The European Association of CCP Clearing Houses (EACH) welcomes the opportunity to respond to the ESMA Consultation Paper on Post Trade Risk Reduction (PTRR) Services with regards to the clearing obligation. In summary:

• Skeptical about the exemption from the clearing obligations – EACH is skeptical about the need to exempt from the clearing obligation PTRR trades that are a direct result of the compression exercise (be that bilateral or multilateral). For those financial instruments that fall within clearing obligations, the simple use of a PTRR service is not a reason to exempt them from the clearing obligation. As detailed in our response, when analysing the potential exemption from the clearing obligation of trades that result from PTRR services, we encourage authorities to consider at least the following aspects:
  1. Bilateral exposure profile of uncleared trades
  2. Impact on financial stability
  3. Impact on the G20 reforms
• Discussion shifted towards portfolio rebalancing –  In recent times, the discussion among stakeholders has shifted, and the previous calls for an exemption from the clearing obligation for the trades that result from portfolio compression seems to have been changed to calls for an exemption from the clearing obligation for trades resulting from portfolio rebalancing.
• PTRR services have both benefits and risks – EACH is aware that PTRR services are a useful tool to improve the understanding of exposures and risks in trading books and help reduce margin and capital requirements. However, we would like to underline that an inappropriate supervision may lead to PTRR services to be used to manage particular exposures towards a counterparty, for example, rather than simply cleaning up trading books once trades are completed. In addition, operational risks related to the use of PTRR services should not be underrated.
• Need for a more precise definition of portfolio rebalancing – We suggest to clearly distinguish the concept of portfolio rebalancing from the one of portfolio compression, and in particular we would suggest to define portfolio rebalancing as ‘a practice by which market participants transfer their exposure allocation – without changing it substantially – between existing or new counterparties in order to adjust exposures between their counterparties, either to reduce risk held against a particular counterparty or to bring overall exposures down’.
• PTRR services are not a replacement for central clearing – While EACH welcomes the benefits of PTRR services, we are also mindful that they do not reproduce certain key aspects of central clearing. Although CCPs as well use PTRR services, it is essential to underline that such services come in addition to the usual CCPs’ risk management and cannot substitute it.
• No exemption from clearing obligations at international level – Currently, in the EU as in most key jurisdictions there is no exemption from clearing for PTRR services trades concluded after the entry into force of the clearing obligations.

For more information, please find attached the EACH response or visit our website www.eachccp.eu.