The European Commission is reviewing technical standards for a derivatives clearing exemption, a step that would define when firms may cut portfolio risk without having to clear resulting trades.
The European Securities and Markets Authority (ESMA) submitted its final report, containing the draft standards, on Oct. 9 and published it Oct. 20. The exemption took effect Dec. 24, 2024, for transactions arising from post-trade risk reduction services.
The draft covers portfolio compression, portfolio rebalancing and basis risk optimisation. To qualify, an exercise would have to lower overall risk in each submitted portfolio without increasing aggregate net uncleared risk in any submitted portfolio. A particular type of risk could still rise within a participant’s tolerance. Participants would have to accept or reject the resulting transactions as a group.
ESMA’s draft would further specify providers’ disclosure, control and recordkeeping duties. Providers would need to explain exercises to participants, apply controls and retain records for supervisory checks. The proposal also addresses how authorities would monitor use of the exemption.
The safeguards are intended to prevent firms from using risk reduction exercises to evade mandatory clearing. Market participants could gain a clearer route to reduce portfolio risk, while providers, participants and supervisors would have to meet the applicable service and oversight requirements.
ESMA made limited changes to its earlier proposal for the exemption after receiving four consultation responses. It expects limited additional costs because the standards draw on existing rules and market practices.
The Commission has three months from the Oct. 9 submission to decide whether to endorse the standards.
