The European Securities and Markets Authority (ESMA) has proposed conditions for exempting some over-the-counter derivatives transactions from mandatory clearing, aiming to help firms cut portfolio risk while preserving market safeguards.
The proposal details when transactions generated by post-trade risk reduction (PTRR) services may use an exemption introduced under the European Market Infrastructure Regulation, known as EMIR 3. The exemption took effect Dec. 24, 2024. ESMA says the safeguards are intended to prevent firms from using risk-reduction exercises to bypass the clearing requirement.
The draft covers portfolio compression, portfolio rebalancing and basis risk optimization. An exercise must lower risk in each portfolio submitted to it while keeping market risk unchanged or within minimal tolerances set by participants. Participants would have to accept or reject the resulting transactions as a group.
Under EMIR 3, providers must already be authorized investment firms and conduct exercises independently as third parties. ESMA’s draft would add conflict of interest procedures specific to PTRR services. It would also set requirements for information given to participants and for methods and algorithms established before an exercise begins.
The proposed standards address provider controls, record keeping and oversight of how the exemption is used. ESMA says the requirements would give market participants a clearer way to reduce risk in their derivatives portfolios while allowing authorities to monitor compliance.
ESMA made few changes after a consultation that broadly supported its approach. It expects limited implementation costs because the proposal draws on practices and requirements already in place. Providers, participants and supervisors would still have to meet the applicable service, compliance and monitoring requirements.
ESMA’s final report says it submitted the draft to the European Commission on Oct. 9. The Commission has three months to decide whether to endorse the standards.
