Insurers that use derivatives for hedging should be exempt from the central clearing obligations under the European Markets Infrastructure Regulation (EMIR), according to trade federation Insurance Europe.
In response to the European Commission's EMIR consultation paper, the federation cited insufficient opportunities for long-term investors, such as insurers and pension schemes, to transfer non-cash collateral with central counterparties (CCPs).
Because CCPs are likely to only accept cash as a variation margin, European insurers managing long-term products risk being forced to either hold unnecessary amounts of cash; sell assets when cash is needed; monetise assets via the repo market; or use derivatives less often – threatening the provision of long-term insurance products.
The EMIR came into force in 2012, but elements of it are still being developed. It was designed to reduce counterparty risk in the over-the-counter derivatives market, requiring certain types of derivatives to pass through central clearing. However, the regulation has inadvertently increased insurers' exposure to a liquidity squeeze (IERM, 16 September).
Pension scheme arrangements (PSAs) are already exempt from the central clearing obligations, but the wording of the exemption in EMIR significantly limits its application to insurers managing long-term products.
"This ignores the fact that insurance companies are affected in the same way as PSAs. They also act as long-term investors and minimise the allocation to cash in the interest of their policyholders," the federation said.
Insurance Europe has suggested two solutions to the issue, being:
- a permanent exemption from the central clearing obligation for both pension funds and insurance companies that use derivatives for hedging; and
- to encourage CCPs to develop tailored solutions for pension funds and insurance companies, allowing for non-cash collateral as variation margin.
The federation also urged the Commission to remove the obligation for dual-sided reporting (DSR) and replace it with one-sided reporting.
"One-sided reporting, like in the US, would offer the same, if not better, quality of data, while removing some of the practical and administrative challenges of DSR," the federation said.
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