Financial Market Regulation


Pension funds use derivatives to manage their financial solvency risk as their liabilities are often long-dated, one-directional, and linked to interest rates. The clearing obligation applies to EU firms including pension funds that are counterparties to an OTC derivative contract including interest rate, foreign exchange, equity, credit and commodity derivatives.

On 9 June 2022, the European Commission published a delegated regulation on the final one-year extension of Pensions Scheme Arrangements’ (PSAs) exemption from clearing obligation (to start applying the clearing obligation to PSAs on 19 June 2023) and the report assessing whether viable technical solutions have been developed for the transfer by PSAs of cash and non-cash collateral as variation margins and the need for any measures to facilitate those viable technical solutions. The pension scheme arrangement clearing exemption expired on 18 June 2023.

On 16 June 2022, ESMA published a statement on the implementation of the clearing obligation for PSAs, in which ESMA e.g. states that: ’’… from 19 June 2022 and until the approval process of the Delegated Act has been completed, ESMA expects competent authorities not to prioritise their supervisory actions in relation to the CO for PSAs and to generally apply their risk-based supervisory powers in their day-to-day supervision of applicable legislation in this area in a proportionate manner.’’

On 7 December 2022, the Commission published its EMIR review proposals to encourage the shift of Euro clearing from the UK to the EU CCPs and improve the EMIR framework’s functioning. We submitted our position answer in May 2023 to highlight our concerns regarding the active EU account and the reporting. 

Finally, on 6 February 2024, co-legislators agreed on the EMIR review during a final trilogue meeting, introducing among other issues an active account requirement (AAR) that will require certain financial and non-financial counterparties to have an account at an EU CCP and regularly clear through it at least five trades in each of the most relevant subcategories per class of derivative contract. The texts are expected to be published at the OJEU at the end of 2024.  


In 2007, the Markets in Financial Instruments Directive (2004/39/EC; MiFID) entered into force – succeeding the Investment Services Directive (ISD). MiFID lays down regulations for investment firms, banks and regulated markets, which allow them to provide investment services throughout Europe using a single passport.

On 20 October 2011, the European Commission adopted proposals for (i) a Directive on on Markets in Financial Instruments repealing Directive 2004/39/EC (MiFID II) and (ii) a Regulation on Markets in Financial Instruments (MiFIR). The proposals, inter alia, aim to bring a new type of trading venue into the MiFID regulatory framework: the Organised Trading Facility (OTF). The proposals also aim to introduce new safeguards for algorithmic and high frequency trading activities. Pre- and post-trade transparency provisions in respect of both equities and non-equities are to be enhanced and the role of supervisors is to be strengthened.

MiFID recognises pension funds as professional investors, because they have the in-house expertise or the resources to hire independent investment advisers. Moreover, pension funds make extensive use of external investment services, such as investment consultancy, asset management, fiduciary management and trading and brokerage services. Some pension funds have internal investment departments, but others outsource their investment management.

In 2014, PensionsEurope welcomed MiFID II and MIFIR’s new measures enhancing investor protection. However, ESMA’s proposal regarding investment advice on an independent basis may go a little bit too far and may end up increasing the costs for IORPs or even denying them access to the external advice of investment firms. PensionsEurope fully agreed with the need to establish principles that allow determining when investment advice is independent or not and we believe that these principles should be proportionate.

PensionsEurope has been actively involved in the MiFID review and will remain active in the adoption process of its “Level II” implementing legislation.

Banking rules

Basel III and EU implementation

The “CRD IV” legislative package, adopted in 2013, transposes the 2010 global agreement on capital requirements reached by the Basel Committee on Banking Supervision (“Basel III”) – with some variations to take the specificities of the European banking sector into account. The new rules address some of the weaknesses shown by the banking sector during the financial crisis, in particular the insufficient level but also the quality of capital and liquidity held by banks.

