TriOptima, a post-trade service provider, has eliminated $500 trillion in notional swaps outstanding through its triReduce service. The service, which was launched in 2003, offers compression in cleared and uncleared interest rate swaps, credit derivatives, and commodity swaps.

“We specialize in delivering a service that is pretty much driven by a community,” Peter Weibel, CEO of triReduce, told Markets Media. “So, it’s not just a service for one particular company. What we do works best if we have multiple participants joining a cycle at the same time which is the crucial multilateral aspect of triReduce compression services.”

triReduce helps banks pair up and then compress their trades before they have expired. Banks sign up on a secure website for a cycle and then upload their trade files to TriOptima. Then triReduce matches and links those trades, which become eligible for termination in a compression cycle.

“Banks are able to set a range of risk tolerances so that they can terminate, quite efficiently, the largest possible number of trades, while maintaining their risk profiles,” Weibel said.

Because participants submit large chunks of their portfolios and set their tolerances, it is possible to terminate a swap with a tenor of (for example) 4 1/2 years that is offset by a swap with the same or similar notional with a tenor of 4 years and 4 months, but on the other side.

“As long as the residual risk is within a predefined tolerance by the bank, then such trades can be torn up,” Weibel said. “Setting those tolerances increases opportunities quite considerably. We called that the risk constrained compression approach.”

triReduce achieves maximum unwind efficiency with a risk-constrained compression approach, the company said in a release. Using participants’ individual risk tolerances leads to increased compression opportunities. This will also be available to clearing members for cleared, unlinked trade compression cycles further enabling participants to optimize their leverage ratios.

Currently, LCH SwapClear and TriOptima run the largest compression of cleared trades. Going forward there will be other CCPs that will be added to the service as well. “We already run cycles in SGX and we are in discussions with other CCPs,” said Weibel. “In the LCH situation, right now the banks submit the cleared trades in SwapClear that they want to terminate, and TriOptima’s triReduce algorithm identifies the optimal portfolio of trades for the cycle participants to tear up. The banks agree to the solution, and the CCP is notified.”

The CCP then calculates the changes in margin, “and once the CCP has received the margin payments, the CCP will give the final blessing to the compression proposal and from that point onward, all those trades become legally terminated,” Weibel said.

Dodd-Frank and Emir highlight the need for compression. Banks or market participants are advised to twice yearly assess whether they need to compress. If there is a need, they are advised to take part in such cycles.

“So it’s not a 100% mandate that one must compress, but one must make an assessment whether compression would be useful,” said Weibel. “Banks typically have large balanced portfolios with a good number of payers vs. receivers so it makes absolute sense to terminate as many trades as possible reducing line items and also the notional amount outstanding.”

Banks are all keen to optimize their leverage ratio, so they would want to join as many compression cycles as possible anyway. “There’s been a lot written about the new Basel III liquidity ratios, and how that draws many banks,” said Weibel. “Even the banks have said they’re very interested in reducing their notional outstanding to improve their liquidity ratio.”

Feature image via Thep Urai/Dollar Photo Club