The European Securities and Markets Authority (ESMA) published its final report on post-trade risk reduction (PTRR) services on 20 October. The report sets the conditions under which OTC derivatives resulting from such services can be exempt from the EMIR 3 clearing obligation. It covers information to participants, how exercises are run, controls, record-keeping and monitoring. The draft regulatory technical standards are submitted to the European Commission.

What it means: Post-trade risk reduction services, such as portfolio compression and risk rebalancing, help banks and large participants reduce the number and size of open derivative positions without materially changing their market exposure. The problem was that the new trades created during the process could fall under the central clearing obligation, which would make such exercises practically impossible. The EMIR 3 regulation introduced an exemption, and with this report ESMA specifies when it applies. The logic is that the exemption must not become a loophole to avoid clearing, so it sets transparency, control and record-keeping requirements for providers. For Greek banks, which use interest rate derivatives for hedging, this clarity eases risk management and may reduce capital requirements through smaller portfolios. The standards will apply only once the Commission adopts them and they pass scrutiny by Parliament and the Council. PTRR providers and participants should prepare their procedures and records in good time, as supervisors are likely to check compliance soon after the rules take effect.

Read the original on ESMA

Related service: myDATA integrations

Related stories