A clearing obligation exemption to incentivise post-trade risk reduction

A clearing obligation exemption to incentivise post-trade risk reduction

Andy Brindle, a derivatives, securities and structured products veteran with more than 25 years of experience in the equity, credit and interest rate marketplaces, and currently a principal at Valere Capital Partners LLP as well as a P.R.I.M.E. Finance expert, discusses the recent publication of a white paper in which it is proposed that EMIR is amended to allow transactions that result from post-trade risk reduction services to be exempted from the clearing obligation.

Original News

The International Swaps and Derivatives Association (ISDA), the European Banking Federation (EBF), the International Capital Market Association (ICMA) and the International Securities Lending Association (ISLA) (the Associations) have published a whitepaper 'EMIR REFIT: Incentivising Post-trade Risk Reduction' in which they propose amending the European Market Infrastructure Regulation (EU) 648/2012 (EMIR) to allow transactions that result from post-trade risk reduction services such as portfolio compression and counterparty rebalancing to be exempted from the clearing obligation. Post-trade risk reduction administrative transactions are exempt from the trading obligation under the Markets in Financial Instruments Regulation (EU) 600/2014 (MiFIR) but there is currently no corresponding exemption from the EMIR clearing obligation.

Why have the industry associations decided to publish the white paper?

The very nature of derivatives means that some form of counterparty exposure, whether to a clearing house or another market participant, is inevitable and can be substantial. Market participants and regulators alike are motivated to reduce these exposures to the greatest extent possible. Regulators have incentivized exposure reduction by implementing risk based capital charges and using proxies for risk such as gross notional in these calculations. SA-CCR, SIMM and Cleared Margin all take us a step closer to risk based charges.

Historically, an effective way to reduce operational and counterparty risk in the bilateral OTC derivatives space was through programmatic use of thoughtful combinations of compression and terminations.

With the advent of mandatory clearing for interest rate derivatives, risk based calculations were now introduced to the most liquid instruments in the majority of the asset class in the form of cleared margins.

Mandatory clearing requirements has shifted a substantial portion of historically bilateral exposure to central cleari

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About the author:

Meet Emma:

1.  Banking and finance lawyer with experience in derivatives, debt capital markets, securitisation and structured finance in London and Paris

2.  Likes ballet, playing the harp and holidays

3.  Thinks the law is always changing!

Emma trained and qualified at Allen & Overy LLP and worked in their derivatives and structured finance teams in London and Paris.  She then joined the foreign exchange prime brokerage legal team at Deutsche Bank before spending 4 ½ years with Crédit Agricole CIB advising the fixed income and derivatives desk.