Compression Reduces SwapClear Notional

Terry Flanagan

The total notional outstanding at SwapClear has dropped below $300 trillion for the first time, despite increased trading volumes, due to the uptake in swap compression.

SwapClear, part of London Stock Exchange’s LCH.Clearnet, said in a statement that in the first quarter of this year it compressed 750,000 trades, representing $96.5 trillion in notional. This took notional outstanding to $265.5 trillion at the end of March, down from $362 trillion at the start of this year.

In 2014 SwapClear achieved an annual reduction in notional outstanding for the first time from $426 trillion to $362 trillion due to compression.

Compression allows firms to either cancel or offset trades either in their own portfolios, or multilaterally with other market participants, within defined risk parameters.

The new capital rules and the leverage ratio under Basel III are based on gross notional exposures, so compression allows firms to use less capital in their derivatives businesses. In addition by cutting notional values and the number of individual transactions, firms can also reduce operational and counterparty credit risk exposures.

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

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. Swapclear said 15 members and 15 buy-side firms now using the blended rate compression service, which currently runs twice a week.

In the U.S., swap execution facilities started operating in October 2013 as regulators encouraged bilaterally traded contracts onto electronic platforms and made clearing mandatory for certain products. In addition derivatives activity has to be reported daily to a registered swap data repository.

Chris Barnes of Clarus Financial Technology, which provides content, data and analytics for derivatives, said in a post on the firm’s blog that although swap volumes going through clearing houses in the US are increasing, the amount of open interest is not rising.

Barnes wrote: “SDRView Researcher shows that we saw the highest volumes of compression so far reported to the swap data repositories in March.”

The firm analysed the swap data for Euro transactions and found that over three times as many compression trades were identified in March this year than in January or February

In March, LCH, CME and Japan Securities Clearing Corporation all had a fall in open interest despite increased new trades according to Clarus.

“Whether a result of maturing trades, FX moves or actual compression (very likely in the case of the top three) we see very healthy ratios this month, staying well below 100%,” added Barnes. “This is great news for customers as it means they are, overall, reducing line-item and maintenance charges associated with legacy portfolios whilst continuing to be able to move risk through OTC markets.”

Last month $1.56trn in notional was traded across SEFs, which is the the highest ever on-SEF monthly volume as measured through the swap data repositories according to Clarus.

“When we use SEFView to look at these same volumes, we see March was not quite a record month,” said Barnes. “This is because the SEFs report their volumes in-aggregate, without applying the block thresholds to individual trade amounts. SEFView therefore paints the truest picture of total volumes, and we see that March 2015 just fell short of breaking the December all-time record.”

Clarus said Tradeweb had the highest overall SEF volume during the first quarter of this year, with Bloomberg taking the number one spot if compression list trading volumes are excluded.

“For the industry as a whole, the proportion of trades conducted on-SEF was running above 60% for the whole month. March was therefore a very positive month,” added Barnes.

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