A new whitepaper published by several leading securities associations examined the benefits of post-trade risk reduction services as a crucial risk management tool.
The paper discusses how post-trade services like compression and counterparty rebalancing play an important role in reducing risks in derivatives markets. Compression, for example, reduces the size of gross derivatives exposures, which in turn reduces systemic risk. It was published by the International Swaps and Derivatives Association (ISDA), European Banking Federation (EBF), International Capital Market Association (ICMA), and International Securities Lending Association (ISLA).
In the paper, the organizations recommend that the European Market Infrastructure Regulation (EMIR) be amended to exempt transactions resulting from post-trade risk reduction services from the clearing obligation.
“Post-trade risk reduction has become an essential risk-management tool for the derivatives market, resulting in hundreds of trillions of euros in derivatives risks being removed. An exemption from the EMIR clearing obligation for transactions resulting from post-trade risk reduction would help further reduce systemic risk,” Roger Cogan, head of European Public Policy at ISDA, said.
Mark Hutchings, chief operating officer at ISLA, said that recognizing the risk reduction benefits of compression is critical when considering amendments to EMIR.
“For securities lending, post-trade risk reduction like compression will bring with it efficiencies such as less collateral being called, which will ultimately improve collateral liquidity and reduce collateral costs,” Hutchings said.