On 12 April 2021, the European Commission published its report to the European Parliament (EP) and the Council on whether trades that directly result from post-trade risk reduction services (PTRR services) should be exempted from the clearing obligation for over-the-counter (OTC) derivatives under the European Markets Infrastructure Regulation (EMIR).

The statutory basis of the report is Article 85(3)(c) of EMIR (as amended by EMIR REFIT) which mandates the Commission to report to the EP and Council on whether trades that directly result from PTRR services, including portfolio compression, should be exempt from the clearing obligation referred to in Article 4(1) of EMIR. The report should take into account the extent to which those services mitigate risk, in particular counterparty credit risk and operational risk, the potential for circumvention of the clearing obligation and the potential disincentive to central clearing.

The report takes into account input received from a report by the European Securities and Markets Authority (ESMA), responses by stakeholders to ESMA’s public consultation and discussions with stakeholders. ESMA’s report was adopted on 10 November 2020; it was prepared in cooperation with the European Systemic Risk Board (ESRB), and takes into account the results of a public consultation.

In its report the Commission concludes that whilst ESMA has undertaken an extensive and thorough analysis of PTRR services important open questions remain. In particular, the Commission feels that the following issues need further attention:

  • The definition of PTRR services, e.g. how different types of PTRR could be defined more concretely.
  • The possible interlinkages between PTRR services and the impact of their combined use on the aspects raised in the report.
  • The materiality of the risk of the circumvention of the clearing obligation, especially possible market practices that could be used to conduct such a circumvention.
  • Possible conditions limiting the risk of such misuse of a possible exemption from the clearing obligation.
  • The incentives to centrally clear taking into account a possible exemption from the clearing obligation.
  • Evaluation of potential liquidity shifts from centrally cleared to uncleared space.

The Commission states that further work on the above issues could feed into the general EMIR assessment report which should be submitted to the European Parliament and the Council by 18 June 2024.