The International Swaps and Derivatives Association, Inc. (ISDA), in its proposal to HM Treasury, the FCA and the Bank of England, has suggested that there should be permanent intragroup exemptions from clearing and margining requirements regardless of an equivalence determination. This will be in line with the amendments proposed under EMIR 3, where the need to rely on an equivalence determination will be replaced by a list of jurisdictions in respect of which exemption cannot be granted. This aims to provide greater legal certainty and predictability with regards to the application of the intragroup exemption regime.

Single stock equity options and index options

The relevant clearing and margining obligations for all non-centrally cleared single stock equity options and index options have been deferred and are due to apply from 4 January 2024 under both UK EMIR and EU EMIR.

Eight trade associations, including ISDA and the European Banking Federation, have recommended there be a permanent exemption from margining requirements under EU EMIR for equity options, on the basis that imposing the margining requirements will increase funding costs and operational complexity, and that smaller EU counterparties could be discouraged from using equity options for hedging and risk mitigation. The CEO of ISDA has similarly written to the FCA and the Bank of England, urging them to consider making this exemption permanent under UK EMIR, given that the initial reasons for introducing the temporary exemption – to avoid market fragmentation and ensure a level playing field with other jurisdictions that do not require margining for equity options (such as the U.S.) – have not substantively changed, and having such exemption is necessary to ensure the continued competitiveness of the UK market. There is as yet no indication from ESMA or the UK regulators whether they are considering making this exemption permanent.

[1] Pursuant to Commission Delegated Regulation (EU) 2023/315, and Commission Delegated Regulation (EU) 2023/314.