Eurex Adds TriReduce Compression

Shanny Basar

Eurex Clearing, Deutsche Börse’s central clearer, has completed the first triReduce compression cycle for euro interest rate swaps as the overall volume of compressions for interest rate derivatives continues to grow.

Portfolio compression allows firms to 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.

Danny Chart, head of sales initiatives at Eurex Group, said in a statement: “We will continue to develop netting and compression services so that our members and their clients will be able to realise additional efficiencies when clearing more of their derivatives through Eurex Clearing, mitigating the impact of capital and balance sheet pressures.”

TriReduce is the multilateral compression service from TriOptima, the post trade infrastructure provider, for over-the-counter derivatives in collaboration with clearinghouses and CLS, the bank-owned physical settlement system for foreign exchange. TriOptima said in statement that this was its first collaboration with Eurex Clearing and that since triReduce was launched in 2003, market participants have eliminated more than $750 trillion in notional principal outstanding .

Peter Weibel, chief executive of triReduce, said in a statement in March: “The positive effect of compression is clearly reflected in the declining outstanding notional amounts reported by the BIS. We are planning to introduce triReduce compression cycles in more CCPs later this year and will continue the expansion of our catalogue of compression products.”

This month the Bank for International Settlements said in a report that the notional amount of global OTC derivatives markets declined in the second half of last year as outstanding contracts fell by 11% from $552 trillion in June to $493 trillion in December. BIS said: “Trade compression to eliminate redundant contracts was a key driver.”

The interest rate market, and swaps, account for the majority of OTC derivatives activity. At the end of last year the notional amount of outstanding interest rate swaps fell to $289 trillion, primarily driven by a contraction in US dollar-denominated contracts from $160 trillion to $139 trillion. Contracts in euros decreased from $126 trillion to $118 trillion according to BIS.

“The overall volume of compressions continued to grow in the second half of 2015, mainly reflecting the greater clearance of interest rate swaps and other contracts through central counterparties,” added BIS.

The report said there is continued shift in activity towards central clearing, which has been pushed by the G20 in order to reduce systemic risks. The European Securities and Markets Authority has said firms in the region will have to centrally clear certain interest rate swaps from 21 June 2016.

Eurex Clearing has launched a number of initiatives as part of its liquidity action plan ahead of the introduction of mandatory clearing. In February Eurex set up a new central limit order book for EurexOTC cleared interest rate swaps with Trad-X, the interest rate swap trading platform. This summer Eurex Clearing will start giving direct access to asset managers through ISA Direct, a new model which aims to reduce fees for clients while generating higher returns for clearing members.

Daniel Berner, chief investment officer of Swiss Life Switzerland, said in a statement: “ISA Direct alleviates the regulatory requirement to centrally clear over-the-counter derivatives in several ways. By enabling us to become a direct member of the CCP, our concerns regarding counterparty credit risks, clearing costs and portability of our assets are much better addressed compared to the traditional client clearing model.”

This month Bloomberg was connected as an approved trade source for EurexOTC Clear. Large sellside and buyside traders can benefit from straight-through processing of their OTC transactions on Bloomberg and reduce risk. The first trade to be successfully cleared using this direct connectivity was between Société Générale and Zürcher Kantonalbank.

Nicholas Bean, global head, fixed income electronic trading product at Bloomberg, said in a statement: “This service, which Bloomberg is the first to offer, creates significant workflow and execution efficiencies to the shared clients of Bloomberg and EurexOTC Clear. We look forward to working closely with Eurex Clearing as the clearing mandate in Europe approaches.”

Last month rival LCH, the clearing house partly owned by the London Stock Exchange Group, announced that it is offering inflation swap clearing through its SwapClear service. Firms clearing inflation swaps through SwapClear can offset their margin requirements with correlating interest rate derivatives cleared at LCH.

Nathan Ondyak, head of products and markets at SwapClear, said in a statement: “After thorough risk reviews and testing, we are proud to be the first CCP to secure regulatory approval under both the Emir and US Commodity Exchange Act regulatory frameworks for inflation swaps clearing.”

Featured image via Maksym Yemelyanov/ Dollar Photo Club

Related articles

  1. CEDX is planning to expand its range of products in 2023, subject to regulatory approvals.

  2. The CFTC regulated derivatives market and clearer was not included in FTX's bankruptcy filing.

  3. Schroders cleared NDF trades across a Asian and Latam currency pairs via Citi.

  4. The derivatives venue owned by FTX wanted to offer products that were not fully collateralized.

  5. Trading Europe From ‘Across the Pond’

    Cboe acquired EuroCCP on 1 July 2020.