The Dutch Federation of Pension Funds has voiced its opposition to a central clearing proposal that it believes will result in pension funds being "forced" to take out derivatives at a less attractive swap rate.

The European Commission has proposed a revision to European legislation on the central clearing of derivatives, whereby market participants would maintain and ‘active account’ with a central counterparty (CCP) registered within the EU.

Currently, a large part of the clearing takes place outside of the EU in London.

The federation said that it understood the requirement that pension funds must be able to clear with a CCP in the EU, which is why it supports the principle of having an account with an EU CCP.

However, it noted that the European Commission also wants ESMA to define the minimum percentage of transactions that must be cleared at the EU CCP.

The federation warned that this would lead to forced retail trade, in which pension funds might not able to opt for the best market conditions.

“If pension funds are forced to take out derivatives with a less attractive swap rate, this can lead to poorer investment results,” the federation stated.

“Legislation should therefore not impose a minimum percentage. In order to verify that market parties have an active account with an EU CCP, supervisors can check whether market parties have the correct contracts and operational systems.

“This ensures that they can actually clear within the EU, should circumstances warrant it.”

Pension funds have an exception for central clearing until June 2023, after which pension funds with positions above certain thresholds will be required to settle their transactions centrally.

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