Exempting post-trade risk reduction transactions from the clearing obligation

Overview

1. This consultation paper (CP) sets out the Bank of England’s (the Bank’s) proposal to exempt transactions carried out as part of a post-trade risk reduction (PTRR) service from the derivatives clearing obligation as set out in Article 4 of UK EMIR.^{footnote [1]}

2. PTRR providers offer services to two or more counterparties to derivatives transactions for the purpose of reducing counterparty, operational and basis risk in derivatives portfolios. Market participants, such as large banks, submit trades from their portfolios to PTRR providers and set parameters for risk reduction. A PTRR exercise is then conducted which can involve amending, terminating or inserting a set of new market-risk neutral transactions to reduce counterparty, operational and basis risk. Portfolio compression, portfolio rebalancing and basis risk optimisation are the three main types of PTRR services commonly offered in the market.

3. Article 4 of UK EMIR requires that all eligible over-the-counter (OTC) derivative contracts are cleared by a central counterparty (CCP). The Bank is responsible for specifying the products subject to the clearing obligation.^{footnote [2]} As part of the Financial Services and Markets Act 2023 (FSMA 2023), the Bank gained a power to exempt transactions arising from PTRR services from the clearing obligation where it is necessary or expedient for the purposes of advancing its financial stability objective.^{footnote [3]} The Bank considers that exempting transactions arising from PTRR services would support its financial stability objective by reducing complexity and increasing the efficiency of PTRR services. This should support access to PTRR services for a wider range of market participants, allowing them to reduce their counterparty, operational and basis risk. This can unlock resources, that would otherwise be managing these risks, for other purposes. For example, increasing greater liquidity in the system which in turn benefits financial stability or as capital, to support innovation and growth.

Responses and next steps

4. This consultation closes on the 11 March 2026. The Bank invites feedback on the proposals set out in this consultation. Please submit any comments or enquiries by emailing PTRR_exemption_CP@bankofengland.co.uk.

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Background

Legislative framework

9. Following the 2008 financial crisis, G20 leaders agreed that all standardised OTC derivatives should be traded on exchanges or electronic platforms where appropriate, cleared through central counterparties and reported to trade repositories. These measures were designed to reduce counterparty risk, improve transparency and mitigate systemic risks in derivatives markets.

10. EU EMIR and following the UK’s withdrawal from the EU, UK EMIR, implemented these changes in the UK. Article 4 of UK EMIR requires all OTC derivative contracts that are subject to the clearing obligation to be centrally cleared through a CCP. The Bank of England is responsible for specifying the class or classes of OTC derivatives that are subject to the clearing obligation under Article 4. The list of classes of derivatives in scope of the clearing obligation can be found on the Bank’s Public Register for the Clearing Obligation.

11. The derivatives trading obligation (DTO) requires certain financial and non-financial counterparties to conclude transactions in standardised and liquid OTC derivatives only on regulated trading venues or on equivalent third-country venues. The FCA is the primary supervisor for monitoring compliance with the DTO. For a derivative or class of derivatives to be subject to the DTO it must be subject to the clearing obligation.

12. HM Treasury’s Wholesale Markets Review proposed introducing an exemption for PTRR transactions from the DTO. The Wholesale Market Review sought views on the benefit of having an aligned exemption for PTRR transactions from the clearing obligation. The majority of respondents supported both proposals on the basis that PTRR trades are market risk neutral and differ to price-forming transactions.

13. FSMA 2023 provided the Bank and the FCA with the powers to enact the exemptions proposed for PTRR transactions in the Wholesale Market Review. UK EMIR, as amended by FSMA 2023, introduced powers for the Bank to make rules exempting OTC derivatives from the clearing obligation: (a) in relation to activities or transactions of a specified description carried out as part of a risk-reduction service; or (b) to persons of a specified description in the provision of such services. These PTRR services must not give rise to any transactions that contribute to the price discovery process.

14. In July 2025, the FCA published final rules exempting PTRR transactions from the DTO. The Bank has engaged with the FCA and considered its approach when developing the Bank’s proposals for exempting PTRR transactions from the clearing obligation.