In 2016, the European Commission opened a consultation on the Net Stable Funding Ratio (NSFR) rules.PensionsEurope answered this consultation to call on the Commission to adapt the rules, as the NSFR requirements lead to the cash preferences of banks, which are detrimental to pension funds and their service providers.

In fact, certain elements of the CRDIV bank capital rules have strong opposing incentives for banks to only receive variation margin in cash to support non-cleared OTC derivatives positions. More precisely, the leverage ratio and net stable funding ratio (NSFR) rules could force pension funds to post Variation Margin in cash only, and not permit other assets for collateralising non-cleared derivative trades. 

In addition, the leverage ratio and NSFR rules only allow cash Variation Margin (VM) to offset any positive mark-to-market exposures borne by a bank on OTC derivatives positions. The Capital requirements for banks, imposed by Basel III and CRDIV rules, have had also a negative impact on market liquidity, especially in the repo market. CRDIV and CRR restrict liquidity in the repo market.

In 2021 PensionsEurope also responded to the Basel Committee on Banking Supervisions’ (BCBS) targeted consultation on a credit valuation adjustment risk (CVA Risk) framework. PensionsEurope emphasised additional adjustments of the CVA risk framework that would be needed to mitigate the cost impacts which would be passed on to end-users, more specifically EU pension funds. The CVA risk framework applies a “one-size-fits-all” treatment to all financial entities and does not differentiate the risk weights that will be assigned to different types of financial counterparties with very different creditworthiness profiles. 

In general, we suggest policymakers consider allowing high-quality government bonds with appropriate haircuts to offset the mark-to-market exposures of OTC derivatives in leverage ratio and NSFR calculations and to exempt pension funds from posting collateral in non-cleared transactions until non-cash solutions for posting collateral are developed.

ESAs review

The EU finished reviewing in 2019 the mandates of the European System of Financial Supervision and the mandates of the three European Supervisory Authorities (ESAs): the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA). Set up in the wake of the financial crisis, these authorities play a significant part in developing EU regulation that is relevant for occupational pensions.

PensionsEurope supports a balanced approach to the convergence of capital market supervision. PensionsEurope believes that a vibrant Capital Markets Union, which provides European pension funds with long-term investment opportunities to achieve good returns for members and beneficiaries, requires robust supervision of market participants. The role of EIOPA in directly overseeing European occupational pensions has been limited to date because a minimum harmonisation framework at the European level governs pension funds. They are built on the foundation of first-pillar pensions, closely linked to Member States’ social security systems and embedded in domestic labour and social law. PensionsEurope therefore questions the need for supervisory convergence in the area of occupational pensions.

Other areas of concern are the governance structures of the ESAs and the funding model. Occupational pensions are still very divergent across Member States, both in terms of their prevalence and design. They are closely linked to first-pillar pensions, as well as to social and labour law more broadly. Importantly, the strong link between occupational pensions and national tax and labour law has resulted so far in relatively limited cross-border activities of IORPs. For these reasons, the rationale for a bigger regulatory or supervisory role for EIOPA on IORPs is absent. Nonetheless, we have seen a clear impact of EIOPA on the regulatory framework. Both EIOPA’s own Opinions and its work on Level 2 in the area of insurance have a significant impact on the supervisory activities of National competent Committees across Europe.

Since its inception, the mandate of ESMA has been expanded significantly, particularly in areas with strong financial stability or cross-border aspects. Pension Funds have supported the strengthening of this mandate. However, PensionsEurope believes that ESMA faces challenges due to the EU framework’s persistently poor design. 

Finally, the Commission published in May 2022 a report on the operation of the European Supervisory Authorities which indicated that “governance arrangements of the ESAs (..) are not always conducive to ensuring that the convergence tools and other instruments at the disposal of the ESAs are used in the most effective way”. As the modifications brought by the ESAs review, became applicable in 2020, the Commission concluded that more time was needed to assess the impacts of the changes on ESMA, EIOPA and EBA regulations, but it is more than likely that the issue will once again be highlighted by the next Commission. 

Liquidity/NBFI issues

Financial Market Regulation
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