Exempting post-trade risk reduction transactions from the clearing obligation

Overview - The Bank of England proposes to exempt transactions from the derivatives clearing obligation when carried out as part of a post-trade risk reduction (PTRR) service [1][3]. PTRR Services - PTRR providers assist market participants in reducing counterparty, operational, and basis risk in derivatives portfolios through services like portfolio compression, rebalancing, and basis risk optimisation [2][16][20]. - The Bank aims to support financial stability by increasing the efficiency of PTRR services and allowing broader access for market participants [3][29]. Legislative Framework - The UK EMIR mandates that all eligible OTC derivative contracts be cleared by a central counterparty (CCP) [3][10]. - The Financial Services and Markets Act 2023 (FSMA 2023) grants the Bank the authority to exempt certain transactions from this clearing obligation [3][13]. Proposal Details - The Bank proposes that PTRR transactions, which are non-price forming and do not affect market risk, should be exempt from the clearing obligation [27][28]. - This exemption is expected to enhance the efficiency of PTRR services and reduce the complexity for market participants [29][39]. Implementation and Compliance - The Bank suggests that the changes take effect three months after the final rules are published [36]. - PTRR providers must notify the Bank of their intention to provide services and comply with specific conditions to ensure the integrity of the process [34][42]. Cost-Benefit Analysis - The Bank conducted a cost-benefit analysis indicating that the benefits of the exemption, such as increased efficiency and reduced complexity, outweigh the marginal costs associated with compliance [41][44]. - Estimated one-off implementation costs for PTRR providers are approximately £15,000–£20,000, while participants may incur costs of less than £5,000 [59][60]. Financial Stability Implications - The proposed exemption is expected to support financial stability by reducing counterparty and operational risks, thereby freeing up capital and enhancing liquidity in the financial system [52][39]. - A larger network of participants in PTRR exercises could lead to greater risk reduction and mitigate systemic risks in the derivatives market [52][56].