15. In 2024, the International Organization of Securities Commissions published a consultation to obtain a better understanding of the role PTRR services play within the global derivatives market. The final report identified potential policy considerations and risks associated with the use and provision of PTRR services and presented good practices in this area. The Bank has considered the report’s findings when developing this policy.

PTRR services

16. PTRR providers are independent third parties that offer services to assist market participants in reducing counterparty, operational and basis risk, while leaving their underlying market risk exposure unchanged. PTRR services achieve this by terminating, amending or inserting new market risk neutral transactions. Reducing counterparty risk should lower participants’ margin requirements and, in some cases, notional outstanding. This can result in a more beneficial calculation of risk-weighted assets that are used to calculate participants’ capital requirements. A reduction in the number of trades and notional outstanding may also result in lower operational risk and costs.

17. PTRR exercises are executed at pre-established times. Eligible transactions are submitted by market participants along with their specified risk tolerances which must be maintained during the PTRR exercise. The PTRR provider’s non-discretionary methodology determines overall risk reduction opportunities, and the output of the exercise is binding on all participants. The outputted transactions are non-price forming, participants are not able to post bids or offers and no price negotiations take place. The transactions are market risk and position neutral such that they do not contribute to the price discovery process. Once the exercise is complete, market participants will execute any resulting transactions.

18. Feedback from industry has indicated that the requirement to clear eligible new PTRR transactions, such as interest rate swaps, is limiting the use of PTRR services. This is because it is not possible to book cleared PTRR transactions back into a bilateral portfolio. As a result, market participants are using instruments not covered by the clearing obligation, such as swaptions, for PTRR exercises. These instruments are more complex and less efficient than interest rate swaps and can deter market participants from using PTRR services.

19. There are three types of PTRR services commonly used in the market: portfolio compression, portfolio rebalancing and basis risk optimisation.

Portfolio compression

20. The aim of portfolio compression is to reduce the total number of contracts and the total notional outstanding, reducing counterparty and operational risk, without materially affecting the market risk of a portfolio. Portfolio compression achieves this by identifying transactions with matching characteristics and netting them off against one another. Where trades can be offset, they are eliminated but where this is not possible, new risk replacement transactions can be created.

21. The process of portfolio compression reduces operational and counterparty risk by simplifying the overall structure of a portfolio. This results in a reduction in risk and can also reduce operational costs and free up capital. The effectiveness of a portfolio compression exercise is dependent on the number of market participants, their submitted portfolio size and the tolerances chosen. Under UK EMIR, financial counterparties and non-financial counterparties with 500 or more uncleared OTC derivative contracts outstanding must have in place procedures to consider conducting a portfolio compression exercise to reduce their counterparty credit risk at least twice a year.

Portfolio rebalancing

22. While portfolio compression eliminates transactions by identifying transactions with matching characteristics, portfolio rebalancing can create new non-price forming trades, as well as amending or cancelling existing trades. These trades aim to change the non-market risk in each set of transactions with a view to reducing non-market risk of the whole portfolio. The new trades offset part of the risk between participants while maintaining market neutrality by inserting equal amounts of buy and sell exposures in a multilateral setting. The larger the network of transactions submitted to the portfolio rebalancing exercise the greater the potential risk-reducing effect.

23. The rebalancing exercise reduces credit exposure risk between counterparties, which can help reduce liquidity strains that could arise from increases in initial margin contributions.

Basis risk optimisation

24. Basis risk optimisation aims to address the risks that arise in a hedging strategy where there is an imperfect correlation between the asset being hedged and the hedging instrument, otherwise known as basis risk. Over time, the accumulation of price and timing mismatches creates risks which require hedging.

25. Basis risk optimisation brings together market participants and identifies mutually beneficial trades which efficiently hedge these risks. As with portfolio compression and portfolio rebalancing, these trades are not price forming and do not materially change the overall market risk of a portfolio.

