FIA and ISDA respond to the European Securities and Markets Authority’s (ESMA) “First report for consultation: central clearing solutions for pension scheme arrangements (PSA)” focusing on topics that affect the clearing market.
The associations write that while market-based tools like collateral transformation by the clearing member (CM) or the repo market will be able to support PSAs in normal times, these tools are not guaranteed to work in extreme stressed markets unless regulators are prepared to make relevant changes to bank capital rules, leverage ratio and the GSIB framework which provides pension funds guaranteed access to repos in stressed conditions without disproportionate cost.
The response points out that only a central bank backed collateral transformation facility would be a credible solution for the cash Variation Margin (VM) problem as described in ESMA’s report to provide additional security. The Associations also propose potential options, requiring further in-depth feasibility analysis, how central bank access could be intermediated to allow a last resort solution for PSAs.
