12.01.2014
By Terry Flanagan

Banks Look to Compress Swaps

Daniel Maguire, global head of SwapClear, said the firm is compressing four to five times as much as a year ago as banks aim to reduce their capital requirements.

Compression enables firms market participants to reduce the overall notional amounts in their swap portfolios so they can reduce their capital requirements.

A report from Isda, the over-the-counter derivatives trade organisation, in February 2014 found that compression has helped to reduce the notional size of the interest rate derivatives market by approximately 30%, or $239 trillion, since 2009, citing data from post-trade infrastructure provider TriOptima.

Maguire said in a media briefing last week: “There is a huge appetite within banks to compress as much as possible. We have moved from monthly to weekly TriOptima multilateral compression cycles and we are compressing four to five times as much notional outstanding as at this time last year.”

SwapClear, which is part of global clearing house LCH.Clearnet, said that amid record cleared volumes, SwapClear’s compression this year is more than $250 trillion of gross notional outstanding as at the end of October 2014.

As a result SwapClear is on track to achieve its first ever annual net reduction in notional outstanding in OTC interest rate derivatives. At the end of October SwapClear had $406.9 trillion outstanding, down from start of the year when it had $426 trillion.

“Reducing notional outstanding in OTC interest rate derivatives in SwapClear to less than $300 trillion is eminently achievable next year,” added Maguire.

In addition to capital efficiencies, compression provides operational efficiencies by reducing the number of trades in a portfolio. By the end of October this year SwapClear had compressed 1.95 million trades, resulting in an overall reduction in trades outstanding from 3.2 million in January to 2.7 million.

The number of trades eligible for compression was increased in September this year when SwapClear launched a new blended rate compression service.

Michelle Neal, global head of listed derivatives, markets clearing and FIC market structure, Deutsche Bank said in a statement at the time: “Blended rate compression provides members with the flexibility to perform significant amounts of compression on their cleared portfolio at LCH.Clearnet, and it is a welcome development for the industry.”

In December 2011 SwapClear had launched its Solo compression offering which allows participants to unilaterally compress trades with identical interest rates and remaining cash flow dates. Blended compression allows unilateral compression of swaps with different fixed rates but the same remaining cash flow dates which reduces positions to one blended interest rate.

Solo compression cycles occur twice every day but the blended cycle is currently twice a week.

“Six to eight dealers have embraced solo compression,” added Maguire. “The intention is that the solo with blended rate compression cycle will become daily.”

When the blend cycle was launched, it was introduced with caps on the total number of trades.

“In the New Year as demand increases we would look to increase the current cap of compressing 40,000 trades per blended cycle and 7,000 per member. In 2015 we will also add FRA to the blended rate cycle,” said Maguire.

Featured image via Maksym Yemelyanov/ Dollar Photo Club

Related articles

  1. MarketAxess Expands in Asia

    Phase 5 of the uncleared margin rules (UMR) took effect from September 2021.

  2. Temporary equivalence is set to expire on June 30 2022.

  3. Margins Raised Ahead of Brexit Vote

    IRS trading volumes have fragmented without an equivalence agreement.

  4. New Collateral Transformers To Emerge

    Phase 5 of the uncleared margin rules came into effect on 1 September.

  5. Buy Side Forced to Review Collateral Arrangements

    Triparty repos can be executed across U.S. Treasury securities to central clearing.