Post-trade risk reduction has become increasingly common as a means to reduce risks in the derivatives market. Portfolio compression is a case in point: offsetting trades between multiple parties are torn up, which reduces the size of gross exposures, in turn reducing systemic risk. Over €1,000 trillion in derivatives exposures has been eliminated in this manner.
Regulators recognize the value of compression. Under the European Market Infrastructure Regulation (EMIR), market participants with more than 500 over-the-counter (OTC) trades on their books are required to examine the possibility of performing portfolio compression twice a year.
However, EMIR simultaneously disincentivizes use of this service by requiring administrative trades that result from compression, and which fall under the clearing mandate, to be cleared. This limits the ability of participants to perform compression and reduce risk.
The same is true of other post-trade risk reduction services like counterparty rebalancing. This involves inserting new, market-risk neutral transactions into netting sets to reduce risk exposures between counterparties. This decreases counterparty credit risk and therefore reduces systemic risk. However, those new transactions are required to be cleared if they are subject to the clearing obligation, preventing counterparty rebalancing risk reduction from taking place. As a result, counterparty rebalancing today is only limited to FX derivatives, which are not subject to the clearing obligation. Over €100 billion in counterparty credit risk has been reduced in this manner.
ISDA, the EBF, ICMA and ISLA believe EMIR should be amended as part of the Regulatory Fitness and Performance program (REFIT) to allow non-price forming, market-risk neutral transactions that result from post-trade risk reduction services to be exempted from the clearing obligation.
To read the full whitepaper, click on the link below.
Documents (1) for Incentivizing Post-trade Risk Reduction
Latest
ISDA response to ESMA MiFIR Review Consultation
On July 11, ISDA submitted a response to the European Securities and Markets Authority's (ESMA) fourth package of Level 2 consultation under the Markets in Financial Instruments Regulation Review (MiFIR), on transparency for derivatives, package orders and input/output data for...
Canadian Transaction Reporting Party Requirements
These Reporting Party Requirements establish the hierarchy and tie-breaker logic to determine a single reporting counterparty for Canadian provincial reporting. By leveraging the existing reporting party standard established for reporting to the CFTC, in most cases these rules facilitate submission...
ISDA In Review – June 2025
A compendium of links to new documents, research papers, press releases and comment letters published by ISDA in June 2025.
ISDA Presents Lock-Up Agreement Proposal
ISDA is pleased to present the proposed Lock-Up Agreements and CDS – Proposed Auction Solution. “Lock-Up Agreements” are market-wide arrangements, broadly standardized and predominantly integrated with court sanctioned restructuring or bankruptcy processes. Numerous end users will sign material Lock-Up Agreements...