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Most Read Contributor in United States, November 2018
ISDA, the European Banking Federation, International Capital
Market Association and the International Securities Lending
Association (collectively, the "Associations") called for
amendments to the European Market Infrastructure Regulation
("EMIR") to exempt certain transactions resulting from
post-trade risk reduction services from mandatory clearing.
In a joint whitepaper, the four associations encouraged regulators to eliminate mandatory
clearing as a disincentive to conducting risk-reducing post-trade
portfolio compression and counterparty rebalancing exercises.
According to the Associations, while European regulators recognize
the value of these services, EMIR simultaneously disincentivizes
many such exercises by requiring derivatives produced in such
exercises to be cleared. Using hypothetical examples, the
Associations attempt to show that multilateral compression
exercises can be expanded and made more effective by introducing
over-the-counter ("OTC") trades between a pair of
participants that are offset by a cleared trade for the same pair.
Because the new OTC trade would also be subject to mandatory
clearing, these exercises may effectively be blocked. Similarly,
the Associations note that the expansion of clearing may disrupt
the ability to perform post-trade risk reduction exercises where
offsetting trades are split between OTC and cleared trades or
between two different CCPs. In these situations, the Associations
advocate for the benefits of clearing exemptions from transactions
created through counterparty rebalancing exercises.
The Associations acknowledge that exemptions for mandatory
clearing may create possibilities for regulatory arbitrage. To
avoid this, the Associations recommended that regulators require
trades resulting from post-trade risk reduction services to (i) be
market-risk neutral, (ii) be non-price forming, (iii) address
second order portfolio risks, and (iv) be executed as integrated
all-or-none packages.
Commentary / Jeff Robins
The examples in the whitepaper attempt to illustrate a
non-intuitive message that exempting compression trades from
mandatory clearing can facilitate additional transfers of risk from
OTC books to clearinghouses. It is an informative read from that
perspective. Its persuasiveness depends on whether one agrees that
moving even more risk to clearinghouses is a good outcome (a
question obliquely raised in a forward to the whitepaper).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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