UK's HM Treasury has published its response to the call for evidence on pension funds’ exemption from the clearing obligation for certain derivatives and decided the exemption should be maintained for the longer term. Secondary legislation will be taken forward to prevent the exemption expiring on 18 June 2025 and to remove any further time limit. The review drew on 26 responses from pension schemes, asset managers, market infrastructure firms, trade associations and advisory firms. Stakeholders reported that pension schemes currently hedge mainly with gilts, often supported by gilt repo, but continue to use derivatives such as interest rate swaps and inflation swaps as part of liability-driven investment strategies. Most eligible schemes use the exemption to keep these trades bilateral, citing central counterparty requirements to post variation margin in cash, including daily and sometimes intraday calls, and to post initial margin, while bilateral markets typically allow non-cash collateral such as gilts. Respondents warned that mandatory clearing would likely require larger cash buffers, reduce investment in higher-growth assets and increase liquidity pressures in market stress, and many highlighted differences between UK market structure and other jurisdictions. HM Treasury will keep the policy under review in coordination with UK regulatory authorities and indicated it may reassess if market dynamics, market structure or wider government reforms materially change the case for mandatory clearing for pension schemes.
HM Treasury 2025-01-01
UK's HM Treasury will legislate to remove the time limit on the pension fund derivatives clearing exemption
HM Treasury will maintain the exemption for pension funds from the clearing obligation for certain derivatives, with secondary legislation to prevent its expiration in June 2025. This decision follows stakeholder feedback on derivatives in liability-driven investment strategies and concerns over liquidity pressures from mandatory clearing. HM Treasury will review the policy with UK regulatory authorities.