National Association of Pension Funds ("NAPF") Responds to BCBS and IOSCO Margin Requirements for Non-Centrally-Cleared Derivatives

The NAPF issued its comments in response to the Basel Committee on Banking Supervision ("BCBS") and the International Organization of Securities Commissions' ("IOSCO") requests for comment as to the amount and handling of margin to be posted as part of OTC derivatives trades. The key points asserted by NAPF are as follows:

• Pension schemes use derivatives largely to hedge liabilities and, thereby, reduce risk. Extra costs or processes that provide a disincentive for pension schemes to use derivatives could in fact increase the degree of risk in the markets.
• The new margin requirements would significantly increase the cost of hedging to pension schemes. This would have an impact on individual pension scheme members through lower pensions, increased contributions, increased risks, higher pension ages or scheme closures.
• Pension schemes exhibit low systemic risk. Indeed, they are obliged by the EU Directive on Institutions for Occupational Retirement Provision ("IORP Directive") and by UK trust law to use derivatives in a carefully risk-controlled manner. Ideally, this should be recognized by exempting pension schemes from the new initial margining requirements. If this is not possible, then an alternative approach would be to reflect pension schemes' creditworthiness and the long-term one-direction nature of their derivatives positions by reducing the amounts of collateral that they are required to post.

Related News: "SIFMA Comments on the BCBS and IOSCO in Response to the Second Consultative Document on Margin Requirements for Non-Centrally-Cleared Derivatives" (March 20, 2013); "MFA Submits Comments on Basel-IOSCO Second Consultative Document on Margin Requirements for Uncleared Derivatives" (March 15, 2013); and "Basel Committee and IOSCO Issue Near-Final Proposal on Margin Requirements for Non-Centrally-Cleared Derivatives" (February 19, 2013).