The International Organization of Securities Commissions (IOSCO) has released its final report on Post-Trade Risk Reduction Services (PTRRS), urging regulators to address potential risks associated with these increasingly used tools. PTRRS, which include portfolio compression and counterparty risk optimisation, are vital for managing operational and credit risks in over-the-counter (OTC) derivatives markets but remain concentrated among a few global providers.
Kevin Fine, chair of the IOSCO Committee on Derivatives, highlights the growing importance of these services. “The use of PTRRS continues to grow, as market participants try to improve the efficiency in the way they use OTC derivatives. These good practices are a set of important tools which will help mitigate the potential risks identified in our analysis,” he said.
Market concentration
PTRRS are designed to enhance market efficiency by reducing the volume of outstanding OTC derivatives contracts, lowering gross contract values, and minimising counterparty risks without changing market exposure. These services also help reduce operational burdens, such as the need to maintain and settle numerous trades, and may lower systemic risks in financial markets.
However, the market for PTRRS is highly concentrated, with only a few providers offering these services globally according to the report. This concentration stems from the need for scale and extensive participant networks to maximise efficiency. IOSCO warns that this reliance on a small number of firms increases vulnerability to service disruptions and raises questions about market stability and competition.
Risks and regulatory gaps
While PTRRS offer clear benefits, IOSCO’s report identifies significant risks. These include governance and transparency of the algorithms used, potential unfair treatment of participants, data protection concerns, and legal uncertainties. As the volume of derivatives exposed to PTRRS grows, these risks could have broader implications for market resilience.
Currently, most jurisdictions do not directly regulate PTRRS providers. Instead, the responsibility for due diligence and risk management falls on the institutions using the services. IOSCO recommends enhanced regulatory coordination to address these oversight gaps and ensure that PTRRS are used responsibly.
Consultation
The report incorporates feedback from a public consultation held earlier this year, which received responses from industry associations, service providers, and financial infrastructure operators. Based on this input, IOSCO has outlined good practices for regulators and market participants to mitigate risks while maintaining the efficiency benefits of PTRRS.