Proposal

26. The Bank is proposing to exempt transactions carried out as part of a PTRR exercise from the derivatives clearing obligation. The clearing obligation is designed to improve transparency and ensure that derivatives trades are efficiently collateralised. As transactions outputted from a PTRR exercise are non-price forming, participants are not able to post bids or offers and no price negotiations take place meaning they do not contribute to the price discovery process. Furthermore, they do not materially affect the market risk of the portfolio, so are distinct from transactions used for trading purposes by market participants. As a result, the Bank does not consider that requiring these trades to be centrally cleared is proportionate or supports the aims of the 2008 post-crisis reforms.

27. The Bank understands that requiring PTRR transactions to be centrally cleared may limit access to PTRR services. This is because some market participants are not willing or able to engage with complex swaptions that are being used as an alternative to bilateral swaps. Exempting PTRR trades from the clearing obligation will support the Bank’s financial stability objective by allowing for more efficient PTRR service outcomes to reduce risk and support a wider range of market participants to reduce their counterparty, operational and basis risk. This can unlock resources, that would otherwise be managing these risks, for other purposes. For example, increasing greater liquidity in the system which in turn benefits financial stability; or as capital, to support innovation and growth.

Definition of a PTRR service

28. To help ensure PTRR transactions are distinct to typically traded derivatives transactions, and their purpose is only to manage risk, the Bank will require PTRR providers to ensure their services are aimed at reducing non-market risk and do not contribute to the price discovery process.

29. The Bank is proposing to define a PTRR service as a service provided to two or more counterparties to derivatives transactions:

• for the purpose of reducing non-market risks in derivatives portfolios; and
• that does not give rise to any transactions contributing to the price discovery process.

Question 1: Do you agree with the proposed definition of a PTRR service?

Exemption from the clearing obligation

30. To meet the definition of an eligible agreement between a PTRR provider and a market participant, the Bank is proposing that the agreement must identify the point in time that a PTRR service becomes binding and include supporting legal documentation. The Bank also proposes that the PTRR provider must have taken certain steps in relation to the risk tolerance of each participant and provided certain information about how the PTRR exercise will work before the agreement comes into force.

31. Requiring PTRR providers to be third parties that are independent of the market participants to whom the service is provided will help to ensure the integrity of the process and prevent conflicts of interest. Similarly, requiring the exercise to operate on the basis of non-discretionary rules set in advance by the PTRR provider should increase transparency and reduce the risk of inappropriate influence of the participants over the exercise.

32. The proposal for the outcome of the PTRR exercise to be binding for all participants should reduce the risk that transactions can be ‘cherry-picked’ by participants and executed for their advantage. This should help to support the integrity of the process.

33. Central clearing through CCPs provides significant financial stability benefits. Introducing an exemption for PTRR transactions from the clearing obligation could create regulatory arbitrage risks if market participants look to use the exemption to circumvent the clearing obligation for trades beyond those outlined in this proposal. To minimise this risk, the Bank is proposing that eligible transactions must not be designed by the market participant or PTRR service provider to circumvent the clearing obligation.

34. In addition to these requirements, the Bank is proposing to require PTRR providers to meet certain conditions for eligible transactions to be exempt from the clearing obligation. The Bank is proposing that PTRR providers should notify the Bank of their intention to provide PTRR services for the first time and details of each type of eligible PTRR service it intends to provide. The Bank is also proposing that PTRR providers confirm to the Bank that they agree to notify the Bank of any intention to vary the type of eligible PTRR services provided and, prior to ceasing providing any eligible PTRR service. These requirements would allow the Bank to monitor the ways in which the exemption is being used, including to assess any impact on financial stability.

35. The Bank is proposing that to be eligible for an exemption from the clearing obligation, transactions must be carried out by a PTRR provider and as part of an eligible agreement. The PTRR provider must ensure that:

• the transaction is the output of an exercise performed by an entity that is not (a) affiliated to the market participants to whom the service is provided to; or (b) a party to a transaction resulting from the PTRR service;
• the transaction is the output of an exercise which operates on the basis of non-discretionary rules set in advance by the PTRR provider that are based on specified parameters;
• the transaction is part of a set of transactions which are binding on all participants;
• the transaction is performed in accordance with an eligible agreement; and
• the transaction is not designed by the market participant or the PTRR service provider to circumvent the clearing obligation referred to in Article 4(1) of UK EMIR.

