OSTTRA, the global post-trade solutions provider, along with two industry peers, secured a no-action letter from the US Commodity Futures Trading Commission for solutions related to post-trade risk reduction (PTRR). The relief provided by the letter will allow US firms to more efficiently manage systemic risk and optimise capital.

For many years, post-trade risk reduction services (PTRRS) have played a key role in supporting global derivatives market efficiency and stability. As the world’s largest PTRRS network and the leading provider of compression, counterparty risk rebalancing and basis risk reduction, OSTTRA is already helping US firms manage their capital and risk exposure.

Regulators have long recognised compression, one of three commonly used PTRRS. The letter from the CFTC now extends the same treatment to rebalancing and basis risk reduction services.

The letter provides exemptions that concern trading, clearing and reporting obligations. These rules previously added unnecessary complexity, which limited PTRRS to larger US firms where, for example, counterparty risk rebalancing required the use of more complex swaptions instead of vanilla interest rate swaps. They also needed to report the non-price forming trades that are used to rebalance and reduce basis risk in portfolios. This welcome regulatory clarity enables firms to more efficiently manage and administer non-price forming transactions for the purposes of post-trade risk reduction.

This will streamline operations for existing PTRRS users, making it easier to conduct risk reduction on a more frequent basis. The exemption further enables smaller, regional banks to utilise PTTRS where previously it was too operationally onerous.

PTRRS providers also received a trading venue exemption, allowing OSTTRA to digitally facilitate the bank-to-bank execution of rebalancing runs, improving the operational efficiency of each run cycle. OSTTRA has already executed its first rebalancing run using the new digital protocol involving US and non-US clients. Also, US firms rebalancing credit index risk will see efficiencies and greater benefit from the widened scope of the service in credit default swaps by allowing the on-the-run and the first-off-the-run indices to be executed off trading venue.

From OSTTRA’s perspective, the changes will provide more certainty during rebalancing and basis risk optimisation runs, allowing for greater and more efficient risk reduction for market participants.

The CFTC letter brings the US into regulatory alignment with the EU and UK, which already has exemptions for PTRRS for most of these obligations, with a clearing exemption scheduled to go into effect in both jurisdictions later this year. Together, this will further enhance stability, funding and liquidity for the global derivatives markets.

OSTTRA expects the relief to reduce operational risk, increase efficiency and automation, as well as lower barriers to entry for PTRRS users.

Kirston Winters, Chief Risk Officer, OSTTRA said: “The greater regulatory clarity in the US for post-trade risk reduction services enables US firms to better manage their portfolios. This will not only improve outcomes for existing users but also enable wider market access to firms who previously were dissuaded by unnecessarily high barriers that complicated adoption.

“PTRRS play a critical role in helping derivative traders manage non-market risk. Global alignment on these exemptions is recognition that these services strengthen market stability and the existing rules were unnecessarily burdensome upon transactions resulting from PTRR. Over the past decade, OSTTRA has played a critical role in promoting the benefits and soundness of post-trade risk reduction.”

Source: OSTTRA