The Board of the International Organization of Securities Commissions (IOSCO) published a consultation report on Post Trade Risk Reduction Services (PTRRS), which identifies potential policy considerations and risks associated with the use and offering of PTRRS associated with over-the-counter (OTC) derivatives trades, and presents sound practices as guidance to IOSCO members and regulated users of PTRRS.
IOSCO is seeking to better assess the risks associated with the increased use of PTRRS and concentration of PTRRS providers, particularly in the areas of portfolio compression and counterparty risk optimization.
The Consultation Report notes that PTRRS offer important benefits, including post-trade operational efficiencies, reduction in counterparty risk and, potentially, an overall reduction in systemic risk.
However, PTRRS may pose a number of challenges and risks. For instance, risks relating to market concentration of service providers, a lack of transparency regarding the algorithms used by providers, and a lack of meaningful due diligence by users of PTRRS. Further, while PTRRS are widely used in many jurisdictions, there is limited data received by regulatory authorities, in addition to either limited or no direct regulatory oversight of PTRRS.
Kevin Fine, chair of IOSCO’s Committee on Derivatives, said in a statement: “PTRRS play an increasingly significant role in the efficient functioning of OTC derivatives markets. It is important that IOSCO understands both the benefits and the evolving risks associated with the use of PTRRS, the challenges that market participants face in using such services, and whether there are ways to improve market practices.”