Question 2: Do you agree with the proposed exemption from the clearing obligation?

Implementation period

36. The Bank proposes that these changes come into force three months after the publication of final rules.

Question 3: Do you agree with the proposed implementation period?

The Bank’s statutory obligations

Compatibility with the Bank’s objectives

37. The Bank considers that exempting transactions arising from PTRR services would support its financial stability objective by reducing complexity and increasing the efficiency of PTRR services. This should improve outcomes for existing participants and support access to PTRR services for a wider range of market participants, allowing them to reduce their counterparty, operational and basis risk with a positive impact on systemic risk. A reduction in counterparty, operational and basis risk should reduce the capital which is committed to manage these risks. In turn, this could improve the availability of liquidity within the financial system and lower the burden of meeting margin calls, which is particularly important during periods of market stress.

38. The proposed policy does not meet the definition of an FMI function. That is because although it relates to the making of rules, these rules are made under a power in UK EMIR rather than the Financial Services and Markets Act 2000. As a result, the Bank’s secondary objective and requirement to have regard to the regulatory principles in section 30E of the Bank of England Act 1998 are not engaged.

39. The Bank considers that this proposal to exempt transactions arising from PTRR services could support innovation. This policy allows for more efficient PTRR service outcomes which should reduce risk and be available to a broader set of market participants. This could result in lower capital needed to meet margin and regulatory capital requirements. This can unlock resources, that would otherwise be managing these risks, for innovation and growth while having a positive effect on systemic risk overall.

Equality and diversity

40. In developing its proposals, the Bank has had due regard to the equality objectives under section 149 of the Equality Act 2010. The Bank considers that the proposals do not give rise to equality and diversity implications.

Cost benefit analysis

Overview

41. The Bank has undertaken cost benefit analysis (CBA) for its proposals in line with the approach set out in the Bank’s approach to cost benefit analysis and has consulted the CBA Panel (‘the Panel’). In line with the Bank’s approach to CBA, the Bank has used a Standard Cost Model to quantify direct costs to firms based on standardised industry data for staff costs and estimates of staff time needed to implement proposals.

42. The Bank notes that PTRR providers and market participants will not be required to seek the exemption and so can choose not to comply with the conditions outlined in the proposal. In this case, they will be able to continue with their current arrangements and will not incur any benefits or costs from the proposal.

43. Overall, if PTRR providers and market participants choose to seek the exemption and comply with the conditions the Bank considers that the costs will be outweighed by the benefits for both providers and their participants. The proposal is expected to reduce complexity and increase the efficiency of eligible PTRR services. This should support access to PTRR services for a wider range of market participants, allowing them to reduce their counterparty, operational and basis risk. The policy is also expected to improve the efficiency of PTRR services for current participants. This will support further risk reduction and may reduce the capital they need to hold to manage these risks. This can increase the availability of liquidity in the financial system and in turn, this should have a positive impact on financial stability. That capital could also be used for other productive purposes.

44. The costs of this policy are considered to be marginal. There will be some familiarisation and implementation costs for PTRR providers and participants, and limited cost to the Bank.

CBA Panel feedback

45. The Bank consulted the Panel on 27 November 2025. The Panel provided advice on framing the rationale for change, noting the unique nature of the exemption being optional meant that firms and participants would consider the costs and benefits closely when making their decision. The panel noted the difficulty of precisely quantifying benefits and supported the use of qualitative explanation of potential benefits. They suggested that the benefits could be explained through the use of an illustrative example to demonstrate how market participants potentially would be impacted. Box A has been added to address the Panel’s feedback.

