On June 15, ISDA and the Futures Industry Association (FIA) submitted a joint response to ESMA’s consultation on central clearing solutions for pension scheme arrangement (PSA).

ISDA and the FIA express their view that market-based liquidity transformation like the repo market will be able to support PSAs in normal times, but PSAs might struggle to obtain cash for variation margin (VM) calls at a CCP in extreme stressed markets. While changes to bank capital rules, leverage ratio and the GSIB framework will increase the capacity of banks to provide PSAs with access to repos, ISDA and the FIA believe that only a central bank-backed collateral transformation facility would be a credible solution for the cash VM problem as described in ESMA’s report to provide additional security.

ISDA and the FIA also asked ESMA to review the exemption from the clearing mandate for UK PSAs to avoid an unlevel playing field.

Not being exempt from the clearing obligation under EU rules could have the two negative consequences:

• UK PSAs may prefer to contract with UK dealers over EU dealers post-Brexit to benefit from the clearing exemption.
• EU fund vehicles set up for EU28 PSAs that include UK PSAs as investors will no longer benefit from any exemption post-Brexit, making Europe a less desirable jurisdiction for those vehicles.