OTC Question 11: Portfolio Compression [last update 4 June 2013]
Article 14 of the RTS on OTC derivatives
Article 14 of Regulation (EU) 149/2013: Portfolio Compression
(a) When financial and non-financial counterparties conclude that a portfolio compression exercise is not appropriate, they need to be able to provide a "reasonable and valid explanation". What is considered as a "reasonable and valid explanation"?
(b) Does the requirement on portfolio compression prevent an offsetting transaction to be concluded with a counterparty different from the counterparty to the initial transaction?
OTC Answer 11
(a) The explanation the counterparty needs to be able to provide to the competent authority when they are requested to do so should adequately demonstrate that portfolio compression was not appropriate under the prevailing circumstances. Depending on the circumstances, the justification could include that:
1. the portfolio is purely directional and does not allow any offsetting transactions;
2. multilateral compression services are not available in the relevant markets, for the relevant products, or to the relevant participants and that compression on a bilateral basis would not be feasible;
3. compression would materially compromise effectiveness of the firm’s internal risk management or accounting processes.