Benefits

46. When assessing the benefits of the proposal to exempt PTRR transactions from the clearing obligation, the Bank has considered the benefits from reducing the complexity and increasing the efficiency of a PTRR exercise to (i) PTRR providers; (ii) potential new participants accessing PTRR services; (iii) existing participants using PTRR services; and (iv) the stability of the financial system more broadly.

PTRR providers

47. The Bank understands that this proposal would allow PTRR providers to offer their current participants a more efficient service. Furthermore, it will allow PTRR providers to offer their services to a greater number and wider range of market participants.

Potential new participants accessing PTRR services

48. The Bank understands that the use of swaptions may deter smaller market participants from participating in PTRR exercises. This is because swaptions are more complex to administer and introduce additional risks. The Bank anticipates that removing the requirement to clear eligible PTRR transactions will reduce this complexity and therefore support a wider range of market participants in accessing PTRR services. As a result, more market participants will be able to reduce their counterparty, operational and basis risk. Enhanced risk management and reduction can translate into lower margin and capital requirements for new and existing participants, allowing them to allocate capital for other productive purposes.

Existing participants using PTRR services

49. The Bank considers that this proposal should reduce the complexity and increase the efficiency of PTRR exercises for existing participants through facilitating the use of bilateral swaps in PTRR exercises. While existing participants may be more comfortable managing the complexity of swaptions that are currently used, bilateral swaps are more notional efficient in reducing interest rate risk. This can lead to more efficient counterparty risk reduction and operational simplicity with fewer trades to maintain. This brings benefits to participating firms and the financial system overall. In addition, the proposal should increase the number of market participants in PTRR exercises, resulting in larger, more diverse portfolios for PTRR exercises. This should result in a greater offsetting of risk overall.

Financial stability

50. The policy is expected to support financial stability through improvements to the efficiency of PTRR services and increased take-up by market participants. Given the larger potential network, this should result in greater counterparty risk reduction across the market which can reduce the likelihood of systemic issues arising or being amplified in swap markets. Furthermore, a reduction in counterparty, operational and basis risk, which results in a decrease in regulatory capital held by participants, can free up resources which could support greater liquidity in the system. This could help reduce liquidity strains from margin demands, particularly in periods of market stress, supporting financial stability. The Bank expects these benefits will be amplified by the existing exemption for PTRR transactions from the equivalent clearing obligation in the EU.

Costs

55. The Bank has given consideration to the potential costs of the policy should PTRR providers and participants decide to comply with the conditions for the exemption. These include limited costs to PTRR providers, participants and the Bank.

Costs to PTRR providers

56. The Bank considers that PTRR providers will incur limited costs if they seek to comply with the conditions and use the exemption from the clearing obligation. For PTRR providers, these costs include satisfying themselves that a PTRR agreement is an eligible agreement for the purposes of the exemption and notifying the Bank of their intention to rely on the exemption. Further minor costs could be incurred in notifying the Bank of any variation or cessation of a PTRR service. The Bank understands that there could be less than five PTRR providers that operate in the UK who might choose to comply with the conditions for the exemption. The Bank estimates that they would incur a one-off implementation cost of approximately £15,000–£20,000 per provider. The Bank anticipates that there will be de minimis on-going costs for PTRR providers.

Costs to participants using PTRR services

57. The Bank estimates that participants that decide to comply with the conditions will incur a one-off implementation cost of less than £5,000 per participant. These costs would arise from familiarisation costs, including ensuring transactions meet the conditions for the exemption. The Bank anticipates that there will be de minimis on-going costs for PTRR participants.

Costs to the Bank

58. The Bank expects there to be a small resource cost from processing the initial notifications from PTRR providers. Costs may arise from processing notifications in the future relating to intended new PTRR services, intentions to vary PTRR services or intentions to cease PTRR services but these costs are not expected to be significant.

Question 4: Do you have any comments on the CBA undertaken by the Bank?

Annex

• Bank of England FMI Rulebook: Draft post-trade risk reduction services rules Instrument 2025

  Bank of England FMI Rulebook: Draft post-trade risk reduction services rules Instrument 2025