IOSCO: Final Report on Post Trade Risk Reduction Services: Sound Practices for Consideration

25 November 2024

PTRRS offerings have evolved over the recent years with counterparty risk optimisation emerging more recently. Despite the increasing use and the evolving nature of PTRRS, there remains a limited number of firms that offer PTRRS globally.

Post Trade Risk Reduction Services (PTRRS) are provided by third party service providers to market participants in order to assist them in reducing operational and counterparty credit risks associated with outstanding over-the-counter (OTC) derivatives trades. PTRRS are increasingly being used by market participants to increase efficiency in the way they manage their OTC derivatives trades. For purposes of this Final Report, PTRRS covers notably portfolio compression and counterparty risk optimisation (also called “rebalancing”).1
PTRRS offerings have evolved over the recent years with counterparty risk optimisation emerging more recently. Despite the increasing use and the evolving nature of PTRRS, there remains a limited number of firms that offer PTRRS globally. This is mainly because the efficiency of such services is dependent on scale and existing networks (i.e., more participants in an exercise could lead to greater efficiency), and therefore new entrants face challenges in building a network of participants.
PTRRS provide certain clear benefits, including reduction of risk and improved efficiency. Among other things PTRRS may help:
• Provide an opportunity for OTC derivatives counterparties to reinvest released capital while they reduce the gross outstanding value of contracts;
• Reduce counterparty risk without changing market exposure risk;
• Diminish operational risk by reducing transaction count, as there are fewer trades to maintain, process and settle; and
• potentially reduce systemic risk and enhance overall financial market stability, by reducing operational risk for individual market participants.
However, despite all the benefits, the offering and increased use of PTRRS may also present challenges for OTC market participants and merit further consideration from a risk perspective. This may include risks in terms of control and governance around the algorithms, fair treatment of participants, data protection, legal certainty, and operational resilience. Such risks may be exacerbated by the concentration of service offerings in a handful of firms and the substantial increase in the volume of contracts that are exposed to PTRRS warrants consideration.
Given the sheer volumes of derivatives contracts that are exposed to portfolio compression and counterparty risk optimisation services and the possible material impact of these services on the overall amount of Initial Margin (IM) posted as a result of the use of these services, IOSCO believes these services deserve attention from regulators, with better global coordination.

 

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