ESMA Sets Conditions for Post-Trade Risk Reduction Clearing Exemption

The European Securities and Markets Authority set out on 20 October 2026 the conditions that providers and users of post-trade risk reduction (PTRR) services must meet for certain OTC derivative transactions to be exempt from the clearing obligation under EMIR 3, publishing its final report on draft Regulatory Technical Standards (RTS) for the exemption. The rules also establish safeguards for the provision of PTRR services and for the monitoring of the use of the exemption.

According to ESMA’s announcement, the final report specifies the elements and requirements of PTRR services, including the information to be provided to participants, how exercises are carried out, the controls providers should have in place, record-keeping and how the exemption will be monitored. ESMA said the goal is to “facilitate the use of PTRR services” while ensuring that the exemption is used under the conditions laid down in EMIR 3 and does not lead to misuse of the clearing obligation. The authority said the final rules build on existing market practices and aim to avoid introducing additional requirements where existing rules already meet the relevant objectives, in line with its simplification and burden reduction objectives.

EMIR 3, Regulation (EU) 2024/2987, was published in the Official Journal on 4 December 2024 and entered into force on 24 December 2024. Its Article 4b introduced a conditional exemption from the clearing obligation for transactions resulting from PTRR services, and Article 4b(6) mandated ESMA to develop draft RTS specifying, among other elements, what constitutes market risk neutrality, the required risk reduction in submitted portfolios, the possible inclusion of mixed portfolios, the management of PTRR exercises, requirements for different types of PTRR services, the process for monitoring the exemption and the criteria for assessing whether the clearing obligation is circumvented. The mandate set a submission deadline of 25 December 2025. Because the Level 1 provisions applied immediately, an interim period has been ongoing in which the exemption is in force without the RTS being applicable, and ESMA publishes and maintains a register of PTRR service providers under Article 4b(5).

Earlier, on 28 March 2024, the MiFIR Review amended Article 31 of MiFIR to expand an exemption previously applicable to compression, covering transparency requirements, the derivative trading obligation and best execution, to a broader range of PTRR services. The review deleted the requirement to make public the outcome of the transactions while maintaining the record-keeping obligation, and in November 2025 the European Commission published a Delegated Act identifying compression, rebalancing and basis risk optimisation as the eligible PTRR services for that exemption.

ESMA published its consultation paper on the standards on 26 February 2026, drawing on a roundtable it held on 21 October 2024 and on the IOSCO final report on PTRR sound practices published in November 2024. The consultation closed on 20 April 2026 with four responses, which the report states covered the perspectives of providers, users and central counterparties; the Securities and Markets Stakeholder Group provided no comments. ESMA states that the feedback was broadly supportive and that only marginal adjustments were made to the initial proposals.

Service Types, Market Risk Neutrality and Risk Reduction

The draft RTS identify PTRR services as services that achieve a reduction of risk in each derivatives portfolio subject to an exercise using market-risk-neutral, non-price-forming transactions, provided by a third party through an Algorithm, defined as the pre-agreed rules of the exercise including methods and algorithms, on an all-or-nothing basis. Within that framework, compression reduces the notional amount in a portfolio through the replacement or termination of transactions. Portfolio rebalancing reduces counterparty risk by adding offsetting transactions, with notional increased. Basis risk optimisation reduces basis risk in hedged portfolios by adding non-price-forming trades without terminating or replacing existing trades, also with notional increased. Exercises presenting the identifying features of more than one of these services may also benefit from the exemption when the conditions are met.

Market risk neutrality is defined as “no change or close to no change, when within reasonable tolerances, in the market risk of each portfolio before and after the exercise.” Following consultation feedback, ESMA amended Article 5(2) of the draft RTS so that a provider must ensure the tolerances set by all participants in an exercise are minimal and do not significantly affect the overall exposure of the submitted portfolios toward market risk, confining the provider’s assessment to the portfolios submitted to the exercise. ESMA said it stands ready to consider further guidance on risk metrics, including DV01, if a need for greater consistency in the metrics used by providers emerges after the RTS enter into force.

The draft RTS require an overall risk reduction for each participating portfolio, and they draw the line between legitimate and illegitimate use of the exemption at whether an exercise increases the aggregate net uncleared risk in any of the portfolios submitted. ESMA clarified that if a participant drops out of an exercise because it obtains no risk reduction in a run, its portfolios are not considered in assessing whether risk reduction occurred in all portfolios. ESMA did not restrict exercises to uncleared portfolios, concluding that the new requirements on providers may already prevent the use of the wide tolerances that had concerned its 2020 report on mixed portfolios. Participation is limited to entities that initially submitted a portfolio, and each exercise must be accepted in full or rejected, with partial execution not allowed; providers must inform clients of these features during onboarding, for example in a rulebook referenced in the contractual agreement.

Provider Obligations, Record-Keeping and Monitoring

Under Article 4b of EMIR, PTRR service providers must be firms authorised under MiFID II. Article 6 of the draft RTS requires a dedicated PTRR section in the provider’s conflicts-of-interest policy describing circumstances that may give rise to conflicts and the procedures to prevent or manage them, with records kept of conflict cases. Article 8 requires providers to test the Algorithm before deployment or any substantial update and to adopt safeguards against external manipulation; the Algorithm is expected to produce the same outcome for the same portfolios and tolerances regardless of the entity owning the portfolio. Article 12 requires the Exercise Proposal made available to participants to identify the counterparties included in the exercise, the changes to notional value and counterparty risk, a breakdown of how different risks are reduced, how compliance with participants’ tolerances was ensured and how the proposed output leads to no increase in aggregate net uncleared risk.

Articles 13 and 14 require formalised governance arrangements with separation between staff running exercises and control or compliance staff, ongoing targeted checks against circumvention of the clearing obligation, reporting of non-compliance to the management body and yearly compliance reports on the adequacy and effectiveness of the measures. Article 15 requires providers’ records to include the PTRR identifier set out in the EMIR reporting delegated regulation and evidence that the result of each exercise is market risk neutral. Article 16 sets a retention period similar to that required of trade repositories under Article 80(3) of EMIR, and providers may use the Exercise Performance Report to comply with the record-keeping obligations. Under Article 17, providers must submit a confirmation of compliance, with accompanying reports, to their competent authority annually or upon request and must notify material changes or cases of non-compliance without undue delay; following feedback, ESMA amended the provision so that only material changes to methods and algorithms are included in the yearly report, while all changes to the provider’s rules are reported.

ESMA also recommended that the Commission enable providers to use the Exercise Proposal or the Exercise Performance Report to comply with the record-keeping obligation under Article 31 of MiFIR, provided the documents display market risk neutrality, the risk-reduction objective of the exercise and the non-price-forming nature of the transactions used.

The report notes parallel regulatory work outside the European Union: the UK Financial Conduct Authority published policy statement PS25/2 on the derivative trading obligation and PTRR services in April 2025, and the US Commodity Futures Trading Commission issued Staff Letter No. 26-20 on 16 June 2026 providing a no-action position regarding portfolio rebalancing and basis risk optimisation.

ESMA submitted the final report to the European Commission on 9 October 2026. Under Article 10 of the ESMA Regulation, the Commission has three months to decide whether to endorse the proposed RTS.